Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 58499-MOR

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED LOAN

IN THE AMOUNT OF EURO 150 MILLION

(US$205 MILLION EQUIVALENT)

TO

THE KINGDOM OF MOROCCO

FOR A

FIRST DEVELOPMENT POLICY LOAN IN SUPPORT OF THE

PLAN MAROC VERT

February 10, 2011

Sustainable Development Department 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.

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Morocco - GOVERNMENT FISCAL YEAR January 1st – December 31st

CURRENCY EQUIVALENTS (Exchange Rate Effective as of January 26th, 2011)

Currency Unit Moroccan Dirham Euro

US$1.00 MAD 8.21 €0.73

ABBREVIATION AND ACRONYMS

ADA Agricultural Development Agency (Agence pour le Développement Agricole)

AFD French Development Agency (Agence Française de Développement) AfDB African Development Bank AREF Regional Education and Training Academy (Académie Régionale

d'Education et de Formation) BAM Central Bank of Morocco (Bank Al-Maghrib) CDA Agricultural Development Center (Centre de Développement

Agricole) CFAA Country Financial Accountability Assessment CPAR Country Procurement Assessment Review CPS Country Partnership Strategy CRPII Pillar II Resources Center (Centre des Ressources Pilier II) CSM Council for Strategic Monitoring CT Centers of Works (Centres des Travaux) DPA Provincial Agricultural Directorate (Direction Provinciale de

l’Agriculture) DPL Development Policy Loan DRA Regional Agricultural Directorate (Direction Régionale de

l’Agriculture) DSS Strategy and Statistics Directorate (Direction de la Stratégie et des

Statistiques) EIA Environmental Impact Assessment EU European Union FAO Food and Agriculture Organization of the United Nations FDA Agricultural Development Fund (Fonds de Développement Agricole) FDI Foreign Direct Investment FDR Rural Development Fund (Fonds de Développement Rural) FSAP Financial Sector Assessment Program FTA Free Trade Agreement GDP Gross Domestic Product GEF Global Environment Facility GoM Government of Morocco HACCP Hazard Analysis and Critical Control Point IBRD International Bank for Reconstruction and Development IFAD International Fund for Agricultural Development IMF International Monetary Fund INDH National Initiative for Human Development (Initiative Nationale

pour le Développement Humain) INRA National Institute for Agronomic Research (Institut National de la

Recherche Agronomique) ISO International Standards Organization

ii

KfW German Development Bank LSI Large Scale Irrigation M&E Monitoring and Evaluation MAD Moroccan Dirham MAEG Ministry of Economic and General Affairs (Ministère des Affaires

Economiques et Générales) MAPM Ministry of Agriculture and Maritime Fisheries (Ministère de

l’Agriculture et de la Pêche Maritime) MCC Millenium Challenge Corporation MENA Middle East and North Africa MEF Ministry of Economy and Finance (Ministère de l’Economie et des

Finances) MET Ministry of Infrastructure and Transportation (Ministère de

l’Équipement et du Transport) MI Ministry of Interior (Ministère de l’Intérieur) MICNT Ministry of Industry, Commerce, and New Technologies (Ministère

de l’Industrie, du Commerce et des Nouvelles Technologies) MMEWE Ministry of Mines, Energy, Water and Environment (Ministère des

Mines, de l’Energie, de l’Eau et de l’Environnement) MTEF Medium-Term Expenditure Framework (Cadre de Dépenses à

Moyen Terme) ONSSA National Food Safety Agency (Office National de Sécurité Sanitaire

des Produits Alimentaires) OPA Professional Agriculture Organization (Organisation Professionnelle

Agricole) ORMVA Public Agricultural Development Agency (Office Régional de Mise

en Valeur Agricole) PAR Regional Agricultural Plan (Plan Agricole Régional) PARL Public Administration Reform Loan PEFA Public Expenditure and Financial Accountability PFM Public Financial Management System PMV Green Morocco Plan (Plan Maroc Vert) PNEEI National Program of Irrigation Water Conservation (Programme

National d'Economie d'Eau en Irrigation) PPPs Public Private Partnerships PSIA Poverty and Social Impact Analysis SCCF Special Climate Change Fund SEAT State Secretariat for Territorial Planning (Secrétariat d'Etat chargé

de l'Aménagement du Territoire) SEEE State Secretariat for Water and Environment (Secrétariat d’Etat

chargé de l’Eau et de l’Environnement) SEP Social and Economic Program SOE State-Owned Enterprise TA Technical Assistance UCS Use of Country System USAID United States Agency for International Development VAT WMSs

Value-Added Tax Wholesale Market and Slaughterhouses

Vice President:

Country Director: Sector Director:

Task Team Leader:

Shamshad Akhtar Simon Gray Laszlo Lovei Julian A. Lampietti

iii

MOROCCO

SUPPORT PLAN MAROC VERT DPL

TABLE OF CONTENTS LOAN AND PROGRAM SUMMARY....................................................................................................................... i I. INTRODUCTION ................................................................................................................................................ 1 II. COUNTRY CONTEXT ....................................................................................................................................... 1

A. RECENT ECONOMIC DEVELOPMENTS IN MOROCCO ................................................ 5 B. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY .................................. 8

III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES ......................................... 11 IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ....................................................................... 14

A. LINKS TO THE CPS ............................................................................................................ 14 B. COLLABORATION WITH THE IMF AND OTHER DONORS ........................................ 14 C. RELATIONSHIP TO OTHER BANK OPERATIONS ........................................................ 15 D. LESSONS LEARNED .......................................................................................................... 15 E. ANALYTICAL UNDERPINNINGS .................................................................................... 17

V. FIRST DEVELOPMENT POLICY LOAN IN SUPPORT OF THE PLAN MAROC VERT .................... 18 A. OPERATION DESCRIPTION ............................................................................................. 18 B. POLICY AREAS .................................................................................................................. 19 Component A. Improve the efficiency of domestic markets .......................................................... 19 Component B. Improve the socio-economic impacts of projects directed to small farmers ........... 22 Component C. Improve agricultural services ................................................................................. 24 Component D. Improve the use and the management of irrigation water and the planning of irrigation infrastructure ................................................................................................................... 28

VI. OPERATION IMPLEMENTATION ............................................................................................................... 31 A. POVERTY AND SOCIAL IMPACT ................................................................................... 31 B. ENVIRONMENTAL ASPECTS .......................................................................................... 32 C. IMPLEMENTATION, MONITORING AND EVALUATION ........................................... 33 D. FIDUCIARY ASPECTS ....................................................................................................... 34 E. RISKS AND RISK MITIGATION ....................................................................................... 35

VII. ANNEXES ........................................................................................................................................................... 37 A. ANALYTICAL AND ADVISORY WORK ......................................................................... 37 A. Domestic Markets .................................................................................................................. 37 B. Agricultural Investment Support ........................................................................................... 37 C. Agricultural Services ............................................................................................................. 38 D. Irrigation Water .................................................................................................................... 38 B. LETTER OF DEVELOPMENT POLICY ............................................................................ 39 C. PROPOSED POLICY MATRIX .......................................................................................... 59 D. PROPOSED RESULTS MONITORING AND EVALUATION FRAMEWORK ................................ 62 E. MOROCCO FISCAL SUSTAINABILITY ANALYSIS ...................................................... 64

This Loan was prepared by an IBRD team consisting of: Julian Lampietti (Task Team Leader), Mohammed Medouar (Rural Development Specialist), Hassan Lamrani (Irrigation Specialist), Gabriella Izzi (Agriculture and Climate Change Specialist), Andrea Liverani (Social Development Specialist), Stefano Paternostro (Country Economist), Khalid El Massnaoui (Senior Economist), Gael Gregoire (Environment Specialist), Jean-Charles De Daruvar (Lawyer), Anas Abou El Mikias (Financial Management Specialist), Abdoulaye Keita (Procurement Specialist), Anwar Soulami (Communications Specialist), Nabil Chaherli (Agricultural Economist), Emmanuel Hidier (Markets Specialist, FAO), Fabio Maria Santucci (Agricultural Services Consultant, FAO), Philip Van der Celen (Agricultural Policy and Operations Consultant, FAO), Eavan O’Halloran (Senior Country Officer), Françoise Clottes (Country Director), Hocine Chalal (Regional Safeguards Advisor), and Hassine Hedda (Finance Officer). The team worked under the guidance of Simon Gray (Country Director), Laszlo Lovei (Sector Director), and Luis Constantino (Sector Manager).

i

LOAN AND PROGRAM SUMMARY

MOROCCO

FIRST DEVELOPMENT POLICY LOAN IN SUPPORT OF THE PLAN MAROC VERT

Borrower Kingdom of Morocco

Implementing Agency

Ministry of Economy and Finance (MEF) and Ministry of Agriculture and Maritime Fisheries (MAPM)

Financing Data EURO150 million Operation Type

The proposed operation is the first DPL in a programmatic series of 2 single-tranche DPLs

Main Policy Areas

• Domestic Markets • Agricultural Investment Support • Agricultural Services • Irrigation Water

Key Outcome Indicators

The key outcome indicators for the programmatic series of DPLs are detailed in Annexes C and D, and summarized below: A. Improve the efficiency of domestic markets: (i) Number of fruit and vegetable wholesale markets under new management model launched; (ii) Number of private slaughterhouses launched; and (iii) Number of slaughterhouse concessions under new management model launched B. Improve the socio-economic impacts of projects directed to small farmers: (i) Share of new Pillar II projects submitted by Professional Agriculture Organizations (OPA); and (ii) Share of small farmers benefitting from Pillar II projects C. Improve agricultural services: (i) Share of research and extension projects funded through the competitive financing mechanism; (ii) Number of public-private partnerships for agricultural extension created; (iii) Number of training days per category of actor; (iv) Number of Hazard Analysis and Critical Control Point (HACCP)-certified agri-food processing establishments; and (v) Number of sanitary alerts notified by commercial partners (third countries) / number of shipment of products (number of certificates produced) D. Improve the use and the management of irrigation water and the planning of irrigation infrastructures: (i) Percentage increase of the number of declarations and authorization of water abstraction received / delivered; (ii) Cumulated number of farmers participating in projects of collection reconversion to drip irrigation; (iii) Share of Operation and Maintenance costs covered by irrigation water tariffs in seven Public Agricultural Development Agencies (ORMVAs); and (iv) Number of irrigation schemes located downstream of dams under construction or programmed with allocated resources / number of dams with agricultural scope under construction or programmed with allocated resources

Program Development Objectives and Contribution to CPS

The proposed loan is the first in a programmatic series of 2 single-tranche loans designed to support the implementation of the Government’s Plan Maroc Vert (PMV) program. The objectives of

ii

the series are to: (i) Improve the efficiency of domestic markets; (ii) Improve the socio-economic impacts of investments directed to

small farmers; (iii) Improve agricultural services; and (iv) Improve the use and the management of irrigation water and the

planning of irrigation infrastructures. The proposed DPL series is a key component of the new Country Partnership Strategy (CPS) (FY10-FY13). It addresses three long term development challenges facing Morocco identified in the CPS: (i) Enhancing growth and employment; (ii) Reducing social disparities; and (iii) Ensuring sustainability. It contributes directly to the three pillars around which the Bank’s program is structured: (i) Growth, competitiveness, and employment; (ii) Service delivery to citizens; and (iii) Sustainable development in a changing climate. Furthermore, it is linked to the two cross-cutting themes of governance and territoriality.

Risks and Risk Mitigation

Government commitment to agriculture sector reform may weaken. There is a risk that DPL/2 does not materialize due to a weakening of Government commitment to sector reform. This is unlikely given the strong commitment to the implementation of the PMV by His Majesty the King and by the Government. Morocco’s Advanced Association Status with the EU and bilateral agricultural trade liberalization will help maintain momentum of sector reforms. MAEG has set up an inter-ministerial committee to coordinate the actions of all stakeholders of the project. Some of the proposed reforms may be opposed by vested interests and marginalized stakeholders. This is most likely to occur in relation to reforms associated with domestic markets, and tariff adjustments for irrigation water. Specific measures to mitigate these risks are identified in the PSIA and incorporated in the program design. In the short term, Morocco is confronted with uncertainties on the timing, speed and shape of the recovery process from the global crisis. Spill-overs from the global credit turmoil have so far remained limited as external debt is relatively low and long-term, and macroeconomic policies have been strengthened. In addition, the Moroccan banking sector is generally stable, adequately capitalized, profitable, and resilient to shocks. However, it is too early to predict how the global economy will emerge from the recession particularly in the EU. Consequently, it is not yet clear to what extent Morocco’s economy will continue to be confronted with the impact of the economic slowdown on its exports, remittances, ability to attract FDI and sustainability of its public stimulus program. The associated economic risks can be partly mitigated through continued strong macroeconomic management and Morocco’s track record suggests that it is well placed to face the uncertainties of the current situation. This risk will be mitigated through continued monitoring and dialogue with the authorities on

iii

the overall macroeconomic context, as well as analysis of options for remedial measures as requested. In the medium term, Morocco’s overall outlook is positive but predicated on the effectiveness of the set of reforms currently under way in several sectors. Should the current reform efforts take longer than anticipated, it is uncertain if the current economic structure can sustain the pre-crisis economic growth performance in the medium term. This potential risk is mitigated by Government’s strong commitment to proceed with the envisaged reforms as well as the Bank engagement in multiple related sectors including financial sector, energy sector, business environment, and the water sector. Morocco remains susceptible to chronic drought. The dependence of Morocco agriculture on rainfed yields, particularly for poor and vulnerable farmers, coupled with increased water scarcity and climate change poses long run concerns for the agriculture sector. The Government is aware of the situation and is developing an integrated strategy to address climate change issues. The Bank is supporting this effort with programmatic work on climate change as well as a Special Climate Change Fund (SCCF) / Global Environment Facility (GEF) grant integrating climate change adaptation into the PMV.

Operation ID P116557

1

IBRD PROGRAM DOCUMENT FOR A

FIRST DEVELOPMENT POLICY LOAN IN SUPPORT OF THE PLAN MAROC VERT TO THE KINGDOM OF MOROCCO

I. INTRODUCTION 1. This Program Document proposes a first Development Policy Loan (DPL) in support of the Plan Maroc Vert to the Kingdom of Morocco. The proposed operation is the first of a programmatic series of two single-tranche DPLs. It follows a request by the Government of Morocco (GoM) in February 2009 and confirmed in January 2010. The loan supports the implementation of four components of the agri-food sector investments and reforms outlined in the Plan Maroc Vert (PMV), the GoM’s agricultural development strategy for the period 2008-2020. These components include: (i) domestic markets; (ii) agricultural investment support; (iii) agricultural services; and (iv) irrigation water. The objectives of the operation structured around these four components are to: (i) improve the efficiency of domestic markets; (ii) improve the socio-economic impacts of projects directed to small farmers; (iii) improve agricultural services; and (iv) improve the management of irrigation water and the planning of irrigation infrastructures. 2. The program supports an ambitious government initiative in the agriculture sector and builds on extensive dialogue between the World Bank and the GoM and is underpinned by a large body of analytical work and sector operations. The proposed program has benefited from a broad range of analytical work recently completed by the World Bank and others. Key analytical activities completed by the World Bank include economic and sector work, policy notes, and topical research and analysis covering strategic themes such as agri-food trade, wholesale markets and food security, agricultural subsidy schemes, contract-farming, land markets, rural poverty, climate change adaptation, and territorial development. The program also builds on the outcomes and experience from past and ongoing Bank operations in water and irrigation, integrated rural development, human development, and public sector administration reform. Additional value added of the World Bank includes bringing global best practice lessons to the implementation of the PMV as well as encouraging inter-ministerial dialogue.

3. The policy framework supported by this program is helping the Ministère de l’Agriculture et de la Pêche Maritime (MAPM) inform, focus, and leverage the support of other donors and the private sector. A large number of multilateral and bilateral donors are mobilizing around the investment agenda set out by the PMV. Key players include the Millennium Challenge Corporation (MCC), European Union (EU), African Development Bank (AfDB), French Development Agency (AFD), International Fund for Agricultural Development (IFAD), Belgian Cooperation (BC), the German Development Bank (KfW), and the Food and Agriculture Organization (FAO). Most of the programs under development will support the implementation of Pillar II investment projects in specific agri-food chains (filières) in certain Regions or focus on capacity-building activities related to the Pillar II investment program and sustainable natural resource management.

II. COUNTRY CONTEXT1

4. Over the last decade, Morocco carried out sound macroeconomic policies and continued to sustain momentum of structural reforms. As a result, the growth pattern shifted to a higher level averaging 5.1 percent over 2001-09, almost double of the average rate of the 1990s (2.8 percent). The good growth performance allowed the Gross Domestic Product (GDP) per capita to almost double over the last decade to reach US$2,890 in 2009. Furthermore, sound fiscal policies led to the consolidation of public finances, allowing the budget to run surpluses in 2007 and 2008 (averaging 0.3 percent of GDP) and to withstand well in 2009 the impact of the global crisis, with a

1 Unless otherwise indicated, all estimations and projections of economic indicators are those of the World Bank. All historical data are those of the government.

2

manageable budget deficit of 2.2 percent of GDP. The Government adopted a prudent debt strategy and debt of the Treasury steadily declined to 46.9 percent of GDP in 2009 from 62 percent in 2005. In addition, the monetary authorities pursued appropriate monetary policy geared toward maintaining low and stable inflation (an average 2.2 percent since 2005) and enhanced financial sector supervision. Furthermore, the country sought to deepen its integration into the world economy through the signing of many Free Trade Agreements (FTAs) culminating with the recent “Advanced Status” awarded by the EU. Overall, these efforts have led to a stable macroeconomic stance, stronger public finances, and a sound financial sector. On the basis of these achievements, Morocco gained “investment grade” rating in 2007 from Fitch, which was confirmed again in 2009 and 2011. In March 2010, it received the “Investment grade” again from Standard & Poor (BBB- with stable outlook) which further reinforced the confidence of investors, both domestic and foreign. 5. With the involvement of the private sector Morocco designed and is implementing specific sector strategies to increase investment and employment in sectors of the economy with high growth potential. Thus, investment in these sectors has increased, strengthening the fundamentals of the economy. While gross investment hovered around 25 percent of GDP on average in the 1990s, it increased rapidly in the 2000s, to reach an outstanding rate of 36 percent of GDP in 2009 with strong participation of the private sector and State-Owned Enterprises (a share of 64 percent of the total) (Figure 1). High Foreign Direct Investments (FDI) inflows (an average 4.5 percent of GDP over the last five years) also contributed to reinforce gross investment. These higher investment rates geared to dynamic sectors led to improved diversification and growth potential of the Moroccan economy, and reduced volatility.2

Higher investment also improved the employment situation with the number of jobless shrinking to 9.1 percent in 2009, although efforts are necessary to further reduce unemployment among young people, especially those with a degree.

6. Reforms triggered positive changes in the Moroccan economic structure but manufacturing is losing momentum. The structure of production changed in favor of services and this to the disadvantage of both primary and secondary sectors’ shares in GDP declining over time. The shrinking of the secondary sector’s share is mainly due to falling manufacturing which has steadily declined over the last two decades, denoting some weaknesses at the level of the productive tissue that reduces its productive capacity and hinders its long term growth and development. This weakness stems from the slow structural transformation in the manufacturing sector, which also explains the modest results of Moroccan exports. The latter continue to be concentrated around relatively undiversified, low knowledge, low value-added, traditional products. As a consequence, exports do not fully benefit from trade dynamics of Morocco’s trade partners and thus have been unable to fulfill their potential for contributing to growth and job creation.

7. The agri-food sector is an important pillar of the Moroccan economy. Representing 15 percent of Morocco’s GDP and 23 percent of the country’s exports, and employing close to half of the labor force, the agri-food sector (together with the forestry and fishing) is a pillar of the Moroccan economy. In the rural areas it is the primary source of employment and income for about 80 percent of the labor force. Although rural poverty decreased from 25 percent in 2001 to 14 percent in 2007 largely due to the combined effect of increases in the value of agricultural production, diversification of the rural economy, and increases in remittances, the contribution to overall inequality of the gap between rural and urban living standards in Morocco is the highest of any Middle East and North Africa

2 The standard deviation of growth rates in the 2000s is three and half times less than in the 1990s.

Figure 1. Rising investment, in percent of GDP

Source: Moroccan Government and Staff estimates.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2004 2005 2006 2007 2008 2009

Private & SOEs Households Public Administration

Changes in stock FDI (right axis)

3

(MENA) country. In fact, poverty rates in rural areas are almost 3 times as high as in urban areas and 70 percent of poverty in Morocco remains rural. With a Gini coefficient of 0.6, land remains inequitably distributed: a majority of low-productivity smallholders owns only 26 percent of cultivated land, while a minority of less than one percent of mostly commercial and export-oriented farms owns about 14 percent. 8. Despite some successes in selected commodities, the agri-food sector’s growth potential is constrained by the dualistic nature of farming in Morocco. The vast majority of the 1.5 million agricultural holdings are semi-subsistence farms that have low productivity and product quality levels and limited market integration. These farms are small (70 percent are less than 5 hectares) and largely rainfed and vulnerable to recurrent droughts. They often have aging household heads with a low education level (more than 45 percent of the heads of farming families are over 55 years old, and 81 percent are illiterate), make limited use of modern technologies, and lack technical know-how. In order to meet their food consumption and animal feed needs and partially in response to the incentives provided by Government subsidy schemes and market protection, smallholders typically engage in the production of low-value agricultural commodities such as wheat and barley. This large group of smallholder farmers co-exists with a small but very efficient group of commercial farmers producing crops (such as citrus, tomatoes, strawberries, grapes, melons, and peppers) for high-value export markets and milk for domestic markets. This sub-sector of mainly irrigated production accounts for 7 percent of GDP, 50 percent of Morocco’s agricultural value added, generates over 75 percent of Morocco’s agricultural exports, and provides jobs to 50 percent of the rural labor force. 9. This duality was partly a result of policies that have limited the opportunities of traditional agriculture and smaller farmers. First, an antiquated legislative system of commercialization of certain agricultural products designed to raise municipal revenues raises the cost and lowers the quality of fruits, vegetables and meat. The results are lower producer and higher consumer prices and reduced incentives for quality and value-addition. Second, the effectiveness of the traditional support (extension, credit, technology), particularly for small farmers, has eroded due to the absence of an integrated approach that the takes account of the links between production and marketing, availability of adequate technical support and attention to quality of the products. Third, the participation of the farmers and communities in the design and implementation of support policies has been limited, with a centralized approach dominating.

10. Morocco launched a transformative agricultural development strategy - the Plan Maroc Vert (PMV) for the period 2008-2020. The PMV is an ambitious strategy that aims to transform the agri-food sector into a stable source of growth, competitiveness, and broad-based economic development in rural areas through a combination of agricultural investments and systemic public sector reforms. The PMV addresses important constraints in the sector and embodies a paradigm shift from a highly protected to a more open market oriented agriculture and away from concerns with only farm-level production and towards integrated value-addition all along the agri-food chain that will bring better opportunities to small and large farmers alike. Institutionally, it represents a major shift from state intervention that replaces private sector to one that focuses on delivering public goods and services and developing Public Private Partnerships (PPPs) to support the sector. In the period 2009-2020, an estimated 140 billion MAD of combined public and private sector investments are envisaged in around 1,500 commercial (Pillar I) and smallholder (Pillar II) agriculture investment projects. The latter would focus mainly on marginalized rural areas. In combination with the GoM’s ongoing Programme National d'Economie d'Eau en Irrigation (PNEEI) and the systemic public sector reforms undertaken by the PMV, these investments are to realize the agri-food sector’s domestic and export growth potential, particularly in fresh and processed high-value fruits and vegetables, stemming from Morocco’s geographic position and privileged access to the EU and US markets, rising domestic demand for quality food driven by growing incomes, favorable climate, and abundant and relatively low cost labor.

4

A. Macroeconomic achievements over the last decade

Source: Moroccan Government and Staff estimates.

Figure 2. Growth shifted to higher path and is less volatile and less dependent on agriculture (in percent)

Figure 3. Unemployment declined (in percent)

Figure 4. External position is solid with vulnerability in trade (in percent of GDP)

Figure 5. Public Finances have improved before the global crisis (in percent of GDP)

Figure 6. Inflation remains subdued (in percent)

Figure 7. Central Government debt is declining and sustainable (in percent of GDP)

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

-7.0

-4.0

-1.0

2.0

5.0

8.0

11.0

14.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

GDP Agriculture output (right axis) Poly. (GDP)

0%

8%

16%

24%

32%

40%

0%

5%

10%

15%

20%

25%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

National (Left axis) Urban (Left axis)Urban Youth (right axis) Urban Women (right axis)

-28

-18

-8

2

12

22

32

-6

-4

-2

0

2

4

6

8

10

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Current account balance Net reserves in months of GNFSForeign direct investments, Gross Trade Balance (right axis)

0%

5%

10%

15%

20%

25%

30%

35%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%19

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Budget deficit Wages & salaries

Consumer subsidies Total revenues (Right Axis)

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

CPI Food Non-Food

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Foreign Domestic Total

5

Table 1. Selected Macroeconomic Indicators (in percent of GDP) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Est. I. National Accounts

Gross Investment 26.1 25.9 27.4 29.1 28.8 29.4 32.5 38.1 36.0 35.7 Gross National Savings 30.4 29.6 30.5 30.8 30.7 31.6 32.4 32.9 31.0 31.7 Government Investment (Nat. Acc.) 2.6 2.2 2.1 2.1 1.9 2.1 2.3 2.7 3.1 2.6 Private Investment (incl. SOEs) 23.6 23.7 25.3 27.0 26.9 27.4 30.2 35.4 32.8 33.1

Of which SOEs 4.4 4.8 4.9 5.6 6.1 7.1 8.0 9.6 11.5 14.3 II. Central Government Finances

Total revenues 22.4 22.1 21.6 22.2 23.8 25.1 27.4 29.7 25.9 23.8 Tax revenue 20.4 20.4 19.8 20.0 21.7 22.2 24.9 27.4 23.4 22.1 Current Expenditure. Of which 21.9 20.6 20.6 20.8 24.1 21.5 21.7 22.8 20.7 21.1

Wages 11.3 10.9 11.2 11.2 11.7 10.9 10.7 10.2 10.2 10.3 Capital Expenditure 5.1 4.5 4.1 4.2 3.9 4.1 4.6 5.5 6.3 5.1 Global Balance -5.7 -4.1 -4.4 -4.0 -5.2 -2.0 0.2 0.4 -2.2 -4.2

III. Balance of Payments Imports GNFS 32.6 32.9 32.0 34.8 38.2 39.8 46.0 52.1 40.7 42.8

Exports GNFS 29.6 30.2 28.6 29.2 31.6 33.1 36.2 37.6 28.8 32.6 Trade Balance -10.3 -9.9 -10.9 -13.9 -17.0 -18.3 -22.3 -24.7 -20.8 -21.0 Tourism receipts 6.8 6.5 6.5 6.9 7.8 9.1 9.5 8.1 7.2 7.5 Workers' remittances 8.6 7.1 7.2 7.4 7.7 8.3 8.9 7.7 6.8 7.1 Current Account Balance 4.3 3.7 3.2 1.7 1.9 2.2 -0.1 -5.2 -5.0 -4.0 Foreign Direct Investment, net 7.6 1.4 4.9 1.9 5.0 4.6 6.2 4.1 2.8 2.0 Reserves, net (months of GNFS imp.) 8.8 9.1 10.0 9.9 9.9 10.0 8.8 6.6 7.6 7.6

IV. Indicators of Credit Capacity of CG Public Debt of CG 67.1 63.7 60.8 58.2 62.1 57.3 53.5 47.3 46.9 48.2

Total interest payments/Tax revenues 21.6 19.1 18.4 17.4 15.2 14.5 12.6 9.7 10.1 10.3 Memo:

Country’s external debt stock/GDP 49.8 44.5 36.5 29.6 27.2 27.1 27.3 23.4 24.7 25.8 Consumer price (%, yearly average) 0.6 2.8 1.2 1.5 1.0 3.3 2.0 3.7 1.2 0.9 GDP Growth (%) 7.6 3.3 6.3 4.8 3.0 7.8 2.7 5.6 4.9 3.5 Non Agriculture GDP growth (%) 5.7 3.2 3.6 4.7 5.6 5.4 6.5 4.2 1.4 6.1 Unemployment (%) 12.5 11.6 11.6 11.0 11.2 9.7 9.8 9.6 9.1 9.0

Source: Moroccan Government and staff estimates.

A. RECENT ECONOMIC DEVELOPMENTS IN MOROCCO 11. In the context of the global economic crisis, growth performance in Morocco has been good. Economic growth in 2009 reached 4.9 percent following a growth rate of 5.6 percent in 2008. This performance is mainly due to an exceptionally good agricultural output, which gained 30.6 percent benefiting from a favorable climate. This shows that agricultural variations due to weather conditions still affect GDP growth, albeit with less intensity than in the past. Growth of the non-agricultural GDP slowed down to a much lower rate than projected due to the negative impact of the global crisis. It edged down to 1.4 percent over 2009 compared to 4.2 percent registered the previous year and it is mostly explained by a slow-down or decline of most of the activities, especially manufacturing and tourism. 12. Data from the first three quarters of 2010 show that the economy is recovering from the effects of the global economic slowdown that started in late 2008. Non-agricultural GDP gained 5.4 percent in the first quarter of 2010 and stabilized at around 4.8 percent in the second and third quarters. It is expected that growth momentum of the non-agricultural activities would continue through the end of the year. However, total GDP growth is estimated to be around 3-3.5 percent for the whole year owing to a lower, although good harvest this year compared to the exceptional one of last year, translating into an estimated negative growth of the agricultural output (down 8 percent). Furthermore, there are no apparent signs that the recent sovereign debt crisis of Greece and Ireland and the subsequent restrictive policies of some European countries have had any major impact on exports or capital inflows.

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13. The Government has implemented a stimulus package to support the income of the population and help the most affected sectors (Box 1). The income support package is mostly benefiting the low income employees. It includes an increase of 10 percent in the wages of civil servants at the lower end of the salary scale and the Minimum Wage for private sector employees. The wage increase was implemented in two steps, the first increase of 5 percent in July 2008 and the second one in July 2009. In addition, effective January 2009, the marginal income tax rate was cut from 42 percent to 40 percent and further to 38 percent in January 2010. At the same time the upper end of the exempt income bracket was extended. In addition to the measures aiming to preserve employment, direct support measures for firms affected by the crisis included financial relief (guarantees on loans; rescheduling of debt; help with export insurance) as well as subsidies for training and marketing. Economic stimulus was also provided through some monetary easing. The total budgetary gross cost of the stimulus package has been estimated by the government at MAD21 billion3

(over the 2008-2010 period) or 2.7 percent of 2010 GDP, and as such does not pose a risk to the medium term sustainability of public finances.

3 Because of their structural nature, the extra subsidies for food and petroleum products (MAD 7 billion) generated by higher world prices of cereals and fuels are not included in the stimulus package.

Box 1. Fiscal Stimulus packages and Outcomes

The Government has implemented several measures to help affected firms cope with the decline of external demand. Early in 2009, the Government set up a high level Council for Strategic Monitoring (CSM), comprising concerned ministers as well as representatives of the private and banking sectors, to follow developments related to the ongoing global crisis. The CSM targeted the export sectors hit by the effects of the global crisis for support through the following measures that would expire at the end of 2010:

• Social component: budgetary support to help firms in the payment of their contribution to employees’ social benefits

• Financial component: public guarantees for financing roll-over funds of firms and for rescheduling of their debt service

• Commercial component: budgetary support for the prospection and marketing costs abroad, and preferential conditions for export insurance

• Training component: Budgetary support for training and logistics Subsequently specific support programs have been designed for tourism and remittances and investment of Moroccan workers residing abroad.

Data as of June 2010 show that 70 percent of the demand for support concerned social benefits relief and was requested by 443 firms, of which 398 firms operating in the textiles sector and the remaining firms in automotive equipment and electronics. At the same time, 129 firms benefited from loan guarantees (of which most are operating in the textiles sector), and 134 firms benefited from training, of which 111 firms from the textiles sector and 20 from automotive equipment.

Measures to help low income households were already started in 2008 and included in the 2009 and 2010 Budget Laws. For the most part, they consisted of tax relief and wage increases for selected groups as well as an increase in social expenditures by relevant government departments. These measures, along with a much higher public investment program in place for 2009 and confirmed for 2010, kept domestic demand high as reflected in the rising credit to consumption, equipment and real estate (see below). Specific measures included the following:

• The marginal income tax was cut from 42 percent to 38 percent, and the upper limit of the tax-exempt bracket was increased by 25 percent;

• Salaries of civil servants at the lower end of the pay scale were increased by 10 percent (5 percent in July 2008 and 5 percent in July 2009);

• For private sector employees, the minimum wage was raised by 10 percent (5 percent in July 2008 and 5 percent in July 2009); and

• Minimum pension payments were increased by 20 percent and family allowances by 33 percent.

Economic stimulus was also provided through monetary easing. Reserve requirements for banks were cut in steps from 15 to 8 percent over 2009, and further to 6 percent effective April 1st, 2010. The Central Bank also cut its policy rate by 25 basis-points in March 2009 translating into a policy rate of 3.25 percent.

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14. Public finances continue to be well managed despite the impact of the global crisis on the budget. The steady reform efforts of expenditure and tax management and sound active debt management over the last few years have been critical in maintaining public finances on a sustainable path. These reforms translated into better control of the Government’s consumption, enhanced tax collection, and declining public debt. In this context, the budget deficit was limited to 2.2 percent of GDP in 2009 despite decreasing revenues impacted by the reduction of corporate and personal tax rates, the slow-down of economic activities ensuing the global crisis and the introduction of the stimulus package. This manageable deficit follows a good performance of public finances that were in slight surplus in 2007 (0.2 percent of GDP) and in 2008 (0.4 percent of GDP), which is remarkable given the impact on the budget of high subsidies following the food and fuel crisis. 15. Recent data on budget execution over the first 10 months of 2010 show that the annualized budget deficit would be contained to less than 4 percent of GDP. The budget deficit is mainly explained by soaring food and fuel subsidies (up 135.6 percent) caused by increasing world prices. The deficit, however, may have been even larger without efforts to improve revenue collection that helped fiscal revenues to gain 2.3 percent despite the impact of the global crisis and the effects of the stimulus package. It is clear that subsidies still represent a heavy burden on the budget and thus constitute a potential risk factor for sustainability in case of serious exogenous shocks such as very high world prices of fuels and food items or severe drought. Nevertheless, public finance stance remains sustainable due to the sound macroeconomic policies and accompanying sectoral measures the Government is undertaking to mitigate the effect of such shocks. Indeed, the Government continued to improve tax administration and collection and contain recurrent expenditures (up only 2.3 percent), of which the wage bill. It launched a medium term plan to reform the subsidy system along an ambitious program aiming at enhancing the productivity of the agricultural sector and insulating it from the uncertainties of the climate conditions. In addition, the Government is implementing better targeted social programs such as conditional cash transfer program and a scaled up non-contributory health insurance scheme for the poor (RAMED). The stable macroeconomic stance and the continued reform momentum have allowed Morocco to successfully issue Euro 1 billion of bonds in the international market end September 2010, at relatively low interest rate (4.5 percent), with a risk premium of 200 basis points, showing the confidence of international investors for the positive economic prospects of Morocco. 16. Sound fiscal management helped further reduce the Treasury’s debt. Reflecting the good performance of public finances and sound active debt management, the debt stock of the central Government declined to 46.9 percent of GDP in 2009, down by almost a half percentage point compared to the previous year (and by more than 6.5 percentage points relative to 2007). The decline is explained by a decrease in that of domestic debt, which fell by 1.2 percentage points to reach 36.2 percent of GDP, while foreign debt slightly increased by 0.8 percentage point of GDP (representing 10.7 percent of GDP) reflecting the Government’s debt strategy to improve the share of external debt in total public debt, contributing in this way to the reinforcement of the external reserves of the country. 17. The Government and the central bank showed continued commitment to fighting inflation. Helped by prudent monetary policies, protected domestic markets from increasing world food and fuel prices and ample domestic food supply inflation was low over the first 11 months of 2010 (0.9 percent). This inflation rate is less than that of 2009 (1.2 percent) the same period and much less than that of 2008 (3.7 percent). Both food and non-food inflation have been low (1 and 0.9 percent respectively). 18. The external position remains solid with signs of improvements of the current account. For the first time since the 1980s, the current account ran large deficits in 2008 (5.2 percent of GDP) and 2009 (5 percent of GDP). The latest data show that current account deficit improved to an estimated 4 percent of GDP over the first 11 months of 2010. Current account deficits followed comfortable surpluses over the period 2001-06 (average surplus of 2.8 percent of GDP) and a quasi-balance in 2007 (a deficit of 0.1 percent of GDP). The improvement of the current account is principally explained by buoyant exports and the recovery in workers’ remittances and tourism receipts are following the on-going recovery of world economy that is having a positive impact on exports over the first 11 months of 2010, exports of goods increased by 26.7 percent (while imports gained only 12.9 percent), remittances by 7.8 percent and tourism receipts by 7.3 percent. Consequently, after declining by US$ 5.3 billion (or down 21.4 percent) at end June 2010 (y/y), net foreign reserves started to steadily improve over the last months reducing the loss to US$ 2.3 billion by end November 2010, reaching US$ 22.4 billion, which represent 6.9 months

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of imports, down from 7.6 months in 2009. In parallel to the improvement of the international commerce, operations which have allowed an increase in the level of foreign reserves by about Euro 1 billion by the Government on the international market end September 2010 include the recent selling of 40 percent of Medi-Telecom for Euro 640 million, and increasing share of foreign financing of the budget. 19. The recent economic events revealed once again the weaknesses inherent in the Moroccan trade structure. The trade deficit deteriorated to 24.7 percent of GDP in 2008, up from 22.3 percent of GDP in 2007 (and only 11 percent in 2000). It improved in 2009 as imports declined by more than exports in nominal terms (20.8 percent of GDP). The latest data show the trade deficit further improved to 19.4 percent of GDP by end November 2010. The high trade deficit is mainly a volume effect rather than a price effect because Morocco actually benefited from positive terms of trade movement: while the price of oil and food imports increased, so did the price of key Moroccan exports such as phosphate products and agri-food. The poor performance of exports reflects their low diversification and lack of competitiveness. This explains largely why Moroccan exports were not able to benefit fully from the many FTAs it signed over the last decade such as those with the EU, the USA, and Turkey. The PMV is aimed at addressing those weaknesses by promoting private sector-led investments, in particular in higher quality and value agri-food products.

20. Monetary and exchange rate policies remained appropriate. In 2008, the central bank (BAM) resorted to raising the cost of money (plus 25 basis points in September 2008) to contain soaring credit and inflation, while it relaxed its policy to enhance liquidity in the face of the global crisis. As liquidity tightened and inflationary pressures started to ease over the second half of 2008 through 2009, BAM relaxed gradually the money reserve rate reducing it from 15 to 12 percent January 2009, and then to 10 percent July 2009. BAM decided to further cut the money reserve rate to 8 percent in October 2009 and to 6 percent starting April 2010 to ease the pressure on liquidity and thereby allowing Banks to be able to cope with the new money demands while contributing to keeping interest rates close to the BAM’s policy rate. It has also cut its policy rate by 25 basis points in March 2009 to reach 3.25 percent. Despite these relaxed policies, money supply slowed to 5.5 percent (y/y) by end November 2010, compared to an average 14.5 percent over 2005-2008. Although credit for equipment soared at 18 percent, total credit to the private sector slowed down (up 11 percent) driven by reduced growth in credit for consumption (up 7.7 percent), construction (up 9.6 percent), and for working capital (up 5.7 percent). At the same time, the stock of non-performing loans increased by 8.2 percent (y/y) , but their share in total credit to the economy has been on a downward trend over time (from 4.9 percent in November 2009 to 4.8 percent November 2010). In recent years the exchange rate remained in line with macroeconomic fundamentals with no signs of misalignment.

B. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 21. Sound macroeconomic and fiscal policies, as well as efforts to improve sector productivity and competitiveness, put Morocco in a position to maneuver with less damage through the moderate effects of the global crisis, while being in a position to benefit from the recovery of the world economy (Table 2). The decision of the Government to continue its reform efforts and revamp its sector strategies along the targeted and short term sector fiscal stimulus should allow the Moroccan economy to expect good prospects over the medium term. Meanwhile, economic growth is estimated to be between 3-3.5 percent in 2010 mostly owing to the recovery of the non-agricultural sector benefiting from dynamic activities such as construction, finance services, telecommunication, and tourism.

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Table 2. Base-line Medium Term Macroeconomic Indicators

Est. Projections

2008 2009 2010 2011 2012 2013 Growth Rates in percent

Real GDP 5.6 4.9 3.5 4.4 5.1 5.2 Real private consumption 6.0 4.0 3.8 3.6 5.0 4.2 Real Gross Domestic Investment 12.8 4.4 4.2 4.9 5.3 5.5 Export Volume (GNFS) 7.2 1.9 7.4 6.0 7.0 7.7 Import Volume (GNFS) 12.2 12.2 4.7 4.9 6.5 6.2 GDP deflator 5.9 1.8 2.0 2.0 2.0 1.9

Ratios to GDP Gross Domestic Investment 38.1 36.0 35.7 35.8 35.9 36.0

Fiscal Balance 0.4 -2.2 -4.2 -3.6 -3.4 -3.2 Central Government Debt 47.3 46.9 48.2 47.9 47.2 46.4

of which foreign 9.9 10.7 12.1 13.1 13.2 13.2 Current Account balance -5.2 -5.0 -4.0 -3.2 -2.7 -2.1 FDI, gross 2.3 0.9 2.0 3.1 3.4 4.6 External Debt (public and private) 23.4 24.7 25.8 26.6 26.0 24.4

Source: Moroccan Government and Staff estimates. 22. Growth prospects in the medium term are positive.4 It is assumed that the Government will sustain the reform momentum of the last few years, achieve the ambitious public investment programs it devised, and continue to implement the main sector strategies it launched, thus consolidating further economic diversification, growth potential, and domestic demand, and it is also assumed that the world economy will slowly recover from the current crisis to allow the on-going export promotion strategies to achieve their targets and contribute to growth. Under these conditions, growth rates will improve from the low 3.5 percent estimated for 20105

to around 5.2 percent in 2013. Should the underlying sources of growth assumed above be slow to materialize, growth prospects would have to be adjusted downward. Moreover, there is a potential risk that even pre-crisis growth levels might not be sustainable over the medium term if internal demand remains the key driver of growth.

23. Sound macroeconomic policies will help contain inflation at low levels. Inflation edged down to 1 percent only in 2009, mainly driven by ample food supply and to a lesser extent by declining prices of imported food items, and should remain subdued at around 2 percent thereafter. As the Moroccan agriculture sector meets domestic demand for most of basic food commodities and even allows to export many food items, its inflation rate is only slightly affected by international food price fluctuations. In addition, subsidies for staple food and energy prices – while clearly having an impact on the budget – contribute to a stable inflation rate. 24. After a temporary higher estimated deficit in 2010, the fiscal stance should remain sound over the medium term, with fiscal deficits around the targeted threshold of 3 percent of GDP, benefiting from the ongoing fiscal reform and more targeted social programs, as well as a better-controlled wage bill. The budget deficit is expected to edge up to 4.2 percent of GDP in 2010 before gradually dropping to 3.2 percent by 2013. Reaching this outcome implies maintaining momentum of the ongoing tax reform to broaden the tax base, improve the efficiency of the VAT, strengthen tax administration, and remove unproductive tax exemptions in order to reduce the high tax expenditures. These measures would offset the negative impact of the reduced top rates on corporate and personal income taxes. Under these assumptions, revenues are projected to stabilize at around 25 percent of GDP. On the expenditure side, the consolidation of public finances relies on four critical measures: deepening of fiscal reform, achievement of oil and food consumption subsidies reform, continued tight control of the wage bill evolution, and an active debt management. Under these conditions, public debt will slightly increase in 2010 48.2 percent of GDP before following a downward trend to decline to less than 46.5 percent of GDP in 2013.

4 IMF (2010), Morocco: 2009 Article IV Consultation—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Morocco 5 The low growth in 2010 is mainly explained by normal agricultural output translating into a negative growth rate for agriculture after an outstanding growth in 2009.

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Table 3. Morocco: Financing Requirements of the Treasury (in percent of GDP) Est. Projections

2008 2009 2010 2011 2012 2013 Financing required 9.3 10.8 11.8 10.9 10.8 10.5 Budget deficit (+) -0.4 2.2 4.2 3.6 3.4 3.2 Amortization 9.7 8.6 7.6 7.4 7.4 7.3

Domestic 8.3 7.8 6.8 6.5 6.4 6.3 External 1.4 0.8 0.8 0.9 1.1 1.0

Total Financing available 9.3 10.8 11.8 10.9 10.8 10.5 Domestic financing 6.6 7.1 7.0 7.8 8.3 8.3 External disbursement 1.7 2.1 3.6 1.6 1.4 1.1 Others (Privatization, capital grants, CST*) 1.0 1.6 1.2 1.5 1.2 1.1 Source: Moroccan Government and staff estimates. (*) CST: Comptes Spéciaux du Trésor 25. The financing needs stemming from the higher budget deficit in 2010 and declining deficits over the medium term are easily financed through domestic market as well as from increased drawings on external loans (Table 3). In this context, domestic financing would remain the main source, although external financing would improve its contribution. Indeed, since 2006, net external financing reversed its long negative trend and became positive, reflecting the Government’s strategy to slightly change the debt composition in favor of external borrowing. This financing strategy would ease the pressure on domestic financial markets and prevent any crowding out of the private sector’s investment now that the money market is less liquid than in previous years. At the same time it is consistent with the intention to maintain a comfortable level of foreign reserves. 26. The Government’s debt strategy is to diversify financing sources and take on a greater proportion of external financing. Three main factors underpin the decision of the Government to reinforce its external sources, especially multilateral and concessional. The first is linked to Morocco’s public debt maturity structure. The maturity of public debt has fallen in recent years and will fall further given that the Government mostly financed its needs through issuing T-bills of up to 1 year in the domestic market. The main reason behind this choice is to avoid affecting long-term floating rates for Banks’ domestic lending to the private sector, especially housing credit, as they are indexed to primary market rates on long-term securities (10 and 15 year bonds).6

The second relates to the higher balance of payments needs although the level of foreign reserves remains relatively comfortable. The third is due to the current higher borrowing requirements of the Budget, in a context of tightening liquidity of the domestic financial markets after a long period of an over-liquid money market. Consequently, additional external lending is consistent with prudent debt management which fosters improved terms of debt, while maintaining a comfortable level of foreign reserves and at the same time avoids pressure on domestic financial markets. In September 2010 Morocco successfully completed a ten year bond issue for one Billion Euros against a total demand of over 2.2 Billion, further attesting international markets confidence in Morocco’s sound macroeconomic stability.

27. A comprehensive public debt sustainability analysis shows that the fiscal framework is robust to downside risk in the medium term (see Annex E.3). Public debt under the two main shocks proved sustainable over the medium term.7 Under alternative scenarios, six other shocks to the baseline scenario are simulated,8

and public debt sustainability is preserved in all of them. Under these shocks, public debt would slightly increase in 2010 and, for a few simulations in 2011 as well, before steadily declining over the medium term.

28. The external position is expected to remain sustainable over the medium term. The current account deficit is estimated to have improved in 2010 (4 percent of GDP) and would continue its slight downward trend over the medium term to edge down to 2.1 percent of GDP in 2013, as the impact of reforms and sector strategies take hold. Indeed, the balance of payments is expected to progressively improve, with lower trade and current account deficits, which would benefit from improved export potentials and a recovery of tourism activities and workers’ 6 However, since early this year, credit with variable interest rates is no longer linked to the rate of long-term treasury bonds. 7 The two main shocks are A1: Key variables are at their historical averages; and A2: No policy change (constant primary balance). 8 See Annex E.3 for their description.

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remittances. This scenario assumes that Morocco would reap the fruits of its continued reform efforts, its sound macroeconomic and fiscal policies, and targeted sector strategies that entail higher public investments, which would translate into higher private investments, including FDI, and progressive gains in competitiveness of its exports, including tourism. In this context, external debt is expected to follow an inverted U path reaching a maximum at 26.6 percent of GDP in 2011 from 24.7 percent of GDP in 2009 before steadily dropping to 24.4 percent by 2013 while net foreign reserves will stay at an average of 6.5 months of imports. 29. Balance of payments financing requirements do not constitute a serious concern given the sound economic fundamentals, the country’s low external debt stock, and the ample foreign reserves. As the current account deficits are projected to steadily improve in the medium term, there are no constraints on financing them through multilateral and bilateral credit lines along other private capital flows, including FDI. The latter is expected to gradually improve, attracted by an improved business environment and the opportunities offered by important structural projects and the devised privatization program of the country. 30. In sum, Morocco’s macroeconomic framework remains adequate and sustainable in the medium term. The moderate effects of the global crisis on the Moroccan economy have been mitigated by the good economic fundamentals resulting from sound macroeconomic policies carried out over the last years and by the response of the Government through the stimulus package to mitigate these effects on the population and businesses alike. The stimulus package has allowed supporting investors’ confidence and domestic demand while reducing risks. The Government’s commitment to maintain momentum of reform effort supports robust prospects of investment, growth, and employment.

III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES 31. The Government installed in October 2007 seeks to strengthen Morocco’s economic growth and competitiveness while improving social indicators. The GoM’s Social and Economic Program (SEP) for the period 2008-2012 aims to increase the country’s growth and export potential by promoting investment in key infrastructure (energy, transport, water) and productive sectors such as industry and agriculture. In order to ensure that the ensuing growth dynamic results in improved social outcomes, these investment programs are combined with increased efforts to improve access to quality health, education, and housing as well as better targeted social protection programs. The GoM’s commitment to these objectives has been reflected in increased budget resources under a multiannual framework for six priority sectors: health, education, justice, water, energy, and agriculture. To further facilitate attainment of these sector goals and priorities, the Government is pursuing a series of crosscutting reforms in the areas of governance, public sector management, and decentralization. 32. The GoM has an ambitious agricultural development strategy, the Plan Maroc Vert (PMV), for the period 2008-2020. The PMV, launched in April 2008, constitutes an ambitious investment program in the agri-food sector and provides a road map for implementing a series of systemic public sector reforms. The ongoing Programme National d'Economie d'Eau en Irrigation (PNEEI) is an integral part of the GoM’s strategy. The PMV’s development was motivated by several factors, including: (i) the desire of the Government to confront problems of falling productivity and low incomes in the agri-food sector; (ii) the mounting uncertainty in international commodity markets in the period 2007-2008; and (iii) the domestic pressure to address the challenges in a sector that was perceived as a drag on the rest of the economy. The Plan aims to transform the agri-food sector into a key source of economic growth that contributes to employment creation and poverty reduction in rural areas. At the same time, policy reforms and investments in a productive, dynamic and market-oriented agri-food sector are designed to improve food security in Morocco, promote the country’s integration in the global economy, and help the sector adapt to climate change. The vision laid down in the PMV constitutes a paradigm shift from the strategies of the past which have emphasized food self-sufficiency through inward-looking, import substitution policies. The PMV recognizes the opportunities and threats that come with an increasingly competitive global economy and sets out to integrate the agri-food sector in this global framework.

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33. The PNEEI is an integral part of the PMV’s reform and investment agenda. The PNEEI aims to improve agricultural revenues by supporting the conversion of the current irrigation technologies by using more efficient irrigation technologies and practices, as well as a better valorization of water at both the production and marketing level. These strategic objectives were confirmed by the National Water Strategy developed by the State Secretariat for Water and Environment (SEEE) in 2009. The PNEEI is a 15 year development program supporting the conversion of an estimated 550,000 hectares of surface irrigation to drip irrigation, of which 395,000 hectares situated within Large Scale Irrigation (LSI) systems. It is structured around 5 components: (i) modernization of collective irrigation systems; (ii) modernization of individual irrigation systems; (iii) improved agricultural water management; (iv) enhanced technical assistance for drip irrigation and productivity improvements; and (v) targeted support measures. 34. The PMV’s investment program is structured around two pillars. An estimated 140 billion MAD of combined public and private investments are expected to be directed to a total of 955 commercial (Pillar I) and 545 smallholder (Pillar II) agricultural development projects in the period 2008-2020. Pillar I investments aim to integrate commercially-oriented producers in agri-food chains with high value added and high productivity. Pillar II investments aim to increase incomes of smallholder farms through crop switching, diversification, and intensification, as well as strengthening farmer organizations and supporting their integration in suitable agri-food chains. The overall philosophy is that Pillar I projects will rely largely on significant private sector financing with some public support. Pillar II projects will mainly be financed by public resources. In the period 2008-2020, total public investment resources for Pillar I and II projects (including cross-cutting reforms, see following paragraph) are expected to amount to 66.6 billion MAD (approximately one-third of the total cost of the PMV) and would serve primarily to leverage the private investment (approximately two thirds of the cost of the PMV) resources required to realize the program. Under both pillars, the process of value creation is to be driven by a voluntary aggregation of farmers and farm organizations (agrégés) around private investors, traders, and/or entrepreneurs (agrégateurs). One of the most innovative features of the PMV is that it conditions Government support on the conclusion of tri-lateral contractual arrangements between agrégateurs, agrégés, and the GoM. The aggregation model is designed to help overcome existing land constraints, promote farmer organization, and enable producers’ access to finance, knowledge, and technologies, support risk-sharing, and improve marketing. Of the 1,500 projects9

envisaged under the PMV, 168 are currently being implemented. They include 62 Pillar I projects totaling MAD18.9 billion and 106 Pillar II projects totaling MAD5.6 billion.

35. To achieve the successful implementation of the two pillar strategy, the PMV’s investment program focuses on a series of cross-cutting actions. The key strategic axes of this cross-cutting systemic public sector reform program include:

(i) Reorienting the role of the MAPM towards its regulatory functions and delegating other agricultural services functions to private actors through Public Private Partnerships (PPPs), to specialized agencies for agricultural development and food safety, and to professional organizations;

(ii) Improving the agricultural business environment through improved access to investment financing as well as a realignment and improved targeting of agricultural subsidy schemes;

(iii) Pursuing new agricultural Free Trade Agreements (FTAs) and reorienting existing ones to improve access to high value export markets and gradually liberalize protected sub-sectors;

(iv) Reducing domestic market distortions through increased investment and improved management of marketing infrastructure and liberalizing distribution systems for fruit, vegetables, and meat;

(v) Strengthening irrigation water policies by delegating management of LSI systems to private operators, increasing water tariffs in large irrigation perimeters, extending existing irrigation perimeters, promoting on-farm drip irrigation, and ensuring inter-agency coordination of investment programs;

(vi) Mobilizing agricultural land by accelerating the process of private sector participation in the management of state-owned and collective lands and promoting aggregation.

9 These projects were identified through a participatory planning and consultation process at the regional level and each year specific projects are/will be further developed into bankable projects by the regional directorates. The design of these investments is based around a supply chain concept. Priority supply chains have been defined for each region based on their economic and agro-climatic conditions.

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36. Since the launch of the PMV the GoM has undertaken important institutional reforms and arranged for program financing. With respect to the PMV’s agricultural policy and institutional reform agenda, the MAPM has established 16 Regional Agricultural Directorates (DRAs) contributing to more de-concentrated service delivery in each region and restructured the Chambers of Agriculture, (reducing their number from 37 to 16). In another nod to de-concentration, MAPM’s Regional Agricultural Directorate (DRAs) and Provincial Agricultural Directorate (DPAs) prepared in consultation with sector stakeholders 16 Regional Agricultural Plans (PARs) including territorial-based agricultural investment proposals (Pillar I and II), which have been adopted by the Regional Councils, the Chambers of Agriculture, and the local authorities in April 2009. It also signed results-oriented contract programs with 10 priority agri-food chains (filières) on the basis of the PARs. Professional associations (Inter-professions) have been established for these priority agri-food chains. Furthermore, specialized agencies such as ADA10 and ONSSA11 have been created and tasked with implementing the PMV’s investment program (Pillar I and II) and the recently adopted Food Safety Law respectively. In December 2009, the GoM concluded its agricultural trade negotiations with the European Commission. If approved by the European Parliament, the agricultural Free Trade Agreement (FTA) will immediately provide full market access for most Moroccan agri-food exports, while gradually opening the Moroccan market for agri-food imports from the EU over a period of 10 years (except for a number of sensitive products such as wheat, red and white meat, and olive oil).12 With regards to program financing, the MAPM signed a Medium Term Expenditure Framework (MTEF) 2009-2015 with the Ministry of Economy and Finance (MEF) in April 2009.13

Importantly, the Finance Law for 2010 includes an agricultural budget in line with the MTEF. In addition, the MAPM and MEF have signed an agreement with respect to the revision of 6 Decrees and 25 Arrêtés related to the Agricultural Development Fund (FDA) with a view to simplify procedures and aligning support measures with the strategic directions of the PMV.

37. The PMV includes a consultative process. Consultations have taken place in the context of the annual review of the 16 PARs and the monitoring of the implementation progress of the contract-programs signed with the 10 priority agri-food chains. In addition, consultations with universities and professional organizations were organized by the World Bank in relation to the preparation of the CPS, while consultations with producer organizations and associations were organized by the MAPM at the national and provincial level during the preparation of the proposed DPL. Furthermore, consultations have been organized with dedicated stakeholder focus groups in the context of the Poverty and Social Impact Analysis (PSIA) and the Environmental Due Diligence Review as part of the preparation of the proposed DPL (see sections VI.A and VI.B). The outcome of these consultations highlighted the following concerns: (i) large number of intermediaries and lack of transparency in fruit, vegetable, and red meat value chains contributing to relatively high consumer prices and low producer revenues; (ii) weak human and technical capacity of producers and producer organizations constraining technology transfers and access to finance; (iii) insecure land rights and land fragmentation limiting agricultural investments; and (iv) unsustainable use of water resources. Suggestions included: (i) improving financial support mechanisms for producers and producer organizations; (ii) developing strong support structures for producers and producer organizations; (iii) strengthening the dialogue between Government and professional organizations; and (iv) promoting efficient water use and agricultural land management. The consultations confirmed the importance of the PMV and relevance of the specific actions in the proposed DPL, including modernizing domestic marketing and distributions systems, improving the effectiveness of available public investment support under Pillar II through increased transparency and accountability, strengthening agricultural services to producers and producer organizations, and improving the sustainability of irrigation water resources.

10 Loi 42-08 portant création de l’Agence pour le Développement Agricole promulguée par le dahir n° 1-09-16 du 22 safar 1430 (18 février 2009) 11 Loi 25-08 portant création de l’Office National de Sécurité Sanitaire des Produits Alimentaires publiée au Bulletin Officiel Nr 5714 du 5 mars 2009 12 The FTA would allow for the immediate liberalization for 67 percent of fresh agricultural products, 98 percent of agro-industrial products, and 100 percent of fishery products. A limited list of products including tomatoes, garlic, clementines, strawberries, cucumbers, zucchinis and sugar would continue to be subjected to a differentiated treatment, while enjoying improved access to the European market through increased quotas or reduced entry prices. EU products will benefit from a progressive liberalization of the Moroccan market over 10 years, with the exception of 19 product categories that will be subjected to a differentiated treatment, including common wheat, meats, and olive oil. 13 The agreement defines the total (public and private) financial needs associated with the implementation of the PMV during the period 2008-2020, which are estimated at 17 billion USD. The public financing share of this amount (including donor resources) is estimated at 8 billion USD.

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IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM

A. LINKS TO THE CPS

38. The proposed DPL is aligned with the objectives and priorities defined in the Country Partnership Strategy (CPS) 2010-2013. It addresses the three long term development challenges facing Morocco identified in the CPS: (i) enhancing growth and employment; (ii) reducing social disparities; and (iii) ensuring sustainability. By supporting the GoM’s pursuit of institutional and policy reforms in relation to domestic markets, agricultural investments and services, and irrigation water resources, it contributes directly to the three thematic pillars around which the Bank’s program is structured: (i) growth, competitiveness, and employment; (ii) service delivery to citizens; and (iii) sustainable development in a changing climate. Furthermore, it is linked to the two cross-cutting themes of governance and territoriality. Though most pronounced in the proposed Pillar II component, both themes are mainstreamed across the four components of the proposed DPL.

B. COLLABORATION WITH THE IMF AND OTHER DONORS 39. The World Bank and the IMF maintain close collaboration in Morocco. Regular contacts between the IMF and World Bank country teams are customary, with discussions focused on the respective work programs, country priorities, recent developments and prospects. Collaboration between the Fund and the Bank in Morocco has been seamless, with a shared assessment of the critical macroeconomic challenges facing the country. Overall there is broad agreement on the division of labor between the two organizations. The collaboration may also take the form of joint activities such as the Financial Sector Assessment Program (FSAP) update dissemination and follow-up of its recommendations. 40. The Fund regularly participates in Bank project review meetings where relevant. Similarly, Bank staff contributed to the IMF’s 2008 and 2009 Article IV consultation mission to Morocco. The ongoing analytical work being carried out by the Fund team, which was welcomed by Bank counterparts, focuses on the medium-term outlook for public finances in Morocco and the macroeconomic implications of the global financial crisis and economic downturn. The IMF Board has endorsed on January 25, 2010 the Staff Report for the 2009 Article IV Consultation. The overall assessment of the recent macroeconomic developments, outlook and risks to the economy is well aligned between the World Bank and the IMF. 41. The World Bank works closely with other donors. The programmatic framework and results indicators established by the Policy Matrix of the proposed DPL have been leveraged by the MAPM to organize its work with other donors supporting the PMV. Though no joint activities are envisaged at this stage, the World Bank, the European Union (EU), African Development Bank (AfDB), Food and Agriculture Organization (FAO), French Development Agency (AFD), German Development Bank (KfW), the Belgian Cooperation (BC), and United States Agency for International Development (USAID) have been coordinating their preparation activities on a bilateral basis to avoid overlaps and ensure coherence. The financial and technical support programs thus developed by other donors in parallel to the proposed DPL are expected to focus on financing (i) filière-specific Pillar II projects in certain regions and related institutional capacity-building efforts at central, regional, and local level; and (ii) institutional capacity-building and investments in sustainable natural resource management. The analytical and advisory needs related to the DPL program identified in Annex A will be co-financed by the GoM, the World Bank and other donors on an individual basis. MAPM has committed to organizing donor round tables twice a year to monitor and evaluate progress with respect to implementing the PMV and enhance sector dialogue. A first donor round table was organized by the MAPM on July 15, 2010. Finally, regular meetings will be chaired on a rotating basis by donors involved in the PMV program to discuss operational and topical questions related to their PMV support programs.

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C. RELATIONSHIP TO OTHER BANK OPERATIONS 42. The proposed DPL builds on recent World Bank operations in the agriculture and agriculture-related sectors. The institutional and policy reforms supported under the proposed DPL aim to improve the efficiency of the domestic marketing system, the governance of agricultural investment support under Pillar II, the quality of agricultural services, and the sustainability of irrigation water resources. The DPL builds on the experience of the Irrigation-based Community Development Project (DRI-PMH), the Rainfed Agricultural Development Project (DRI-MVB), and the first National Initiative for Human Development (INDH) project, all of which have been supported by the World Bank. The implementation of these projects has highlighted important institutional and structural constraints to effectively promote integrated rural development. It has also underlined the need for greater attention to the marketing aspects of agricultural development as well as the importance of support structures for producers and producer organizations. The actions aimed at improving the sustainability of irrigation water use and management under the DPL comprise many of the actions originally foreseen under the irrigation water component of the Water Sector DPL series. While the irrigation water component of this DPL was completed successfully, the Water Sector DPL series was closed in 2009 after the completion in 2007 of the first operation in the series due to the non realization of some prior actions of DPL/2 in the components of the sector governance and of integrated water resources management. 43. The proposed DPL would be complemented by other World Bank operations recently approved or currently in the pipeline. The proposed second INDH project would further strengthen the capacity of local Government, civil society actors, and marginalized groups, to effectively participate in decision-making processes concerning local development projects. The institutional and policy reforms supported under the irrigation water component of the DPL will improve the effectiveness and the sustainability of the investments financed within the framework of the recently approved Er-Rbia Basin Irrigated Agriculture Modernization project aiming at the modernization of irrigation systems and at the improvement of the access of the farmers to technology, financing, and markets. The proposed SCCF/GEF grant for integrating climate change in the implementation of the PMV is closely aligned with the DPL, supporting the integration of climate change adaptation measures into selected Pillar II projects in five target Regions. The PARL series’ strengthens overall public sector management through improved budget management, human resources management, control of the public payroll, and e-government. The MAPM has been actively engaged in the PARL. Performance based budget contracts between the central MAPM services and three pilot DRAs (Gharb, Chaouïa, and Rabat) are being put in place for 2012 with World Bank technical assistance. The remaining 13 DRAs are expected to follow suit. Finally, the proposed Education Sector DPL series would support human capital building in rural areas through inter alia: (i) the development of new criteria for locating primary schools and colleges with priority given to rural and semi-urban areas; (ii) increased boarding scholarships; and (iii) the piloting in at least 4 communes in different Regional Education and Training Academies (AREFs) of an integrated approach to providing material and financial support aimed at encouraging demand for schooling in rural areas.

D. LESSONS LEARNED

44. A programmatic series of DPLs is the appropriate instrument for supporting the implementation of systemic public sector reform programs in Morocco provided the institutional environment is sufficiently mature for the proposed reforms. Programmatic DPLs have become the GoM’s preferred instrument for implementing public sector-wide, systemic reforms, as demonstrated by many of the past, ongoing, and pipeline Bank operations in the financial, public administration, housing, water, solid waste, education, and energy sectors. Programmatic DPLs provide for the necessary flexibility in implementing a broad and complex systemic reform program such as the PMV, while supporting the GoM’s and stakeholders’ commitment to the implementation of the program over the medium term. Furthermore, they establish an overall framework for coordinating other donor programs in the sector. Provided the proposed reforms have sufficiently matured within the different segments and levels of Government, a programmatic DPL is the right lending tool to support their implementation.

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45. Strong government-wide ownership and commitment are fundamental to a successful implementation of systemic public sector reform programs. Realizing the ambitious reform program laid down in the PMV will require the mobilization of a broad range of actors at both the political and technical levels of Government as well as various sector stakeholders. The PMV reform agenda has the support of the highest levels of the State, the Government and key sector stakeholders. In his statements delivered in June 2008 and April 2009, King Mohamed VI highlighted the need to address the rural-urban gap by promoting broad-based agriculture modernization and competitiveness, adapted to regional specificity, while taking into account water-resource constraints and preservation of the environment. In addition, the PMV has been adopted as a government-wide agricultural development strategy with financing secured through an MTEF for 2009-2015. Moreover, results-oriented ‘contract-programs’ embedded in the PMV have been signed by the MAPM and key Producer associations in 9 priority agri-food chains and other relevant ministries specifying respective roles, responsibilities, and commitments. The World Bank will continue to play an important role facilitating inter-institutional coordination, in particular with respect to the proposed reform programs related to domestic markets and irrigation water. Finally, Morocco’s Advanced Association Status in the context of the EU’s Euro-Mediterranean Partnership is likely to further promote and sustain reform momentum in the country. 46. Past government efforts to promote integrated rural development have had mixed results due to insufficient links between the government’s decentralized and deconcentrated structures and weak capacity. The integrated rural development approach promoted under the Stratégie 2020 de Développement Rural, which had been adopted by the GoM in 1999, has been constrained by the complexity of proposed projects, weak technical capacities at the decentralized and deconcentrated government levels, and insufficient accountability links between the decentralized and deconcentrated services of the government administration. In addition, the approach did not sufficiently take into account the valorization and marketing aspects of agricultural development and necessary support structures for producers and producer organizations. The proposed DPL series has taken this experience into account by supporting the implementation of domestic market reforms, mechanisms enhancing the governance and public financial management aspects of agricultural investment support (Pillar II), the creation of a legal and institutional framework supporting aggregation, ensuring the sustainability of irrigation water resources, and agricultural services reforms. 47. Investments in agricultural development must be accompanied by systemic reforms that enable equitable and sustainable agricultural development. International experience as regards agricultural development programs has demonstrated that success depends on a variety of factors, including (i) suitable incentives for domestic market development and international trade; (ii) strong agricultural institutions and the services to the rural population; and (iii) promoting income diversification in rural areas and a vertical integration of production and marketing systems. The components of the PMV program supported under the DPL reflect this experience by pursuing policy and institutional reforms that would enable producers to better respond to market incentives and seize opportunities in high value markets, access public and private agricultural investments and services, and use and manage irrigation water in a sustainable manner. 48. Agricultural land management reform is best supported with a targeted operation. The agricultural land management component was not incorporated in this DPL series considering the priorities of the GoM on this issue. Moreover, Bank experience in other regions has shown that agricultural land management programs are best supported under a targeted operation led by the responsible line-Ministry.14

Most land policy questions in Morocco are under the authority of several ministries. Importantly, however, the aggregation model proposed for the Pillar I and II investment program is aimed at overcoming near-term land constraints.

14 Albania Agricultural Services Project (ASP) 2001-2008 – Implementation Completion Report (2008).

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E. ANALYTICAL UNDERPINNINGS

49. A large body of analytical work recently completed by the World Bank and other multilateral organizations underpins the DPL. Following the publication of the 2008 World Development Report Agriculture for Development, the World Bank conducted a sector-wide diagnostic identifying key challenges and constraints facing the Moroccan agri-food sector and outlining a series of policy recommendations in its Morocco Agricultural Sector Policy Note (2009) and Morocco Agricultural Sector Review (2010). A similar exercise was conducted by the World Bank at the regional level in the context of the report Improving Food Security in Arab Countries (2009). An analysis of recent poverty trends in rural areas in Morocco is provided by the World Bank’s Rural Poverty Policy Note (2010). The GoM’s past and current agricultural trade policies have been reviewed in the World Bank’s Agricultural Trade Policy Report (2010) and the WTO Trade Policy Review (2009), while a socio-economic impact evaluation of agricultural market liberalization was conducted by the RuralStruc Study (2009). Agricultural subsidy and support schemes were reviewed by the WTO Trade Policy Review (2009) and an impact evaluation was conducted by the World Bank as part of the Opportunity Cost Analysis of Morocco’s Cereal Policy (2009). Furthermore, key topical issues were examined by the World Bank in its Case Study Review of Contract-farming (2010), which was presented by the World Bank during a workshop on aggregation models organized by the MAPM in January 2010, and it’s Land Market Development Study (2008). An assessment of the climate change adaptation aspects of agricultural development was conducted by the World Bank’s Study on Climate Change Impact on Moroccan Agriculture (2010). Territoriality and governance questions were the object of the World Bank’s Regional Development Study (2009) and internal Policy Notes on Decentralization and De-concentration (2009), and Territorial Development (2009). 50. This large body of analytical work has influenced the design of the proposed DPL series. Research outcomes underline that, despite the sharp decrease in rural poverty observed between 2001 and 2007, persistent rural poverty and vulnerability driven by low productivity subsistence agriculture, weak diversification, poor human capital endowments, and gender discrimination, remain a significant development challenge for Morocco. It stands out as the country with one of the largest inequalities in living standards between urban and rural areas in MENA and among other countries with similar incomes per capita. In the context of the PMV, the GoM has embarked on a process of market-oriented agricultural investments and policy reforms. It aims to increase producer incomes and create on- and off-farm employment by promoting high value crop production for both domestic and export markets. At the same time, it seeks to maintain a minimum level of domestic production in a number of strategic staple crops and other commodities through better targeted public support measures, while having a related tariff system. As highlighted in the 2008 World Development Report, supporting agricultural growth and development can be an effective source of poverty alleviation in rural areas. Success of the GoM’s new strategic direction, however, will critically depend upon producers’ capacity to respond to market price signals and integrate into modern domestic and export-oriented market networks and value chains. At a minimum, this will require producers’ access to (public and private) investment capital and core public goods such as high quality marketing infrastructure and adequate agricultural services and support institutions, including research. Confidence between producers and market-oriented investors/traders will be reinforced, for example through proper contract enforcement. Furthermore, the strategy would need to ensure sustainable resource management and take climate change risks into account. The design of this DPL series reflects these findings by focusing the operations on improving the performance of the domestic marketing and distribution system (for fresh fruit and vegetables and meat) to reduce transaction costs and encourage production of higher-value outputs, better governance and public financial management of investment support, a supportive framework for aggregation, increased sustainability of irrigation water resources, and access to quality agricultural services. Integrating climate change adaptation measures in the PMV is the objective of the proposed SCCF/GEF grant being developed in parallel to the DPL series. 51. The reform agenda by the GoM for the agri-food sector is the result of an extensive analytical work. The PMV was prepared by the MAPM and includes a diagnostic of national and international experience with agricultural development and a roadmap outlining the ongoing agricultural investment program and policy reforms. The MAPM also completed a study on municipal slaughterhouses identifying a series of priority facilities to be upgraded. The MAPM’s Conseil Général du Développement Agricole produced a report in May 2009 with

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recommendations for the implementation of the Pillar II investment program of the PMV taking into account the specific needs of smallholder agriculture in mountainous areas and oases. A series of studies by the MAPM and other relevant Ministries concerning institutional reforms in the areas of municipal fruit and vegetable wholesale markets, agricultural risks, extension and advisory services, and irrigation water management PPPs, are ongoing or recently finalized (see Annex A). 52. Additional analytical and advisory work will continue to facilitate the implementation of the proposed reforms. A list of analytical and advisory work to be carried out during the preparation and implementation period of the DPL series is presented in Annex A. The IFC is also in the process of identifying a technical assistance program to support activities related to: (i) improve the efficiency of domestic markets; (ii) improve the socio-economic impacts of projects directed to small farmers; and (iii) improve agricultural services. The activities would be co-financed by the GoM, the World Bank and other donors.

V. FIRST DEVELOPMENT POLICY LOAN IN SUPPORT OF THE PLAN MAROC VERT

A. OPERATION DESCRIPTION 53. The proposed operation will support the implementation of the GoM’s PMV program (2008-2020) by targeting supply and demand constraints to agricultural development. The development objective of the PMV, supported by the DPL series, is to increase the agri-food sector’s productivity and diversification with the goal of maintaining higher rates of agricultural growth and employment. The DPL series is structured around four of the key cross-cutting policy and institutional reform priorities identified in the PMV. The objectives of the proposed operation are to (i) improve the efficiency of domestic markets; (ii) improve the socio-economic impacts of Pillar II projects; (iii) improve agricultural services; and (iv) improve the use and management of irrigation water. Demand constraints to agricultural development are covered by Component A (Domestic Markets) of the DPL program, and supply constraints are covered under Components B (Agricultural Investment Support), Component C (Agricultural Services), and Component D (Irrigation Water). 54. The operation would be the first in a programmatic series of two DPLs. The GoM has asked for the Bank’s financial and technical assistance to implement key cross-cutting policy and institutional reforms identified in the PMV, including the governance and public financial management structures of the agricultural investment program under Pillar II of the PMV. The Bank is well positioned to assist the GoM in implementing its agri-food reforms in light of its experience in supporting the design and implementation of similar operations in other regions.15

In addition to sharing international best practices, Bank support of an inter-ministerial policy dialogue encourages collaboration and maximizes development impact. The analytical and advisory needs identified in Annex A would be co-financed by the GoM, the World Bank and other donors. If approved, a four-year SCCF/GEF grant focused on integrating climate change adaptation in the implementation of the PMV will be closely aligned with the DPL series. The proposed grant is in the range of US$4.2 million.

55. All ten proposed prior actions for DPL/1 have been met (Table 4). The objectives, DPL/1 prior actions, DPL/2 triggers, and results of the DPL series are set out in the Policy Matrix provided in Annex C.

15 For example, the Turkey Agricultural Reform Implementation Project (ARIP) 2001-2008 and the Moldova Poverty Reduction Support Credit (PRSC) 2006-2008.

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Table 4. DPL/1 Prior actions A. Improve the efficiency of domestic markets

Prior Action 1: The national fruit and vegetable wholesale markets reform strategy and action plan (Schéma National d’Orientation) have been validated by MICNT, MAPM, and MI on June 25, 2010 Prior Action 2: The specifications for sanitary, hygienic, and facility requirements of private slaughterhouses (Cahier des Prescriptions) have been adopted by ONSSA on October 1, 2010

B. Improve the socio-economic impacts of projects directed to small farmers Prior Action 3: The manual describing procedures for prioritizing the financing for projects directed to small farmers, and the manual describing procedures for preparing, submitting, and implementing projects directed to small farmers have been adopted by MAPM on November 2, 2010 Prior Action 4: Decree No. 2-09-600 dated December 31, 2009 and Order (Arrêté) No. 361-10 dated January 26, 2010 regulating Government support for contract farming (agrégation) projects have been published in the National Gazettes No. 5800 bis dated December 30, 2009 and No. 5818 dated March 4, 2010, respectively

C. Improve agricultural services Prior Action 5: The Circular (Circulaire) governing the competitive applied research financing mechanism has been issued by MAPM on December 8, 2010 Prior Action 6: The draft law on the legal status of the agricultural advisor (Conseiller Agricole) has been submitted by MAPM to the Secretary General of the Government on December 14, 2010; the financing of the CRPII has been included in the 2011 budget law of the Borrower; and the acting CRPII director has been appointed by MAPM on September 16, 2010 Prior Action 7: The Law No. 28-07 concerning the sanitary safety of food products has been published in the National Gazette No. 5822 dated March 18, 2010; and the food safety control functions to be delegated to private operators have been identified by ONSSA on December 14, 2010

D. Improve the use and the management of irrigation water and the planning of irrigation infrastructures Prior Action 8: Order (Arrêté) No. 362-10 dated January 26, 2010 requiring the beneficiaries of State assistance for drip irrigation to install a water metering system has been published in the National Gazette No. 5818 dated March 4, 2010; and the associated Instruction requiring these beneficiaries to include in their application package for the above assistance a declaration or authorization of water abstraction has been signed by MAPM and MEF in April 2010 Prior Action 9: The decision to waive interest and fees associated with accumulated arrears for farmers who commit to reimburse their debts related to irrigation water within a period of twelve months starting from the date of issuance of this decision, has been signed by MEF on April 2, 2010 Prior Action 10: The integrated investment plan for the irrigation perimeters downstream of the dams under construction and those programmed for the period 2010-2012 has been transmitted by MAPM to MEF on December 1, 2010

B. POLICY AREAS Component A. Improve the efficiency of domestic markets 56. The 38 municipal fruit and vegetable wholesale markets in Morocco are faced with decaying infrastructure, inadequate management, limited marketing services, and poor sanitary conditions. The Charte Communale stipulates that the communes have a monopoly on decisions regarding the establishment and management of fruit and vegetable wholesale markets in their jurisdictions.16 Prices are in principle set by the market management and a fixed tax (redevance) of 7 percent on the gross sales value of each transaction is levied by the communes at the markets. The tax is collected by intermediaries (mandataires) contracted by the communes, who retain a share of the collected tax, while the remainder flows into the general budget of the commune.17

16 Loi 78-00 portant Charte Communal promulguée par le Dahir 1-02-297 du 3 octobre 2002 et modifiée par le Dahir 1-08-153 du 18 février 2009

The lack of uniform rules governing the operation of markets and the inadequate reinvestment of market revenues have contributed to opaque management and poor physical condition of the markets.

17 Arrêté du 22 mai 1962 du ministre de l’intérieur portant sur le statut des mandataires et règlements des marchés de gros de fruits et légumes et des halles aux poissons des communes urbaines

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57. Dysfunctional domestic marketing and distribution systems for fruits and vegetables result in high marketing costs, low producer incomes and high consumer prices, while undermining incentives for improving quality. Current legislation prohibits farmers and traders from selling directly to retailers in urban communes. They are obliged instead to market their produce through the fruit and vegetable wholesale market of the commune where the retailer is located.18

But farmers, especially small one, often lack the resources to transport their products to distant wholesale markets. As a result, their produce is often first traded in a wholesale market closer to the farm where a 7 percent tax is levied, then marketed through a second wholesale market of the commune where the retailer is located which levies an additional 7 percent tax before selling to the retailer. The current system depresses producer revenues due to high transaction costs. It also creates high consumer prices, which hurts the urban poor disproportionately. It also undermines incentive for value addition, constrains producers’ integration in value chains, and distorts domestic trade flows.

58. The weak services of wholesale markets have pushed many producers to market their produce through informal channels. The MAPM has estimated that currently only 30-50 percent of the domestic fruit and vegetable production flows through the municipal wholesale markets, with the remainder being diverted into informal markets that don’t have the necessary logistical platforms to preserve and or improve product quality. 59. The liberalization of the trades in agriculture will contribute to seriously disadvantage local producers in the domestic market. The gradual trade liberalization foreseen under the agricultural FTA with the EU signed in December 2009 will, if adopted by the European Parliament, put domestic producers in an increasingly disadvantageous position since importers are allowed to market imported produce directly to retailers after paying the fixed transaction tax of 7 percent at the wholesale market of entry. Thus large modern retail operations will find it less expensive to source high quality fresh fruits and vegetables outside the country than within. A better functioning of the domestic and international markets would have the effect to balance this phenomenon. 60. The domestic meat marketing and distribution system faces similar challenges. With the exception of fully prepared cuts, wholesalers cannot market meat directly to retailers if the meat does not originate from the municipally owned slaughterhouse located at the point of destination for selling the meat.19 While communes are responsible for the overall maintenance of municipal slaughterhouses, the slaughtering of animals and meat cutting are generally conducted by a large number of small, private businesses run by chevillards. The latter typically purchase animals from farmers and transport them to municipal slaughterhouses, where they slaughter the animals and sell the meat to local butchers. Various municipal taxes are levied at the slaughterhouses that enter the general budget of the commune, including a taxe d’abattage, taxes accessories for complementary services offered by the slaughterhouse, and a surtaxe d’abattage au profit de la bienfaisance.20

In addition, a taxe spéciale de sauvegarde du cheptel is levied, which enters into the FDA. While the level of the taxe spéciale is established by the Finance Law, the other tax levels are established by municipal councils and thus vary from commune to commune. As with fruit and vegetable wholesale markets, there are no mandatory reinvestments of slaughterhouse revenues and no uniform rules for their operation. As a result, slaughterhouses generally suffer from outdated infrastructure and equipment, inappropriate locations, inadequate services, and sub-standard sanitary conditions. In addition to encouraging illegal slaughtering practices in the informal market, these various constraints negatively affect producer revenues, consumer prices, product quality and safety conditions, and domestic trade flows.

61. The objective of Component A is to improve the efficiency of domestic markets by reducing marketing costs and improving marketing services through the modernization of fruit and vegetable markets and slaughterhouses. To this end, the DPL series supports the following two main institutional reforms:

• Modernizing management and rationalizing the revenue structure of fruit and vegetable wholesale markets • Modernizing management and rationalizing the revenue structure of slaughterhouses

These actions are a first step in a process of institutional change that is projected to have a major impact on Moroccan producers and consumers, as well as enabling the sector to function more efficiently domestically and to compete 18 Dahir 1-00-225 du 5 juin 2000 portant promulgation de la loi 06-99 sur la liberté des prix et de la concurrence 19 Arrêté viziriel du 28 septembre 1955 relatif au contrôle de la salubrité des viandes foraines 20 Loi 30-89 portant la fiscalité des collectivités locales promulguée par le Dahir n° 1-89-187 du 21 rebia II 1410 (21 novembre 1989)

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more effectively in the international market. The impact of the reforms will take time to appear because the process of change involves many actors both in the central government and in the municipalities that traditionally have played a large role in regulating marketing at the local level.

A.1. Improve the institutional and regulatory framework governing fruit and vegetable wholesale markets 62. Several ministries have collaborated on a comprehensive review of the institutional and regulatory framework governing fruit and vegetable wholesale markets and distribution systems. The MICNT in coordination with the MAPM, MI, MEF, MAEG, and the Ministry of Infrastructure and Transportation (MET) have undertaken a national fruit and vegetable wholesale markets study, following the Plan Rawaj 2020. The latter was adopted by the government in 2008 with a view to developing domestic trade and distribution systems. The review produced a national strategy and action plan for the restructuring of fruit and vegetable wholesale marketing (Schéma National d’Orientation des Marchés de Gros de Fruits et Légumes). The Schéma National d’Orientation includes: (i) an overall plan for wholesale markets (Schéma d’Implantation des Marchés de Gros) that takes into account the projected evolution of domestic production, consumption, and trade trends until 2020; (ii) identification of viable wholesale market ownership and management models, including required institutional and regulatory adjustments; and (iii) necessary accompanying measures for the implementation of the Schéma National d’Orientation. The MI has already started to examine a possible revision of the status of the intermediaries (mandataires) and the development of a draft Law (Dahir). 63. New ownership and management models for fruit and vegetable wholesale markets will be piloted on the basis of the Schéma National d’Orientation to inform and build momentum for the necessary institutional and regulatory reforms. Following the adoption of the Schéma National d’Orientation, the operation foresees the launching of at least three pilot projects in rural areas that will introduce new ownership and management models for fruit and vegetable wholesale markets. The objective of the pilots would be to demonstrate the effect of potential win-win arrangements among local stakeholders. Generally, the pilots are expected to modernize wholesale market infrastructure and services, and to pursue improved management of the facilities by attracting private operators through public–private partnerships. New options for payment and taxation systems would be developed, including the replacement of the current fixed tax (redevance) of 7 percent applied to the gross sales value of each transaction conducted on the wholesale markets with a service-based fee system. The operation would focus on key actions that are preconditions for a successful introduction of these new ownership and management models and accompanying institutional and regulatory reforms. They include the adoption of the Schéma National d’Orientation, signing of at least three conventions with local governments for implementing the pilot projects, and the development of the legal and institutional measures that must accompany the reform of domestic fruit and vegetable wholesale markets and distribution systems. Three fruit and vegetable wholesale markets have been identified as potential pilot projects by the MAPM to make the object of a feasibility study, with the support of the World Bank and FAO. 64. The prior action for this sub-component of the DPL/1 is the validation of the national fruit and vegetable wholesale markets reform strategy and action plan (Schéma National d’Orientation) by MICNT, MAPM, and MI. 65. The trigger for DPL/2 is the signing of the three conventions between local government and relevant ministerial departments for implementing fruit and vegetable wholesale market pilot projects that will introduce new management models. 66. The expected result for this sub-component is the successful introduction of new ownership and management models for fruit and vegetable wholesale markets, including the introduction of a service-based payment system. This result will be measured through the number of fruit and vegetable wholesale markets under new management model launched.

A.2. Improve the institutional and regulatory framework governing slaughterhouses

67. New ownership and management models for slaughterhouses would be promoted to improve the management of slaughterhouse infrastructure and services. The MAPM and ONSSA conducted a study of

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municipally owned slaughterhouses that identified 12 priority slaughterhouses for modernization. The management of these slaughterhouses will be delegated to private operators through concessions. Three municipal slaughterhouses have been identified by the MAPM and ONSSA as potential pilot projects for introducing concession models. Pre-feasibility studies of these three pilot projects will be launched with World Bank and FAO technical support. In addition, the ‘contract program’ for the red meat agri-food chain foresees the launching of eight integrated projects (projets intégrées) driven by private entrepreneurs in the period 2010–2014. Four integrated projects have already been launched by private investors with support of the MAPM and ONSSA. 68. The operation would focus on key actions that are preconditions for a successful promotion of these new ownership and management models, in particular the adoption of technical specifications (cahiers des charges) for establishing integrated slaughterhouses and concessions at the level of municipal slaughterhouses. The proposed concession model for municipal slaughterhouses may eventually significantly reduce the number of agents such as the chevillards currently operating in the slaughterhouses. Concession rents paid by the private operator would replace the existing revenue streams for the municipality. The integrated projects (projets intégrés) would involve fully privately owned and operated slaughterhouses. 69. The prior action for this sub-component of DPL/1 is the adoption of specifications concerning sanitary, hygienic, and facility requirements of private slaughterhouses (Cahier des Prescriptions) by ONSSA.

70. The triggers for DPL/2 is the adoption of specifications concerning technical, administrative, and contractual requirements for operating municipal slaughterhouse concessions (Cahier des Prescriptions) by inter-ministerial decision of MAPM-MI.

71. The expected result of this sub-component will be the successful promotion of a new ownership and management model for slaughterhouses, with reductions in: (i) the number of intermediaries in the red-meat agri-food chain, (ii) reinspection taxes, and (iii) the size of the informal sector. This result will be measured through: (i) number of private slaughterhouses launched; and (ii) number of slaughterhouse concessions under new management model launched the number of pilot projects launched the number of slaughterhouse concessions and the number of integrated slaughterhouses launched. Component B. Improve the socio-economic impacts of projects directed to small farmers 72. Implementing the PMV’s agricultural investment program directed to small farmers (under Pillar II) poses significant governance and public financial management challenges. ADA was established to manage and monitor the implementation of the Pillar II (and Pillar I) investment program. The monitoring and evaluation mechanisms are in the process of being improved and strengthened.21

21 Under the current system, the recently established Regional Agricultural Directorates (DRAs) are responsible for the identification of potential Pillar II (and Pillar I) projects proposed under the 16 PARs. The ADA is responsible for the evaluation of the project proposals identified by the DRAs. An Investment Committee chaired by the Minister of MAPM is responsible for the approval of the projects validated by the ADA. Once approved, the DRAs are responsible for the execution of the projects, while the ADA is responsible for the overall monitoring and evaluation.

The Pillar II (and Pillar I) projects included in the PARs were largely developed by the DRAs and DPAs in consultation with potential beneficiaries. However, stakeholder consultations have revealed important information needs on how potential beneficiaries can access available investment support and underlined the key role MAPM’s support structures, agrégateurs, and other sector stakeholders play in assisting potential beneficiaries in this process. In this context, the envisaged de-concentration at the level of the DRAs of the decision-making processes as regards the identification and implementation of Pillar II projects, though important, should be reinforced to bring the agricultural investment program’s governance structures closer to beneficiaries and ensure the participation of all relevant stakeholders in the decision-making processes. While Pillar I is expected to be largely financed through the FDA, financing of Pillar II projects is mainly secured through the general budget, grants, and loans from national and international donors, the Hassan II Fund for Economic Social and Development, and contributions from the Rural Development Fund (FDR). The use of the FDR is thus currently split between the MAPM (60 percent) and the State Secretariat for Territorial Planning (Secrétariat d'Etat chargé de l'Aménagement du Territoire, SEAT) (40 percent). Of the 1,500 projects envisaged under the PMV,

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168 are currently being implemented. They include 62 Pillar I projects representing MAD18.9 billion and 106 Pillar II projects representing MAD5.6 billion. 73. The sustainability of Pillar II projects will largely depend on the success of the proposed contract farming (aggregation) model. As outlined in Section III, the process of added value creation under the Pillar II (and Pillar I) investment program is to be driven by a voluntary aggregation of farmers (agrégés) around private investors, OPA, traders, and/or entrepreneurs (agrégateurs). Public investment support provided under Pillar II serves primarily to leverage the private investment resources required to cover the remaining investment costs and is conditioned on the conclusion of tri-lateral contractual arrangements between agrégateurs, agrégés, and the GoM. This aggregation model is intended to help overcome existing land constraints, promote farmer organizations, support risk-sharing, optimize production and marketing links, and enable producers’ access to finance, knowledge, and technologies. International experience suggests that the success of such vertical coordination arrangements critically depends on a sufficient level of trust between agrégateurs and agrégés to enter into a mutually beneficial contractual relationship. The aggregation model envisaged under the PMV consists in the fact that the beneficiaries of each Pillar II project organize themselves around a valorization unit in order to guarantee the sustainability of the project and a better commercialization of their product. The created OPA precedes the establishment of the list of beneficiaries signed by them as well as the signature of a convention with the DRA, précising their respective obligations. This action aims to reinforce the confidence building measures for the identification of agricultural projects eligible for Pillar II support as well as their implementation. 74. The objective of this component is to improve the effectiveness of agricultural investments directed to small farmers. To this end, two main reforms would be pursued through the DPL program:

• Improving the governance and public financial management of the Pillar II projects • Establishing a legal and institutional framework to support aggregation

B.1. Improve the governance and public financial management of small farmers 75. Good governance and public financial management rules for the Pillar II investment program would be strengthened. International experience shows that transparency and stakeholder participation are critical to the effectiveness of publicly financed projects. The transparency of ADA’s existing governance and public financial management systems for the Pillar II investment program could be improved by widely disseminating operational manuals that outline the procedures for (i) prioritizing the use of budget allocations for implementing Pillar II projects; and (ii) preparing, submitting, and implementing Pillar II projects. A communication program and an information campaign has been developed to raise awareness among farmers about the procedures for Pillar II implementation. Accountability would be improved by enhancing stakeholder participation in the decision-making processes related to the identification of Pillar II projects. In this context, a stakeholder-based provincial committee would be responsible for preselecting Pillar II project proposals. In addition, an internet-based project monitoring and evaluation system of the implementation of Pillar II projects is currently under improvement at the central (ADA) and regional level (DRA). It would function on the basis of clearly established baseline indicators and reporting requirements. To these ends, a monitoring and evaluation framework based on results indicators for each individual Pillar II project has already been developed by ADA. 76. The prior action for this sub-component of DPL/1 is the adoption of a manual describing procedures for prioritizing the financing for projects directed to small farmers, and the manual describing procedures for preparing, submitting, and implementing projects directed to small farmers by MAPM. 77. The trigger for DPL/2 is the implementation by ADA of a pre-selection technical committee for projects directed to small farmers at the provincial level. 78. The expected result of this sub-component is increased participation, transparency, and accountability in the decision-making and implementation process of Pillar II projects as operational procedures are formally established and disseminated, local stakeholders participate in the project identification process, and monitoring and

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evaluation mechanisms are put in place. This result will be measured through the share of new Pillar II projects submitted by OPA. B.2. Establish a legal and institutional framework supporting aggregation 79. The Decree and associated regulations (Arrêtés) governing public support of contract farming (Agrégation) projects under Pillar II would be promulgated. Aggregation has two important positive effects: (i) it improves the efficiency of the investments by encouraging integration rather than isolated initiatives; and (ii) it facilitates the incorporation of small farmers into modern integrated value-chains managed by the private sector. The GoM has already allocated resources for Pillar II projects for a total of MAD830 million for 2011. In this framework, the signing of the MTEF by the MAPM and the MEF, the circular regarding budget installment and transfer procedures for financing Pillar II projects, and FDR contributions to Pillar II projects are important achievements. In addition, , the Decree and implementing Arrêtés regulating government support of aggregation projects have been published.22

80. A specific legal and institutional framework governing aggregation will be put in place. Making aggregation work is fundamental for the effective involvement of small farmers in domestic markets. A law on aggregation has been already approved by the Council of Government on the 24 November 2010 and put in the approval circuitto facilitate the implementation of the aggregation model proposed by the PMV for the Pillar I and Pillar II investment support program. The law will regulate key aspects of the proposed aggregation model such as essential contract clauses and the establishment of special courts for resolving contract-related disputes between agregées and agrégateurs. The provisions will create a supportive environment for building trust in the contractual relationship between agregées and agrégateurs. 81. The prior Action for this sub-component of DPL/1 is the publication in the National Gazette of the Decree and Order (Arrêté) regulating Government support for contract farming (Agrégation) projects. 82. The trigger for DPL/2 is the submission of a draft law on contract farming (Projet de Loi sur l’Agrégation) for Government approval. 83. The expected result of this sub-component is an increase in the share of small farmers benefitting from government support. This result will be measured through the share of small farmers benefitting from Pillar II projects. Component C. Improve agricultural services 84. A disjointed public agricultural innovation system constrains technology transfers to farmers. In addition to the human capital constraints outlined in section II, the effective transfer of technologies to farmers is limited by a public agricultural innovation system that is underfunded and understaffed and lacks formal coordination of applied research, training and extension activities. The allocation of funds to applied research programs and extension activities is mainly based on interactions between and within the different layers of the public administration. Producers, particularly smallholders, have limited participation in the decision-making process. Only a few producer organizations perform applied research and extension activities. Organizations such as water user associations and the recently established Regional Chambers of Agriculture are weak and remain dependent on government subsidies. The public extension and advisory service delivered by MAPM reaches only a small share of the total agricultural population. These trends in the public agricultural innovation system are counterbalanced to some extent by the increase in private operators—including input importers and distributors and output processors—that are expanding their field presence to engage in applied research and extension activities aimed at improving their profitability.

22 Décret Nr 2-09-600 réglementant les encouragements de l’Etat en faveur des investissements agricoles réalisées dans le cadre de projets d’agrégation

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85. International food safety and quality standards will become increasingly important determinants of competitiveness. Following the adoption of the new food safety law and the signing of the agricultural FTA with the EU, Moroccan producers and processors will need to meet stringent international food quality standards in order to take advantage of high value export markets opportunities and to compete with foreign imports on the increasingly demanding domestic market. The existing antiquated rules-based food control system that focuses on final food products would need to shift to a modern risk-based system underpinned by self-monitoring by producers and processors across the value chain. The public plant health and veterinary services, under the aegis of the recently established Food Safety Agency (ONSSA), will have a key role in helping producers and processors adjust to international food safety and quality standards such as the Hazard Analysis and Critical Control Point (HACCP) and International Standards Organization (ISO). In addition, they would need to encourage compliance with these standards by separating their risk assessment, risk management, and risk communications functions. The information generated from food safety risk assessments will be used to evaluate available strategies for managing risks. Risk communication requires the interactive exchange of information throughout this process among risk assessors, risk managers, and sector stakeholders. 86. The objective of this component is to improve agricultural services. Two main reforms would be pursued through the DPL program:

• Improving the effectiveness of the agricultural innovation system • Establishing an effective food safety control system

C.1. Improve the effectiveness of the agricultural innovation system 87. The program builds on a series of actions taken by the MAPM since the adoption of the PMV. The MAPM has reorganized its decentralized services by establishing 16 Regional Agricultural Directorates (DRA), which now oversee the Ministry services at the provincial (DPA) and local level (CT). The regional and provincial agricultural directorates prepared, in consultation with sector stakeholders, 16 Regional Agricultural Plans (PARs) including territorial-based agricultural project proposals (Pillar I and II), which have been adopted by the regional councils. The MAPM also signed results-oriented ‘contract programmes’ with nine priority agri-food chains on the basis of the PARs, both of which are subject to annual reviews. In addition, the previous 37 Chambres d’Agriculture have been restructured into 16 Chambres Regionales d’Agriculture and INRA is in the process of establishing six additional research centers, which would ensure its presence in each region in Morocco. The proposed DPL would build on these reforms by supporting four levels of the agricultural innovation system, including: (i) the decision-making process regarding the strategic orientation of applied research, extension, and training activities at the national and regional levels; (ii) the financing mechanism for applied research; (iii) the organization of the extension and advisory services system; and (iv) local capacity-building. 88. While the ultimate decision making authority will remain with MAPM, consultative committees at the national and regional level will be established to coordinate, formalize, and promote cooperation between the various actors in the agricultural innovation system. The national and regional consultative committees will be composed of representatives of the MAPM, INRA, higher education bodies (IAV,23 ENA,24and ENFI25

), vocational education bodies (ITSA, ITA, CQA, LA), Chambres Regionales d’Agriculture, and other professional associations. They will represent institutionalized mechanisms for coordinating national and regional agricultural innovation activities among public, private, and civil society actors. The committees will be responsible for coordinating the overall planning and implementation of development activities, including Pillar I and Pillar II projects envisaged by the PARs. This would improve the decision-making process about applied research, extension, and training, as well as the coordination of implementation.

89. The MAPM’s funding mechanism for applied research will be improved to promote demand-driven agricultural innovation partnerships and to ensure the effective transfer of new technologies. The circular governing the MAPM’s funding mechanism for applied research has been amended so that project proposals are 23 Institute of Agriculture and Veterinary Sciences Hassan II in Rabat 24 Ecole Nationale d’Agriculture in Meknès 25 Ecole Nationale Forestière d’Ingenieur in Salé

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selected competitively according to established procedures and transparent criteria. Financing totalling between 500,000 MAD and 1,000,000 MAD over two years is conditioned on: (i) partnership agreements between different parts of the agricultural innovation system; and (ii) formal arrangements for the transfer of the newly developed technologies to beneficiaries. It is expected that MAPM funds for applied research will be allocated in a more efficient and demand-driven way and reinforce links between (public and private) research and education institutions, farmers and farmer organizations, and (public and private) extension and advisory services. In addition, transfer of applied research results to farmers will be assured. Decisions on funding of proposals will be taken by the National Coordination Committee for Research and Development. 90. A pluralistic approach to delivering extension and advisory services will be developed to diversify and improve the quality of extension and advisory services offered to farmers. The MAPM has launched a study which is expected to result in the development of a National Extension and Advisory Services Strategy and Action Plan. The Strategy and Action Plan intends to redefine the role of existing MAPM services such as the Centres de Travaux (CTs) and the public extension arms (CDAs) of the Public Agricultural Development Agencies (ORMVAs)26

, professional organizations such as the Chambres Régionales d’Agriculture, and the private sector in delivering extension and advisory services. The overall objective is to develop a mixed, public and private system for delivering extension and advisory services to farmers, including setting up a system of private agricultural advisors (Conseillers Agricoles). It is expected that the latter could be contracted by the MAPM, producer organizations, and private firms to provide a broad range of services (e.g., rural mobilization, extension, advisory). A draft legal provision on the status of the agricultural advisor (Conseiller Agricole) has been prepared by the MAPM and has been submitted for government approval.

91. The Pillar II Resources Center (CRPII) based in Ifrane will become operational with a view to strengthen the capacity of local stakeholders. The CRPII recently created by the MAPM is to serve as a knowledge and information center for training and technical assistance to MAPM’s decentralized services (DRAs, DPAs, CTs) and other stakeholders (associations, cooperatives, agri-businesses) involved in the preparation and/or implementation of Pillar II projects. It builds the necessary local capacity for developing and implementing Pillar II projects. The CRPII will also ensure that the lessons learned from Pillar II project development are captured and disseminated through appropriate information and communication systems. Furthermore, the Center will promote a better understanding among stakeholders of essential themes such as natural resource management, territorial development, and product valorization (e.g., produits de terroir). A comprehensive needs assessment for various categories of Pillar II stakeholder is ongoing. On the basis of this needs assessment, tailored training and capacity-building programs will be developed with technical support from the FAO. All the national agricultural research and education institutions have been mobilized for and are associated with the CRPII. 92. The prior actions for this sub-component of the DPL/1 are:

• Issue of the circular (Circulaire) governing the competitive applied research financing mechanism by MAPM

• Submission of the draft law on the legal status of the agricultural advisor (Conseiller Agricole) by MAPM to the Secretary General of the Government; inclusion of the financing of the CRPII in the 2011 budget law of the Borrower; appointment of the acting CRPII director by MAPM.

93. Triggers for DPL/2 are: • Operationalization of National and Regional Consultative Committees, comprising the MAPM, agricultural

research and educational institutions, and professional organizations, with uniform rules of operation to coordinate applied research, extension, and training activities

• Adoption of the National Extension and Advisory Services Strategy and Action Plan for developing a mixed (public and private) system for delivering extension and advisory services

26 MAPM’s extension and advisory services comprise 122 CTs in rainfed areas and 179 CDAs under 9 ORMVAs in the irrigated areas.

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94. Expected results of this sub-component are: (i) improved coordination and synergies between the different stakeholders in the agricultural innovation system as financing and consultation mechanisms promoting stakeholder partnerships are put in place; and (ii) increased availability to farmers of more diversified and higher quality extension and advisory services. These results will be measured through: (i) share of research and extension projects funded through the competitive financing mechanism; (ii) number of public-private partnerships for agricultural extension created; and (iii) number of training days per category of actor. C.2. Establish an effective food safety control system 95. The GoM has taken key steps to establish a legal and institutional food safety framework in line with international standards. With the support of a recently completed EU twinning program, the government developed a new food safety law27 and implementing texts. The new food safety law was recently adopted and reflects existing international principles on risk analysis, in particular the standards and codes of the Codex Alimentarius Commission.28 In addition, the government has formally created ONSSA to bring all administrative structures involved in food safety and quality controls29 in a single body.30

The underlying approach has been food risk analysis in its three constituent components: risk assessment, risk management, and risk communication. Procedures for a risk-based control system have been developed by the ONSSA. The agency has also established 16 regional directorates which are responsible for overseeing the sanitary and phytosanitary services which had previously been housed under the MAPM’s provincial agricultural directorates (DPAs) but have now been transferred to ONSSA. Furthermore, the ONSSA has designated national reference laboratories for critical sanitary and phytosanitary tests.

96. The new food safety law has been promulgated and its implementing texts will be adopted. The implementing texts foreseen under the new food safety law will determine: (i) technical conditions that establishments, including slaughterhouses, must meet for the required approval of their activities; (ii) the modalities of the implementation of self-control and traceability systems; and (iii) labeling requirements. 97. Delegation of food safety advisory and inspection functions to the private sector. ONSSA seeks to expand the sub-contracting of certain advisory and inspection functions to accredited private service providers while maintaining overall responsibility for resolving disputes and ensuring a high quality and transparent system. This would follow the model already in place for the delivery of some veterinary services such as compulsory vaccination campaigns. In combination with the delegation of these functions to private service providers, specific cahiers des charges governing the contracts with these service providers will be developed. In addition, a system introducing cost recovery mechanisms for certain sanitary and/or phytosanitary services (such as certification of seeds and seedlings, diagnosis, disease control, and livestock identification) would also be examined and gradually implemented. 98. The prior actions for this sub-component of DPL/1 are:

• Publication in the National Gazette of the Law concerning the sanitary safety of the food products; and • Identification of the food safety control functions to be delegated to private operators by ONSSA.

99. The triggers for DPL/2 are:

• Presentation to the Council of Government of the implementing texts of the Law No. 28-07 concerning the sanitary safety of the food products; and

• Adoption of a cost-recovery system for veterinary and/or phytosanitary services by MAPM.

27 Loi Nr 28-07 relative à la Sécurité Sanitaire des Produits Alimentaires publiée au Bulletin Officiel Nr 5822 du 18 Mars 2010 28 The Codex Alimentarius is a collection of internationally recognized standards, codes of practice, guidelines and other recommendations relating to foods, food production and food safety. Its texts are developed and maintained by the Codex Alimentarius Commission, a body that was established in 1963 by the Food and Agriculture Organization of the United Nations (FAO) and the World Health Organization (WHO). The WTO Agreement on the Application of Sanitary and Phytosanitary Measures uses the Codex Alimentarius as an important reference to determine the limits within which a member country can adopt food safety, animal health and plant protection measures that have an impact on international trade. 29 Except the Etablissement Autonome de Contrôle et de Coordination des Exportations (EACCE) and the Laboratoire Officiel d’Analyses et de Recherches Chimiques (LOARC) 30 Loi Nr 25-08 portant création de l’Office National de Sécurité Sanitaire des Produits Alimentaires publiée au Bulletin Officiel Nr 5714 du 5 Mars 2009

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100. Expected results of this sub-component are to enhance the sanitary control system and reduce food safety risks. This result will be measured through: (i) number of HACCP-certified agri-food processing establishments; and (ii) number of sanitary alerts notified by commercial partners (third countries) / number of shipment of products (number of certificates produced). Component D. Improve the use and the management of irrigation water and the planning of irrigation infrastructure 101. Efficient and sustainable irrigation will be critical for Moroccan agriculture. The agricultural sector consumes 87 percent of water resources in Morocco and faces increasing water deficit due to mounting water scarcity and to increasing competition from urban, industrial, and tourism consumers. In addition, suboptimal irrigation practices and deficient water service contribute to low irrigation water productivity. Average value-added of irrigation water is 1.63 MAD/m3, which is well below its potential of 4 MAD/m3. An important pillar of GoM’s strategy to reduce current and future water deficits while increasing the productivity of irrigated agriculture is to improve water management at both farmers and service providers level. Farmers need to rationalize water use based on market costs and benefits with the ultimate goal of putting water to its highest valued use. In addition, the quality and sustainability of current irrigation services provided by the ORMVAs need to improve. These services are constrained by poor maintenance of the irrigation infrastructure, under-pricing of water, inadequate allocation of water revenues, and rigid mechanisms for allocating water to farmers. Furthermore, coordination of investment planning and financing between government institutions involved in the irrigation and the water sectors is weak, resulting in a persistent gap between water mobilization capacity through dam storage and area irrigated downstream. 102. Climate change is likely to exacerbate water scarcity in the long run. In the majority of river basins in Morocco, withdrawals from the groundwater table already exceed renewable water resources, and it is expected that water resources will decrease even more under climate change. Recent climate change studies suggest that Morocco will experience gradually increasing aridity because of higher temperatures as well as lower and more volatile precipitation. This could result in a dangerous overexploitation of groundwater and a decrease in the availability of surface water for irrigation, with significant variability among river basins. These changes are expected to negatively affect agricultural yields and increase the volatility of agricultural production. 103. The GoM adopted a National Program of Irrigation Water Conservation (PNEEI) to help address these challenges. The PNEEI forms an integral part of the PMV. The program aims to improve agricultural revenues by supporting the conversion to more efficient irrigation technologies and practices as well as a better valorization at both the production and marketing level. It supports the conversion of an estimated 550,000 hectares of surface and sprinkler irrigation to drip irrigation, including 395,000 hectares in Large Scale Irrigation (LSI) areas and 160,000 hectares in private irrigation areas. The PNEEI is structured around five components: (i) collective modernization at the level of public schemes including off-farm and on-farm irrigation equipment; (ii) individual modernization at the level of private farms; (iii) improving agricultural valorization at both the production and marketing level; (iv) enhancing technical support for farmers, irrigation service providers and equipment suppliers; and (v) other support measures. Upon completion of the program, the total irrigated area with drip irrigation will cover close to 50 percent of the surface equipped for irrigation. 104. The objective of this component is to contribute to improving the use and management of irrigation water and the planning of irrigation infrastructures. Three main reform areas would be supported through the DPL program:

• Improving the efficiency and sustainability of farmers’ water use • Improving the performance of irrigation service operators • Improving irrigation infrastructure planning by the government

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D.1. Improve the efficiency and sustainability of farmers’ water use 105. Monitoring of groundwater extraction will be improved. The GoM has recently significantly improved the incentive framework for the development of drip irrigation by introducing substantial subsidy increases for the acquisition of on-farm drip irrigation equipment. International experience shows that development of drip irrigation could lead to more water consumption if water abstraction is not controlled. In Morocco, surface water (a large part of which is stored in dams) is controlled by river basin agencies (RBAs). Hence, surface water demand is automatically adjusted to surface water availability by reduction of irrigated areas in dry years. Groundwater is abstracted by private farmers with almost no control by RBAs despite the water law imposes that all water users must register their wells and apply for an abstraction authorization. Hence, groundwater abstraction is currently much higher than the renewable volume in most aquifers. The objective of the first action of subcomponent D1 is to obtain from farmers who benefit from State aids to drip irrigation to request an authorization for water abstraction mentioning a maximum volume to abstract taking into account water availability and crops water requirements calculated with drip irrigation efficiency. Under the operation, the Arrêté regulating government support to drip irrigation would be amended so that beneficiaries will need to install a metering system. In addition, the accompanying Instruction would be amended to require beneficiaries to include in their aid application package a groundwater use authorization or declaration. To make this action more effective, the Bank31

and other donors are supporting through other projects the State Secretariat for Water and Environment and RBAs that have the responsibility of groundwater monitoring.

106. Incentives for conversion to drip irrigation in LSI areas would also be set. Experience of the last decade shows that conversion to drip irrigation is developed mainly in areas where groundwater is accessible, generally outside of LSI perimeters. The PNEEI aims at developing drip irrigation in LSI perimeters as well, with an objective of 395,000 ha to be converted in 2025 by replacing open canals networks with pressurized pipelines systems. The Agricultural Investment Code of 1969 established that farmers have to financially contribute to the Government investment efforts through a direct participation which should cover 40 percent of the cost of the initial investment in new off-farm irrigation infrastructure. These direct farmers’ contributions can be paid in the form of annuities over 17 years with a grace period of 4 years and an interest rate of 4 percent. In addition, this direct participation is not applicable to agricultural properties of less than 5 hectares as well as to the first 5 hectares of agricultural properties of less than 20 hectares. In 1997, this provision of the Agricultural Investment Code was amended introducing the participation to water service improvement, in order to cover the costs of the infrastructures built after the beginning of the functioning of the irrigation scheme, and in particular its application to the modernization of existing off-farm irrigation schemes. In addition, the exception for small farmers was taken out. In this way, after 1997, farmers in these irrigation schemes must cover 40 percent of the cost of modernization which is higher than smallholders’ capacity to pay. The operation would support amending the law concerning farmers’ financial contribution to the cost of modernizing existing off-farm irrigation infrastructure in LSI perimeters 32

in a manner that would take into account farmers’ capacity to pay and to facilitate the conversion of the irrigation system towards more efficient techniques.

107. The prior actions for this sub-component of DPL/1 is the publication in the National Gazette of an Order (Arrêté) requiring the beneficiaries of State assistance for drip irrigation to install a water metering system; and the signature by MAPM and MEF of the associated Instruction requiring these beneficiaries to include in their application package for the above assistance a declaration or authorization of water abstraction. 108. The trigger for DPL/2 is the submission to the Government Secretary General of a draft amendment of the Law 23/97 on direct contribution concerning farmers’ financial contribution rates to the cost of modernizing off-farm irrigation systems.

31 PHRD Grant No TF092827: Strengthening Capacity to Adapt to Climate Change Impacts on water Management in the Oum er Rbia Basin Project.

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109. The expected results of this sub-component are (i) groundwater abstraction is monitored in areas where drip irrigation is developed in order to make real water savings; (ii) drip irrigation is developed in LSI areas. These results will be measured through: (i) percentage increase of the number of declarations and authorization of water abstraction received / delivered; and (ii) cumulated number of farmers participating in projects of collection reconversion to drip irrigation. D.2. Improve the performance of irrigation service operators 110. Public Private Partnerships to improve the financial and technical performance of the irrigation service operators in large scale irrigation systems. The government has launched feasibility studies examining strategic PPP options for the operation of 5 LSIs (Loukkos, Tadla, Doukkala, Gharb, and Moulouya) currently managed by the ORMVAs. The PPPs are ultimately aimed at ensuring more efficient and sustainable irrigation water services. In preparing the ORMVAs for this process the Government is improving their financial health through increasing collection rates of arrears and raising irrigation water tariffs to cover the costs of operation and maintenance. Within the framework of the water DPL supported by the Bank, GoM had launched two successive operations in 2006 and 2008 waiving interests and fees associated with accumulated arrears for farmers who reimburse their debts related to irrigation water within a period of twelve months. These operations were successful as they allowed ORMVAs to recover MAD315 million. In 2010, the remaining arrears are estimated at MAD398 million and GoM decided to launch a third similar operation which is supported by the present DPL. In the region, Morocco is among the countries that have made significant progress in irrigation water cost recovery. In LSI areas, water is billed on a volumetric basis and the O&M cost recovery rates in 2010 vary between 68% and 100%. GoM intends to pursue the reduction of the gap between the irrigation water tariffs and the O&M costs in LSI areas with the objective to reach 100% in all perimeters. For this purpose, GoM issued in September 2009, a decision (Arrêté) announcing five biannual tariffs increases until September 2011 in order to send a clear price signal to farmers and to future candidates for PPPs. This, however, sparked opposition from farmers in certain LSIs which led GoM to postpone the measure and the Bank to consider it as a trigger for DPL2 and not as a prior action for DPL1. 111. The prior action for this sub-component of DPL/1 is the signature by MEF of a decision to waive interest for lateness and fees associated with accumulated arrears for farmers who commit to reimburse their debts related to irrigation water within a period of twelve months starting from the date of signature of this decision. 112. The trigger for DPL/2 is the implementation of the adjustment plan for irrigation water tariffs according to an updated calendar. 113. The expected result of this sub-component is the improvement of performance of irrigation service operators as tariff adjustments and public private partnerships are implemented. This result will be measured through the share of Operation and Maintenance costs covered by irrigation water tariffs in seven ORMVAs. D.3. Improve irrigation infrastructure planning by the Government 114. An integrated investment plan for water mobilization and irrigation infrastructure development would promote better coordination among different government actors. Weak planning coordination of water mobilization (responsibility of SEEE) and irrigation infrastructure (responsibility of MAPM) has contributed to underutilization of scarce water resources. In 2010, the gap between the area irrigable by reservoirs and the area irrigated by these reservoirs reached 108,000 ha. The investment needed to fill this gap is estimated at MAD15 billion; this program is included in the MTEF signed between MEF and MAPM. The objective of the action supported by the present DPL is to anticipate on future gaps created following the construction of new dams. An Integrated investment plan would be adopted for the irrigation perimeters downstream of the dams currently under construction and those programmed by the State Secretariat for Water and Environment (SEEE) for the period 2010–2012. This new integrated approach of planning will allow MEF to allocate financial resources consistently for investments in water mobilization and investments for irrigation infrastructure. .

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115. The prior action for this sub-component of DPL/1 is the transmission by MAPM to MEF of the integrated investment plan for the irrigation perimeters downstream of the dams under construction and those programmed for the period 2010-2012. 116. The trigger for DPL/2 is the allocation of resources for the irrigation perimeters located downstream dams under construction or programmed in the budget law. 117. The expected result of this sub-component is improved coherence of planning of investments in water mobilization and investments in irrigation systems. This result will be measured through the number of irrigation schemes located downstream of dams under construction or programmed with allocated resources / number of dams with agricultural scope under construction or programmed with allocated resources.

VI. OPERATION IMPLEMENTATION

A. POVERTY AND SOCIAL IMPACT 118. While the operation is expected to have significant positive impacts, a Poverty and Social Impact Analysis (PSIA) conducted jointly with the Government has been carried out. The PSIA focuses in particular on the potential impacts of the: (i) restructuring of the fruit and vegetable wholesale markets and slaughterhouses on formal and informal operators; (ii) implementation of Pillar I and II projects including aggregation; (iii) irrigation water tariff adjustments;33

(iv) extension and advisory services reform and introduction of enhanced food safety and quality standards. The PSIA report included consultations. An additional poverty and social impact analysis on irrigation is planned for the preparation of DPL/2.

119. The reform of the wholesale markets and slaughterhouses (WMSs) is likely to benefit large numbers of small farmers, however the livelihoods of several people, and particularly those active at the interface between formal and informal sector will be negatively affected. The first category of impacts concerns the delocalization of markets and slaughterhouses away from the city centers into peri-urban areas. All employees and informal sector workers face a steep rise in transport costs to retain their revenues, which can be attenuated by funding transport options (depending on whether the WMSs are publically or privately operated). A second line of impacts concerns the restructuring of WMS through concessions, PPPs, or other forms. The risk is that groups of informal sector workers (petty traders and restaurateurs, guards, transport people) lose source of revenues. Finally, during the course of the PSIA data collection, stakeholders highlighted the lack of physical security within WMSs as one of their main concerns. 120. The authorities have the opportunity to increase the performance and the acceptability of the WMSs reform through specific mitigating actions. The proposed National Communication Plan will be a key tool to raise awareness among stakeholders about the goals of increased efficiency and effectiveness pursued by the reform program as it can be use to communicate the expected impacts and envisaged solutions to key stakeholders. At the institutional level, the creation of the National Structure for the Development of WMSs overseeing the reform will in principle allow the authorities to assure the representation of the interests of different categories of stakeholders in the modernization process. The creation of a Wholesale Markets Modernization Fund can play a supportive role to increasing stakeholders’ buy in, but only if clear and transparent criteria for accessing the resources are put in place. The MAPM is well aware from their earlier experience with introducing concessions in slaughterhouses that legal and regulatory framework supporting the WMSs reform will benefit from greater recognition of the contribution of informal sector workers to the WMS operations. In this regard, the effects of both delocalization and privatization of WMSs can be at least partly mitigated by internalizing the impacts within the process and encouraging operators to take actions such as: (i) setting-up transport facilities linking old and new sites; (ii) re-absorbing (i.e. formalizing) informal sector workers; and (iii) guaranteeing security to WMSs employees. 33 This builds on the analysis undertaken as part of the Water Sector DPL.

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121. Measures aiming at enhancing irrigation water efficiency have largely beneficial impacts, but require capacity building and awareness raising efforts to improve implementation. The increase in the total subsidies for more efficient irrigation infrastructure (drip) has the potential of generating important cost savings in terms of water use, as well as other beneficial effects, such as the reduction in certain pests and diseases associated to traditional irrigation. The main concern has to do with the lack of technical expertise regarding the utilization of drip infrastructure among small farmers, which could lead to a risk of technology exclusion for small farmers, unless the subsidies are associated to capacity of agriculture extension programs. Concerning the potential increase of water tariffs, the consultations with farmers and stakeholders during the PSIA data collection have not highlighted a generalized opposition to this reform component; however there has been some opposition in specific locations. It will be important to raise awareness on the long term beneficial impacts of water tariff increases on the sustainability of water resources, and eventually on land prices. The MAPM has also requested specific assistance in designing a public information campaign around the issue of raising irrigation tariffs to cost recovery levels and this is planned as part of the PSIA during DPL/2. 122. The reform of extension and advisory services will not have major negative impacts, but the introduction of food safety standards will. No major impact is foreseen from the demise of the old extension and advisory system and the rise of the new system, and any gaps that occur are planned to be addressed through the CRPII. The introduction of more stringent food safety standards implies the need for resources and expertise to ensure compliance. To this effect, ONSSA is working with small processing facilities with limited capacity to develop upgrading plans. The aggregation system may also be a powerful tool to bring groups of farmers up to the new standards in the framework of specific Pillar I and II projects. 123. While not part of the World Bank’s support, the Government’s agricultural land mobilization objectives in the frame of the PMV are likely to lead to overall positive effects, although the potential localized opposition should be taken into consideration. In order to achieve its objectives, the Government aims to mobilize roughly 700,000 ha of collective land. As this land mobilization takes place within a program of agriculture development projects under PMV Pillar I and II, it can generate a number of broadly positive effects, such as the valorization of land, increased access by small holders to public and private investments within PMV projects, and job creation. The key risk to implementation is that land mobilization stirs up tensions among stakeholders regarding the transfer of rights. This risk is always context specific, and not inherent to the implementation of the PMV but to all collective land transactions in Morocco. In addition to encouraging the creation of cooperatives/associations of rights holders, good communication between the authorities and the rights holders is critical to success. An additional mitigation measure being considered is that each Pillar I and II project be supported by a mini social assessment addressing issues around land tenure. Another risk concerns the mobilization of land where there are not sufficient water resources to realize the proposed Pillar I or II projects. To minimize this risk, ADA and the DRA have set up social and environmental screening criteria to try and ensure project sustainability.

B. ENVIRONMENTAL ASPECTS 124. Over the last decade, Morocco made significant progress in improving the institutional and legal framework for environmental protection. The State Secretariat (in charge of Water and Environment), within the Ministry of Mines, Energy, Water and Environment (MMEWE), has become a full-fledged environmental administration. Morocco developed a comprehensive environmental strategy in 2005 -the National Environmental and Sustainable Development Strategy- with four main priorities: water protection, waste reduction and management, water quality improvement, and soil protection. In addition, the Government passed Law No. 12-03 in 2003 defining the requirements for Environmental Impact Assessments (EIAs) and creating a national committee within the MMEWE for the review and oversight of EIAs. Furthermore, the Council of Government recently enacted two decrees related to the establishment of the national and regional EIA committees as well as a decree for public consultation and disclosure. Additional measures are also being taken to strengthen the Moroccan environmental institutions and legal framework with the support of various donors and international development agencies, notably GTZ. All these developments strengthen the environmental protection framework in Morocco, both at national and local level, and contribute to the necessary legal and institutional capacity to manage the potential environmental impacts of the proposed reforms.

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125. As per OP 8.60, the Bank assessed whether specific country policies supported by the operation are likely to cause significant effects on the country’s environment, forests, and other natural resources. Agriculture is an environmentally sensitive sector where policy actions supported by a DPL may have either positive or negative effects on the environment. An assessment of likely significant positive and negative effects of the proposed actions on the environment and natural resources was undertaken. The assessment identified the primary the transmission channels through which the proposed reform actions could impact environmental and natural resources and estimated the potential magnitude of these impacts. In addition, an assessment was conducted of the political, legal, and institutional framework governing these potential environmental impacts as well as the capacity of the environmental authorities in Morocco to address any additional environmental impacts that may emerge during implementation. Two consultations were completed, one with representatives from non-government organizations working on environmental issues and the second with representatives from universities. During both of these consultations the potential environmental impacts of the actions in the program were discussed, as were associated mitigating measures. The discussion primarily centered on the potential environmental impacts associated with the construction and/or upgrading of WMSs and proper waste disposal. Overall, the participants broadly concurred with the findings of the assessment and the proposed mitigating measures. 126. The assessment of the potential environmental effects of the reforms under the proposed DPL program concluded that on balance it is likely to have significant positive effects on the environment. Main positive effects of the proposed operation include: (i) improved water resources management (ii) improved waste handling and disposal (iii) increased environmental awareness in the agricultural sector. Potential negative effects include: (i) increased generation and concentration of waste at wholesale markets and slaughterhouses; and (ii) increased pressure on scarce water and arable land resources due to increased demand and pollution resulting from accelerated agricultural development. These potential negative effects, if not properly mitigated, could be important and long lasting. Appropriate mitigating measures already integrated in the current program design include: (i) improved operation and maintenance of wholesale markets and slaughterhouses through the introduction of new ownership and management models; (ii) environmental screening mechanisms governing the identification and selection for Pillar II projects; (iii) development of more efficient irrigation water systems management through PPPs; and (iv) promoting more efficient water use through tariff adjustment and improved monitoring mechanisms. Furthermore, the ADA is proposing to undertake a comprehensive environmental impacts analysis of the entire PMV program over the course of the next year.

C. IMPLEMENTATION, MONITORING AND EVALUATION 127. Responsibility for implementing the program rests with the MAPM. The Strategy and Statistics Directorate (DSS) of the MAPM will be responsible for the overall implementation, monitoring and evaluation of the program in collaboration with other government stakeholders such as the MEF, MICNT, MI, and SEEE. In addition, a Steering Committee including the representatives of the Government departments and organizations involved in the program has been established at the level of the Ministry of Economic and General Affairs (MAEG) and will be responsible for supporting the inter-ministerial coordination of the implementation of the DPL program. 128. Monitoring and evaluation of the program will be an integral part of the supervision process. Bank staff will focus on the impact outcomes of the program and the adjustments that need to be made to the operation as it evolves, to take into account the latest country developments, stakeholder support, and feasible options for realizing the intended development goals. While taking into account the goals of the DPL program, the review will be largely based on the results indicators and associated target values included in the proposed Policy Matrix (Annex C) and Results Monitoring and Evaluation Framework (Annex D) respectively. At the same time, the overall status of the Government’s program will be monitored to determine whether country conditions and the specific policy actions of the proposed operation have been met. The selected monitoring indicators and associated target values focus largely on measuring progress in terms of institutional gains achieved under the DPL program, rather than development gains on the ground. In fact, the program’s development gains are unlikely to materialize in the relatively short timeframe of the proposed program and hence would be difficult to measure.

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D. FIDUCIARY ASPECTS 129. A Public Expenditure and Financial Accountability (PEFA) assessment was undertaken in 2009 jointly by the European Commission and the Bank. The PEFA report has confirmed substantial progress in Public Finance Management (PFM) reforms in Morocco. The results based on the PEFA ratings indicate in particular that Morocco has an overall credible, comprehensive, and transparent budget. The PFM system also supports the achievement of aggregate fiscal discipline, strategic allocation of resources and efficient service delivery. The main strengths of the Moroccan PFM are the following aspects: (i) credible and transparent budget, (ii) transparency of taxpayer obligations and liabilities, (iii) timeliness and regularity of Government’s banks’ accounts reconciliation, (iv) accurate and timely in year budget reports covering expenditures at both commitment and payment stages, and, (iv) strong cash and debt management. The main challenges of the Morocco PFM relate to: (i) improvement of the budget classification, since despite the level of detail, accuracy, and reliability, it does not yet allow for reliable direct tracking of program-related spending being financed under priority programs; (ii) timeliness of annual statements which are submitted for external audit 15 months after the end of the fiscal year,(iii) the limited extent of legislative scrutiny of external audit reports, and (iv) the frequency and scope of audit rated average as is follow-up of audit recommendations. The Government is committed to address these challenges and, in order to do so, has introduced measures to: (i) move to a performance based budgeting framework, (ii) develop an MTEF to assist in fiscal sustainability, (iii) modernize its accounting and internal audit framework, and (iv) improve revenue management. The 2009 PEFA is also contributing to the Government’s reform process by providing information on the extent to which reforms are yielding improved performance. In conclusion, the strength of Morocco’s PFM system and the government’s commitment to reform, taken together, are, in the Bank’s view, adequate to support this DPL. 130. Foreign exchange - No safeguard assessment of the Central Bank (Bank Al-Maghrib) was conducted by the IMF. However, the Central Bank is audited on yearly basis with the audit report being disclosed publicly. These audits did not indicate any weaknesses in the control environment and the external auditor certified 2009 financial statements. 131. With reference to the flow of funds, the proposed loan will follow the Bank’s disbursement procedures for development policy support. Once the loan is approved by the World Bank’s board and becomes effective, the proceeds of the loan will be disbursed in compliance with the stipulated release conditions as defined in the Development Loan Agreement and in a single instalment. Flow of funds (including foreign currency exchange) is subject to standard public financial processes The Government budget is comprehensive, unified and subject to centralized treasury account. Loan proceeds will be deposited in a government dedicated account at the Central Bank and the equivalent of the funds in local currency will be transferred to the Treasury current account being the government budget account. The Ministry of Finance will then furnish to the Bank a confirmation of this transfer and advising that the total sum of the loan has been received in an account that forms part of the country’s official foreign exchange reserves and credited to the account used to finance budget expenditures. 132. Disbursement and Audit - The loan proceeds will be deposited by the International Bank of Reconstruction and Development (IBRD) in a dedicated account opened by the Borrower and acceptable to the Bank at the Central Bank of Morocco (Bank Al Maghrib), upon submission of a signed withdrawal application. The Borrower should ensure that upon the deposit of loan proceeds into said account, an equivalent amount, in the local currency, is credited to the treasury current account at the Central Bank. The Borrower will report to the Bank on the amounts deposited in the foreign currency account and credited to the budget management system. If the proceeds of the loan are used for ineligible purposes as defined in the Development Loan Agreement, IBRD will require the Borrower to promptly upon notice refund an amount equal to the amount of said payment to IBRD. Amounts refunded to the Bank upon such request shall be cancelled. The loan proceeds will be administered by the Ministry of Finance (MoF).

Budget Morocco PFM

System

World Bank MOF

MD Budget Account at CBM

CBM Euro Dedicated Bank Account

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133. Although an audit of the use of the funds may not be required, IBRD reserves the right to ask for a transaction audit. This audit, when asked for, will cover the accuracy of the transactions i.e., receipts and payments of the dedicated account, including accuracy of exchange rate conversions; confirming that the dedicated account was used only for the purposes of the operation where no other amounts have been deposited into the account. Also the auditor will have to obtain confirmation from corresponding bank(s) involved in the funds flow regarding the transaction. The time period for submission of the audit report to the Bank is 6 months from the date a request for such audit is issued.

E. RISKS AND RISK MITIGATION 134. Government commitment to agri-food sector reform may weaken. There is a risk that DPL/2 does not materialize due to a weakening of government commitment to sector reforms, insufficient engagement of government stakeholders outside the purview of the MAPM, difficulties in finding in the short run solutions to complex questions with a high socio-economic impact, or a change in government priorities following the national elections scheduled to take place in 2012. However, these political risks are mitigated by the demonstrably strong commitment to the implementation of the PMV at the highest level of the current government and H.M. the King. In addition, Morocco’s Advanced Association Status with the EU and bilateral agricultural trade liberalization will help maintain reform momentum in the agri-food sector. A Steering Committee involving all government stakeholders involved in the implementation of the DPL program has been established at the level of the MAEG prior to project effectiveness. Furthermore, significant reform actions have already been undertaken by the Government. A Medium-Term Expenditure Framework Agreement (MTEF 2009-2015) has been signed between the MEF and the MAPM and the MAPM’s budget for 2010 is in line with the MTEF. Key institutional and policy reforms have been implemented since the adoption of the PMV, including the creation of 16 DRAs, establishment of specialized agencies such as ADA and ONSSA, regionalization of the Chambers of Agriculture, creation of Interprofessions for 9 priority agri-food chains, reform of the agricultural subsidy system under the FDA, and the signing of an agricultural FTA with the European Commission. 135. Some of the proposed reforms may be opposed by vested interests and marginalized stakeholders. The proposed reform agenda for domestic markets may meet resistance from municipalities as well as the vested interests of current agents and intermediaries linked to the municipal fruit and vegetable wholesale markets (mandataires) and users of slaughterhouses (chevillards). An important mitigating measure that will help ensure the success of the exit plan for the intermediaries is the recent inclusion of the financing necessary for their exit in the 2011 budget. Resistance of municipalities in relation to the domestic markets reform program would be mitigated through the pilot approach adopted under the DPL program as well as the potential demonstration effect of the win-win arrangements in the new wholesale market ownership and management structures piloted under the program. Specific measures to mitigate the risk of opposition stemming from the vested interests of current agents, intermediaries and users at the level of the fruit and vegetable wholesale markets and slaughterhouses, water users, and stakeholders on collective lands, are proposed based on the PSIA and are being taken into account in the design of the program. They are likely to include safeguard measures ensuring enhanced stakeholder consultation and participation in the decision-making processes related to the proposed reforms. 136. The private sector may be hesitant to participate in the proposed aggregation model for the Pillar I and Pillar II investment program. Although central and local administrations will play a mediating role between producers and potential investors and active mobilization of investment resources will be pursued by ADA, the risk of a lack of confidence between potential agrégées and agrégateurs could undermine the design of the PMV’s Pillar I and Pillar II investments. The adoption of the Law on Aggregation could mitigate this condition by creating a supportive legal and institutional environment, for example through the establishment of a procedure in the law. The agrégateurs will sign contracts with both ADA and agrégees in order to benefit from government investment support under the PMV. The modernization and liberalization of domestic marketing and distribution systems supported under the DPL program as well as the enhanced subsidies and investment support under the reformed FDA constitute additional mitigating measures by promoting greater cooperation between producers and investors through an improved incentive framework.

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137. The macroeconomic risk, particularly that of deterioration of fiscal balance and current account as a result of internal or external shocks, is low. Sound macroeconomic and fiscal policies, as well as efforts to improve sector productivity and competitiveness, put Morocco in a good position to maneuver with less damage through the global crisis, while benefitting from the recovery of the world economy. Inflation is expected to be contained at low levels. After a temporary higher estimated deficit in 2010, the fiscal stance is expected to remain sound over the medium term. The financing needs, stemming from the higher budget deficit in 2010 and the declining deficits over the medium term, are also expected to be easily financed through the domestic market as well as from increased drawings on external loans. A comprehensive public debt sustainability analysis shows that the fiscal framework is robust to downside risk in the medium term. The balance of payments financing requirements do not constitute a serious concern given the sound economic fundamentals, the country’s low external debt stock, and the ample foreign reserves.

138. Morocco remains vulnerable to chronic drought, adverse climate changes and fluctuations in energy prices. The dependency of Morocco agriculture on rainfed yields, particularly for poor and vulnerable farmers, coupled with increased water scarcity and adverse evolution of climate changes in the medium and long run pose serious social and economic concerns. The Government is increasingly aware of the situation and is devoting considerable efforts that would lead to an integrated strategy to address climate change issues. The new strategy addressing the impact of global warming as well as the PMV are key contributions to foster this agenda. The Bank will continue to support such efforts as the entire third pillar of the new CPS is devoted to the challenge of climate change and sustainable development. A SCCF/GEF grant on integrating climate change adaption in the implementation of the PMV is closely aligned with the DPL. Regarding energy prices the current reflection on the reform of subsidy system and of energy tariffs will provide the basis for mitigating the risks associated with international price fluctuations.

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VII. ANNEXES

A. ANALYTICAL AND ADVISORY WORK

Output Responsible Agency (Co-)Financing Sources Timeframe

General DPL Poverty and Social Impact Assessment MAPM (DSS)/World Bank MAPM (DSS)/WB 2010 Environmental Due Diligence Review MAPM (DSS)/World Bank MAPM (DSS)/WB 2010

A. Domestic Markets National fruit and vegetable wholesale markets study

MAPM (DSS) / MICNT (DCI) / MI (DGCL) MICNT (DCI) 2010

Pre-feasibility study for 3 proposed wholesale market pilot projects

MAPM (DSS)/ONSSA WB/FAO 2011

Pre-feasibility study for 3 proposed slaughterhouse pilot projects

MAPM (DSS)/ONSSA WB/FAO 2011

Feasibility studies for selected wholesale market and slaughterhouse pilot projects

MAPM (DSS) / ONSSA/MICNT (DCI) / MI

(DGCL) TBD 2012

Establishment of cahiers de charges harmonizing the modalities for slaughterhouse integrated projects

MAPM/ONSSA/MI (DGCL) ONSSA 2010

Establishment of cahiers de charges harmonizing the modalities for slaughterhouse concession projects

MAPM/ONSSA/MI (DGCL) ONSSA 2011

Establishment of cahiers de charges harmonizing the modalities for operating wholesale markets

MAPM (DSS) / ONSSA/MICNT (DCI) / MI

(DGCL) ONSSA 2012

B. Agricultural Investment Support Establishment of a manual describing procedures for prioritizing the use of budget allocations for implementing Pillar II projects

ADA ADA 2010

Designing a monitoring and evaluation system for Pillar II projects

ADA ADA 2010

Definition of Pillar II communication strategy

ADA FAO 2011

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Establishment of an Operational Manual outlining the procedures for preparing, submitting, and implementing Pillar II projects

ADA ADA 2010

C. Agricultural Services Study on the national agriculture extension strategy

MAPM (DSS) MAPM (DSS) 2010

Revised procedures for competitive grant financing mechanism for applied research

MAPM (DEFR) MAPM (DEFR) 2010

Development of training program for conseillers agricoles and MAPM extension staff

MAPM (DEFR) FAO/CB 2010

Development of CRPII training modules and capacity-building programs

MAPM (DEFR)/CRPII FAO 2010

D. Irrigation Water Development of monitoring and evaluation system for PNEEI

MAPM (DIAEA) DIAEA 2010

Development of capacity building program for monitoring PPP studies, selection of private operators, and monitoring PPP contracts

MAPM (DIAEA) DIAEA 2010

Development of a Political Economy Analysis for irrigation water reforms

MAPM (DIAEA) WB 2011

Action Plan for irrigation water research-extension-training

MAPM (DIAEA) DIAEA 2010

Establishment of system for measuring real evapotranspiration and determining water balances at the level of the River Basin Agencies s of Souss and Tensift as well as the ORMVAs of Souss and Haouz

MAPM (DIAEA) DIAEA 2010

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B. LETTER OF DEVELOPMENT POLICY

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TRANSLATED VERSION

KINGDOM OF MOROCCO

Ministry of Agriculture and Maritime Fisheries

Rabat, February 7, 2011

Mr. Robert B. ZOELLICK

World Bank President

Washington, D.C. USA

Subject

: Agricultural Sector Development Policy Letter

Mr. President:

Agriculture is an important pillar for the development of Morocco’s economy. Its economic and social weight, its direct link to rural areas and its various functions which are related to food, economic, social and environmental aspects, make it an important economic driver for our country.

The importance of agriculture is demonstrated by its significant contribution to the formation of national GDP (15% to 20%) and job creation (40%), particularly in rural areas where agriculture remains the largest employer (80%) and the main source of income (1.5 million farmers).

Performance of the agricultural sector shows significant results but they are somewhat non uniform. This performance has been further weakened by high rates of population growth in our country and the absence of diversification of economic activities in rural areas. This has resulted in the sector’s chronic growth deficit in contrast with strong demand from both rural households and the market. The need to improve significantly agricultural revenues through investment and capacity to enhance the sector in order to contribute to food security in a new innovative environment, have both led to recognize the urgent need for a new agricultural policy. The answer was then provided by the Plan Maroc Vert implemented since 2008, which identified Moroccan agriculture as the engine of economic growth and one of the most efficient tool to reduce poverty over the next 15 years.

I. OVERVIEW OF THE AGRICULTURAL SECTOR

Over the last ten years, average annual growth rate of agricultural GDP was over 3.98%. The observed growth variations are mainly due to drought years (every other year).

National agriculture can meet either totally or partially local market needs of food products. National demand met by domestic production have been estimated at 55% for cereals, 100% for fruit and vegetables, 43% for sugar, 20% for oil, 90% for milk and 100% for meat. Indeed, cereals, vegetable oils and oilseeds, sugar and dairy products represent 66% of the average value of agricultural imports.

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Food exports, on the other side, represent 19% of the country’s total exports revenue, about 22 billion DH. They include mainly fresh citrus, fresh and canned vegetables, which accounts for 20, 20 and 16% respectively of the average value of agricultural exports.

Irrigated areas covering 1.4 million ha, about 15% of the agricultural areas, contribute to about 45% to agriculture value-added. This capital, although unevenly distributed throughout the country, has a critical role in economic development and plays a major role in strengthening and stabilizing the country's food security and improving the living conditions in rural areas.

Moreover, our agriculture is predominantly cereal-based (70% of the UAA for 10% jobs), and is therefore always subject to unpredictable weather conditions. Consequently, it is important to adapt policies to the specific agro-ecological conditions of the country and to the challenges of climate change.

In a significant part of the sector and in the various regions, the existing players are fragmented and weak, disorganized and unable to face the challenges of modern agriculture by relying exclusively on their own resources. Indeed, low productivity, lack of investment and valorization of the Moroccan agriculture can be explained by these players’ weaknesses, coupled with a lack of organization of agri-food chains around the entrepreneurs (agrégateurs) with high potential for investment and management capacity. The players’ weaknesses are also responsible for the lack of financial resources allocated to the sector by the national banking system, which covers only 16% of the financing needs.

Marketing is a critical step for the valorization of agricultural products whose competitiveness is reinforced at the production stage. Developing a sales force strategy in the domestic and export markets is the right strategy to achieve the set objectives. The domestic market could, as the case may be, seize this opportunity and/or be the driving force.

However, marketing channels in the domestic market face a structural deficits resulting from lack of liberalization and competition, failure in setting reference price levels and lack of exchange information at the national level, in addition to limitations hindering the development of modern distribution channels.

Transaction costs for agricultural products are still high. Efforts have been deployed to modernize domestic market distribution channels (wholesale reform, infrastructure upgrade, promotion of quality: labeling, traceability, geographical indication ...).

As to the strategy, conditions for the effective functioning of domestic market involving organized players, to supply Moroccan consumers with quality products at a competitive and/or affordable price, entailed the following:

• Improvement of market access through gradual liberalization of domestic markets;

• Improvement of quality and hygiene standards;

• Promotion of modernization of marketing channels;

In addition, Morocco has gradually opened up its domestic agriculture to international markets, either through unilateral trade liberalization, or through bilateral or multilateral free trade agreements.

This opening has allowed the sector to outsource part of its productive potential and thus achieve concrete results in domestic and international markets. Efforts are being deployed to adapt the systems in place to support and protect domestic agricultural production according to the sector set objectives, and by taking into account the country‘s commitments at the national level.

Given the current international markets situation and long-term prospects for international market development for agricultural products (tendency for increased demand, firming of food prices, increased demand for bio-fuels, significant agricultural commodities price fluctuations), adjustment of tariff protection measures should be

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accompanied by the establishment of an enabling environment and incentives for better sector resource allocation and competitiveness of national industries, ensuring growth in the sector and food security in the country.

It is also an opportunity to improve long-term planning for investors and operators and foster long-term commitment of key players.

To consolidate results and take advantage of the strategic position that Morocco could have, by serving as a platform for trade, business, and investment, an aggressive strategy to promote our exports is also necessary, particularly through the harmonization of regulations and procedures, sustained support to recognized dynamic agri-food chains, promotion of quality and the Moroccan labeling for products of high commercial value, the development and promotion of certain niche markets and local products, and new markets exploration.... etc.

To cope with these constraints, it is two years that Morocco has launched its new national roadmap for the agricultural sector Plan Maroc Vert, aiming at modernizing agriculture and facilitating its harmonious integration into the national and the international markets. The Plan aims at making agriculture the main engine of national economic development for the next fifteen years for which well-defined production targets have been identified and data collected at the local level under the Regional Agricultural Plans.

II. GOVERNMENT’S AGRICULTURAL STRATEGY

The Plan Maroc Vert has adopted a pragmatic global approach to mobilize all stakeholders in agricultural development initiatives. It is structured around two pillars:

The first pillar aims at developing a modern and productive agriculture, complying with market rules and based on private investment in agri-food chains with high value added and high productivity.

The second pillar aims at promoting agriculture-based solidarity and the fight against poverty in economically fragile areas by increasing the incomes of poor farmers through the implementation of integrated and economically viable projects.

The social and economic returns of this strategy remain ambitious in terms of value added, investment, job creation and increased income for farmers. The Plan Maroc Vert also relies on revising the sectoral framework and improving cross-cutting factors, particularly related to water policies, land, and inter-professional collaboration.

Better integration with strengthening of upstream and downstream investment was put at the core of this Plan. This downstream agribusiness has an important development potential and adopts the contract farming (Agrégation) model that favors the aggregation of small and medium players around larger ones.

For the period 2009-2015, investments (public and private) account for 20 billion Moroccan Dirham per year. Private investment will be provided by new national and international investors in the sector, investing in contract farming (Agrégation) win-win projects, thanks to a specific Moroccan offer.

The development Plan entailed important reforms and based on accountable governance structure enabled in each region by the various sector stakeholders and operators: farmers representatives, local government, professionals, and relevant government ministries.

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In its first implementation phase, the Plan Maroc Vert launched a series of important institutional reforms including:

Actions taken/completed

– Reorganization of the Ministry of Agriculture and Maritime Fisheries to engage more in decision-making in local regions.

– Establishment of 16 Regional Agricultural Directorates (DRA) and 16 Chambers of Agriculture, which have developed, with the participation of key local players, 16 Regional Agricultural Plans (PARs).

– Establishment of the Agricultural Development Agency, the implementation arm of the Ministry, whose main mission is: the intermediation and the launch of agri-food chain projects in line with the PARs and the management of partnerships with private investors and international organizations.

– Establishment of the National Food Safety Agency (ONSSA) responsible for regulation and quality control and sanitary standards.

– Establishment of the Agency for Development of oasis zones and of Argan (ANDOZA).

To achieve these goals in terms of wealth and employment creation, and to fight poverty, partnerships were established and implemented with stakeholders at different levels (sectoral, regional ...) and involving:

• Creation of 10 Interprofessions and the signing of agri-food chain contract programs between the Government and the professionals involved in these agri-food chains: sugar, citrus, cereals, vegetables, date palm, milk, red meat, poultry, seeds, olive culture, and institutional mechanisms for annual monitoring and evaluation of their implementation (2008, 2009, and 2010);

• 16 Regional Agricultural Contracts reflecting the individual implementation of the Plan Maroc Vert in each region through projects, investments, employment, and exports are implemented with local partners (local authorities, Chambers of Agriculture, and relevant government ministries) (2009).

• Investment decisions were influenced by the review of available financing options and consideration of incentives provided under the Agricultural Development Fund (FDA). These reforms have proven to be effective in achieving the objectives of the country's agricultural policy and improved the efficiency of the FDA as an instrument to promote and encourage investment.

• Partnership contracts were signed between the Government and major Moroccan banks to provide financial support, including the creation of a specialized structure to allocate financing resources to small farmers.

Two years after its launch, the new agricultural strategy was strengthened and implemented, providing visibility to national and international players and becoming a real tool for economic development and the fight against poverty in Morocco.

While the Plan Maroc Vert continues to carry out its major reforms, the Development Policy Loan subject of this letter aims at supporting the implementation of this program and it is structured around the following actions:

Action Plan

- Integration of farmers into the domestic market;

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- Improvement of the socio-economic impact of Pillar II projects directed to small farmers;

- Improvement of agricultural services;

- Improvement of the use and the management of irrigation water and the planning.

1.

The overall objective is to improve the institutional and regulatory framework for fruits and vegetables wholesale markets, slaughterhouses and their management in order to ensure:

Integration of farmers into the domestic market

- Improved farmer access to better quality wholesale markets and slaughterhouses.

- Increased agricultural revenues.

- Improved quality and sanitary safety of food products and agricultural inputs.

- Reduced transaction costs for fruits and vegetables, and meat on domestic markets.

In order to attain these objectives, the Government will essentially adopt the following measures:

- Improve the institutional and regulatory framework governing fruit and vegetable wholesale markets through the implementation of a National reform strategy and Action Plan and the implementation of pilot projects of fruit and vegetable wholesale markets introducing new management models.

To ensure constructive and pragmatic monitoring of these actions, an inter-ministerial partnership effort has been implemented. Thus, a monitoring committee appointed by the Minister of Agriculture was created to work closely with partners of the National reform strategy and Action Plan for fruit and vegetable wholesale markets according to the program’s strategic direction.

- Improve the institutional and regulatory framework governing slaughterhouses, as well as red meat distribution systems through, first, the preparation of specific technical specifications for private slaughterhouse, and second, the development of municipal projects. In this regard, the contract program for the red meat food chain will focus on directing municipal slaughterhouse management operations towards the private sector, representing a major pillar for development and launching of the agri-food chain.

Moreover, the red meat contract program, agreed between the Government and the industry, includes the implementation of at least eight (8) private and aggregated projects for local slaughterhouses. Seven (7) promoters have already taken the necessary steps to implement their projects and are currently at various stages of development. Studies are also under preparation to prioritize slaughterhouse management improvement actions.

2.

The overall objective of Pillar II is improving the socio-economic impact of projects through improved governance and financing, and through the establishment of a legal and institutional framework governing contract farming (Agrégation).

Improvement of the socio-economic impact of Pillar II projects directed to small farmers

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In this regard, the Government will implement the following measures:

• Adoption of a participatory, inclusive and transparent approach for project implementation under Pillar II. The Ministry of Agriculture and Maritime Fisheries, through the development of Regional Agricultural Plans, now has a clear vision for the future with a focus on short-, medium- and long-term actions. The action envisaged aim to reinforce governance in order to ensure the participation in the project and thus their sustainability.

This approach will also ensure that small farmers in target areas, including women and youth, will contribute to the decision-making and implementation process of Pillar II projects. A manual of procedures for prioritizing the projects, and a manual of procedures have been prepared along these lines.

Moreover, an on-line monitoring and evaluation system for Pillar II projects is being upgraded, at both the central (ADA) and regional (DRA) levels. It will be based on clearly defined reference indicators. In this connection, a monitoring and evaluation framework including results indicators for each Pillar II project has already been prepared by ADA.

• Institutionalize the incentives granted to small farmers in the framework of the contract farming (Agrégation): a decree supporting Government investments for contract farming has been published.

The objectives of the contract farming (Agrégation) model based on the findings of a tri-lateral contractual arrangement between entrepreneurs (agrégateurs), farmers (agrégés), and the Government are to help overcome existing land constraints, to promote farmer organizations, support risk-sharing, optimize production and marketing links, and enable producers’ access to finance, knowledge, and technologies.

3.

The overall objective aims to improve the effectiveness of the agricultural innovation system and strengthen the efficiency of sanitary food control operations, as follows:

Improvement of agricultural services

• Improved efficiency of the agricultural innovation system: Government has already created structures (i.e., committees and working groups), responsible for the monitoring of contract programs signed with agri-food chain representatives (vertical approach) which include all components of agricultural extension and training. Moreover, the Government of Morocco has decentralized and deconcentrated the services of the Ministry of Agriculture and Maritime Fisheries and the Chambers of Agriculture.

The Government has also launched the creation of six regional centers of the National Institute for Agronomic Research (INRA), the implementation of a legal framework for private agricultural advisors, and developed a training center, the Center for Pillar II Resources, in Ifrane.

The development of a new strategy for the Advisory Services planned in 2011 includes important progress. The Ministry of Agriculture and Maritime Fisheries has paved the way to ensure that the Advisory Services effectively support the implementation of the Plan Maroc Vert through the establishment of screening criteria for the Advisory Services based on the progressive autonomy of farmers and ownership of parties concerned. The Government regulates and stimulates the development of the Advisory Services while preserving public services for farmers. Private parties are also responsible for the application of Government measures.

Further to the adoption of this strategy, the program will pursue the creation of consultative committees at the national and regional levels to effectively coordinate applied research, agricultural extension and training activities (horizontal approach), including activities not covered by contract programs. These committees will include representatives of the public and private sectors and civil society, and will adhere to uniform

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rules of operation. This program will also aim at the adoption of a legal status for agricultural advisors and the provision of competitive applied research financing mechanism.

• Establishment of an effective food safety control system. The Government of Morocco has already created the National Food Safety Agency through Dahir No. 1-09-20 of 22 Safar 1430 (February 18, 2009) promulgating law No. 25-08 creating the National Food Safety Agency, and has also approved the law on Food Safety. The program would thus focus on preparing application decrees and the necessary follow-up administrative measures. These actions would be strengthened by an integrated information campaign for consumers, producers and agro-industrial enterprises.

4.

This axis has the following objectives:

Improvement of the use and the management of irrigation water and the planning of irrigation infrastructures

- Improving the efficiency and sustainability of farmers’ water use.

- Improving the performance of irrigation service operators.

- Improving irrigation infrastructure planning.

In order to reach these objectives, the Government will adopt the following measures:

• Promotion of the development of drip irrigation through incentives for farmers to declare their water abstraction and to ensure more efficient and sustainable irrigation water use. The Moroccan Government has already significantly improved the incentives framework for the development of drip and sprinkler irrigation by substantially increasing subsidies for on-farm purchase of irrigation equipment and to bolster the National Program of Irrigation Water Conservation (PNEEI).

The Government will implement measures aiming to complete the incentives framework by revising the farmer participation rate in the cost of off-farm irrigation scheme modernization equipment and by requiring farmers benefitting from Government subsidies to comply with the water law on water abstraction. The Arrêté and Instruction regulating Government aid for drip irrigation have been published.

• Improved technical and financial performance of irrigation service operators to ensure the efficiency and sustainability of irrigation infrastructure. The Moroccan Government has launched a large reform effort in this area targeting irrigation service delegation to the private sector. Feasibility studies of Public-Private Partnerships (PPPs) are currently under preparation in five Public Agricultural Development Agencies (ORMVAs), namely Loukkos, Tadla, Doukkala, Gharb, and Moulouya.

The adopted policy aims to improve the rate of irrigation water cost recovery charges, including any existing arrears. This proven effective measure will not only improve recovery from non-performing ORMVA loans over the past several years, but will help create an institutional environment for reforming water service management efforts within PPPs.

The Government is also pursuing an adjustment plan for irrigation water tariffs which aims to cover the sustainable cost of service through irrigation water tariffs. The proposed actions in this Development Policy Loan will focus on facilitating and monitoring this important reform.

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• Ensure coherence of irrigation investments with water mobilization investments to increase the value of mobilized water. The Government of Morocco has planned an irrigation development program downstream of existing dams to reduce the gap between areas dominated by dams and lands with irrigation schemes. The actions proposed aim to anticipate potential gaps which could occur following new dam construction through the establishment of investment plans and feasibility studies of irrigation schemes.

III.

In addition to the operational monitoring and evaluation of the program which will be overseen by the Strategy and Statistics Department of the Ministry of Agriculture and Maritime Fisheries, a pilot committee including relevant ministerial departments and organizations (Ministry of Agriculture and Maritime Fisheries, Ministry of Economy and Finance, Ministry of the Interior, Ministry of Industry, Commerce and New Technologies, State Secretariat for Water and Environment, National Food Safety Agency, and Agricultural Development Agency) will be created within the Ministry of Economic and General Affairs. This committee will be responsible for inter-ministerial coordination and strategic monitoring of the program’s implementation.

Monitoring and Implementation Arrangements of the Reform Program

In view of the need to ensure continued support to the Plan Maroc Vert’s objectives and implementation arrangements, the Moroccan Government will develop a communication strategy including messages, target audience, and the appropriate means to support those objectives.

This vast reform program is part of a sustained and continued endeavor and the Government of Morocco attaches the utmost importance to your institution’s support through a Development Policy Loan. Finally, I wish to express my gratitude for the World Bank’s interest in the development of this sector.

Very truly yours,

The Minister of Agriculture and Maritime Fisheries

/s/

Aziz AKHANNOUCH

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C. PROPOSED POLICY MATRIX

OBJECTIVES ACTIONS INDICATORS DPL/1 DPL/2 A. Improve the efficiency of domestic markets A.1. Improve the institutional and regulatory framework governing fruit and vegetable wholesale markets The efficiency of domestic markets is improved by reducing marketing costs and improving marketing services

The national fruit and vegetable wholesale markets reform strategy and action plan (Schéma National d’Orientation) have been validated by MICNT, MAPM, and MI on June 25, 2010

Three conventions will be signed between local government and relevant ministerial departments for implementing fruit and vegetable wholesale market pilot projects introducing new management models

Number of fruit and vegetable wholesale markets under new management model launched (Target: 3)

A.2. Improve the institutional and regulatory framework governing slaughterhouses The efficiency of slaughterhouses is improved by reducing marketing costs and improving marketing services

The specifications for sanitary, hygienic, and facility requirements of private slaughterhouses (Cahier des Prescriptions) have been adopted by ONSSA on October 1, 2010

The specifications for technical, administrative, and contractual requirements for operating municipal slaughterhouse concessions (Cahier des Prescriptions) will be adopted by inter-ministerial decision of MAPM-MI

Number of private slaughterhouses launched (Target: 7) Number of slaughterhouse concessions under new management model launched (Target: 1)

B. Improve the socio-economic impacts of projects directed to small farmers B.1. Improve the governance and public financial management projects directed to small farmers Pillar II projects are identified and implemented in a participatory, inclusive and transparent way

The manual describing procedures for prioritizing the financing for projects directed to small farmers, and the manual describing procedures for preparing, submitting, and implementing projects directed to small farmers have been adopted by MAPM on November 2, 2010

A pre-selection technical committee for projects directed to small farmers at the provincial level will be implemented by ADA Monitoring and Evaluation system reports will be disseminated

Share of new Pillar II projects submitted by the OPA (Target: 40%)

B.2. Establish a legal and institutional framework supporting aggregation Institutionalize the incentives granted to small farmers in the framework of the contract farming (Agrégation)

Decree No. 2-09-600 dated December 31, 2009 and Order (Arrêté) No. 361-10 dated January 26, 2010 regulating Government support for contract farming (Agrégation) projects have been published in the National Gazettes No. 5800 bis dated December 30, 2009 and No. 5818 dated March 4, 2010, respectively

A draft law on contract farming will be submitted for Government approval

Share of small farmers benefitting from Pillar II support (Target: 15%)

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OBJECTIVES ACTIONS INDICATORS DPL/1 DPL/2

C. Improve agricultural services C.1. Improve the effectiveness of the agricultural innovation system Improve the effectiveness of the system of agricultural research and development

The Circular (Circulaire) governing the competitive applied research financing mechanism has been issued by MAPM on December 8, 2010

National and Regional Consultative Committees will be operational, comprising the MAPM, agricultural research and educational institutions, and professional organization , with uniform rules of operation to coordinate applied research, extension and training activities

Share of research and extension projects funded through the competitive financing mechanism (Target: 50%)

The capacities of different actors (farmers, politicians, OPA, MAPM services, chambers of agriculture) to design and implement Pillar II projects are reinforced

The draft law on the legal status of the agricultural advisor (Conseiller Agricole) has been submitted by MAPM to the Secretary General of the Government on December 14, 2010; the financing of the CRPII has been included in the 2011 budget law of the Borrower; and the acting CRPII director has been appointed by MAPM on September 16, 2010

The National Extension and Advisory Services Strategy and Action Plan for developing a mixed (public and private) system for delivering extension and advisory services will be adopted The first training and capacity-building programs will be launched

Number of public-private partnerships for agricultural extension created (Target: 5) Indicator: Number of training days per category of actor (Target: 880 days)

C.2. Establish an effective food safety control system International competitiveness is enhanced

The Law No. 28-07 concerning the sanitary safety of food products has been published in the National Gazette No. 5822 dated March 18, 2010; and the food safety control functions to be delegated to private operators have been identified by ONSSA on December 14, 2010

The implementing texts of the Law No. 28-07 concerning the sanitary safety of the food products will be presented to the Council of Government A cost-recovery system for veterinary and/or phytosanitary services will be adopted by MAPM

Number of HACCP-certified agri-food processing establishments (Target: 700) Number of sanitary alerts notified by commercial partners (third countries) / number of shipment of products (number of certificates produced) (Target: 20/25,000)

D. Improve the use and the management of irrigation water and the planning of irrigation infrastructures D.1. Improve the efficiency and sustainability of farmers’ water use Groundwater extraction is monitored in areas where drip irrigation is developed

Order (Arrêté) No. 362-10 dated January 26, 2010 requiring the beneficiaries of State assistance for drip irrigation to install a water metering system has been published in the National Gazette No. 5818 dated March 4, 2010; and the associated Instruction requiring these

Percentage increase of the number of declarations and authorization of water abstraction received / delivered (Target: 10%)

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OBJECTIVES ACTIONS INDICATORS DPL/1 DPL/2

Drip irrigation developed in LSI areas

beneficiaries to include in their application package for the above assistance a declaration or authorization of water abstraction has been signed by MAPM and MEF in April 2010

A draft amendment of the Law 23/97 on direct contribution concerning farmers’ financial contribution rates to the cost of modernizing off-farm irrigation systems will be submitted to the Government Secretary General

Cumulated number of farmers participating in projects of collection reconversion to drip irrigation34

D.2. Improve the performance of irrigation service operators

(Target : 10,800)

Improve financial performance of irrigation service in ORMVAs Introduce PPPs for irrigation water management in some ORMVAs

The decision to waive interest and fees associated with accumulated arrears for farmers who commit to reimburse their debts related to irrigation water within a period of twelve months starting from the date of signature of this decision, has been signed by MEF on April 2, 2010 Feasibility studies defining strategic PPP options for 3 ORMVAs are completed

The adjustment plan for irrigation water tariffs will be implemented according to an updated calendar PPP contracts for 2 ORMVAs will be signed by the MAPM

Share of Operation and Maintenance costs35

D.3. Improve irrigation infrastructure planning by the Government

covered by irrigation water tariffs in seven ORMVAs (Target: 88%)

Improve coherence of planning of investments in dams and investments in irrigation

The integrated investment plan for the irrigation perimeters downstream of the dams under construction and those programmed for the period 2010-2012 has been transmitted by MAPM to MEF on December 1, 2010

Feasibility studies of the investment plans for the irrigation schemes will be conducted by MAPM Resources for the irrigation perimeters located downstream dams under construction or programmed in the budget law will be allocated

Number of irrigation schemes located downstream of dams under construction or programmed with allocated resources / number of dams with agricultural scope under construction or programmed with allocated resources (Target: 100%)

34 Ongoing projects only are considered. 35 The Operation and Maintenance (O&M) costs is to be considered in a broad sense, including the costs of replacing equipments having short life (i.e. 10 years).

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D. PROPOSED RESULTS MONITORING AND EVALUATION FRAMEWORK

Indicator Baseline 2010

Target March 2012

Target October 2013

A. Improve the efficiency of domestic markets A.1. Improve the institutional and regulatory framework governing fruit and vegetable wholesale markets Number of fruit and vegetable wholesale markets under new management model launched

0 0 3

A.2. Improve the institutional and regulatory framework governing slaughterhouses Number of private slaughterhouses launched Number of slaughterhouse concessions under new management model launched

0 0

1 0

7

1

B. Improve the socio-economic impacts of projects directed to small farmers B.1. Improve the governance and public financial management of projects directed to small farmers Share of new Pillar II projects submitted by the OPA 10% 24% 40%

B.2. Establish a legal and institutional framework supporting aggregation Share of small farmers benefitting from Pillar II support 5% 8% 15%

C. Improve agricultural services C.1. Improve the effectiveness of the agricultural innovation system Share of research and extension projects funded through the competitive financing mechanism

- 25% 50%

Number of public-private partnerships for agricultural extension created

0 2 5

Number of training days per category of actor 180 540 880

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C.2. Establish an effective food safety control system Number of HACCP-certified agri-food processing establishments 300 400 700 Number of sanitary alerts notified by commercial partners (third countries) / number of shipment of products (number of certificates produced)

28/22,397 25/23,000 20/25,000

D. Improve the use and the management of irrigation water and the planning of irrigation infrastructures D.1. Improve the efficiency and sustainability of farmers’ water use Percentage increase of the number of declarations and authorization of water abstraction received / delivered

2,500 30% 10%

Cumulated number of farmers participating in projects of collection reconversion to drip irrigation36

3,000

7,800 10,800

D.2. Improve the performance of irrigation service operators Share of Operation and Maintenance costs37 76% covered by irrigation water tariffs in seven ORMVAs

82% 88%

D.3. Improve irrigation infrastructure planning by the Government Number of irrigation schemes located downstream of dams under construction or programmed with allocated resources / number of dams with agricultural scope under construction or programmed with allocated resources

18% 94% 100%

36 Ongoing projects only are considered. 37 The Operation and Maintenance (O&M) costs is to be considered in a broad sense, including the costs of replacing equipments having short life (i.e. 10 years).

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E. MOROCCO FISCAL SUSTAINABILITY ANALYSIS MOROCCO FISCAL SUSTAINABILITY ANALYSIS

(IN PERCENT OF GDP) Actual Projections 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Baseline: Public sector debt 1/ 58.2 62.1 57.3 53.5 47.2 47.1 48.4 47.6 46.1 44.5 42.9

Of which: Foreign-currency denominated 13.9 13.1 11.3 10.7 9.9 10.8 11.4 11.4 11.2 10.8 10.3 Change in public sector debt -2.6 3.9 -4.8 -3.8 -6.3 -0.1 1.3 -0.9 -1.5 -1.6 -1.6 Identified debt-creating flows (4+7+12) -2.7 1.4 -5.7 -6.1 -6.9 -1.0 0.8 -1.3 -1.9 -2.0 -2.0

Primary deficit -0.8 0.2 -2.1 -4.2 -4.4 -0.6 1.3 -0.3 -0.7 -0.7 -0.6 Revenue and grants 23.5 25.5 25.9 28.2 31.0 26.4 24.6 26.0 26.4 26.4 26.4 Primary (noninterest) expenditure 22.8 25.7 23.8 24.1 26.6 25.8 25.9 25.6 25.7 25.7 25.8

Automatic debt dynamics 2/ -0.9 2.5 -3.2 -1.5 -2.5 -0.4 0.1 -0.5 -0.7 -0.8 -0.9 Contribution from interest rate/growth differential 3/ 0.1 0.8 -2.1 -0.5 -3.0 -0.4 0.1 -0.5 -0.7 -0.8 -0.9

Of which: Contribution from real interest rate 2.9 2.5 2.3 1.0 -0.3 1.8 1.4 1.5 1.5 1.4 1.3 Contribution from real GDP growth -2.8 -1.7 -4.4 -1.5 -2.7 -2.2 -1.3 -2.0 -2.3 -2.3 -2.2

Contribution from exchange rate depreciation 4/ -1.0 1.7 -1.1 -1.0 0.5 ... ... ... ... ... ... Other identified debt-creating flows -1.0 -1.3 -0.4 -0.5 0.0 0.0 -0.5 -0.5 -0.5 -0.4 -0.4

Privatization receipts (negative) -1.0 -1.3 -0.4 -0.5 0.0 0.0 -0.5 -0.5 -0.5 -0.4 -0.4 Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other (specify, e.g., bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Residual, including asset changes (2–3) 5/ 0.0 2.5 0.9 2.3 0.6 0.9 0.5 0.5 0.4 0.4 0.4 Public sector debt-to-revenue ratio 1/ 247.4 243.2 221.1 189.5 152.2 178.5 196.6 183.1 174.4 168.2 162.3 Gross financing need 6/ 30.4 25.0 15.0 15.1 15.0 18.4 19.5 17.8 16.9 16.1 15.4

In billions of U.S. dollars 17.3 14.9 9.9 11.4 13.4 16.8 18.6 17.9 17.9 18.0 18.2 Scenario with key variables at their historical averages 7/ 47.1 45.4 43.7 41.9 40.2 38.4 Scenario with no policy change (constant primary balance) in 2009–14 47.1 47.0 45.8 44.5 43.1 41.6 Key Macroeconomic and Fiscal Assumptions Underlying Baseline Real GDP growth (in percent) 4.8 3.0 7.8 2.7 5.6 5.0 3.0 4.4 5.1 5.2 5.4 Average nominal interest rate on public debt (in percent) 8/ 6.1 5.9 5.7 5.8 5.5 5.4 5.4 5.3 5.5 5.3 5.1 Average real interest rate (nominal rate minus change in GDP deflator, in percent 5.0 4.5 4.2 1.9 -0.3 4.2 3.2 3.4 3.5 3.4 3.2 Nominal appreciation (increase in U.S. dollar value of local currency, in percent 6.5 -11.2 9.4 9.6 -4.8 ... ... ... ... ... ... Inflation rate (GDP deflator, in percent) 1.0 1.5 1.5 3.9 5.9 1.2 2.2 2.0 1.9 1.9 1.9 Growth of real primary spending (deflated by GDP deflator, in percent) 6.8 16.1 -0.2 3.9 16.7 1.8 3.4 3.3 5.3 5.4 5.9 Primary deficit -0.8 0.2 -2.1 -4.2 -4.4 -0.6 1.3 -0.3 -0.7 -0.7 -0.6 Source: World Bank Staff using IMF DSA framework 1/ Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used. 2/ Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = 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). 3/ The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g. 4/ The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r). 5/ For projections, this line includes exchange rate changes. 6/ Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period. 7/ The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP. 8/ Derived as nominal interest expenditure divided by previous period debt stock.

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.

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ANNEX E.1 Central Government Public Finances

(IN PERCENT OF GDP) Actual Est. Projections 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total revenues 23.8 25.1 27.3 29.5 26.0 23.7 25.1 25.6 25.7

Tax Revenues 21.7 22.2 24.9 27.2 23.5 22.0 23.4 24.0 24.1 Direct Taxes 8.2 8.8 9.8 11.8 9.8 8.7 9.5 9.6 9.7

Business income tax 3.7 4.2 4.9 6.7 5.9 5.1 5.5 5.6 5.7 Personal income tax 4.3 4.2 4.5 4.8 3.5 3.3 3.7 3.7 3.7 Other direct taxes 0.2 0.4 0.4 0.3 0.3 0.3 0.3 0.3 0.3

Indirect taxes 9.1 9.5 10.9 11.6 10.4 10.2 10.9 11.3 11.3 VAT 6.2 6.8 8.1 8.9 7.7 7.7 8.1 8.3 8.3

Domestic VAT 2.4 2.9 3.4 3.8 3.3 3.4 3.7 3.8 3.8 Import VAT 3.8 3.9 4.7 5.1 4.5 4.3 4.4 4.5 4.5

Excise taxes 2.9 2.8 2.8 2.7 2.7 2.5 2.8 3.0 3.0 TIC on energy 1.7 1.6 1.6 1.5 1.6 1.5 1.7 1.9 1.9 Other TIC 1.2 1.2 1.2 1.2 1.0 1.1 1.1 1.2 1.2

Registration and stamp taxes 1.2 1.2 1.5 1.5 1.3 1.3 1.3 1.3 1.3 Customs duties 2.8 2.3 2.3 2.1 1.7 1.5 1.5 1.5 1.5 Road Fund 0.3 0.3 0.4 0.2 0.4 0.3 0.3 0.3 0.3

Nontax Revenue 2.1 2.9 2.4 2.3 2.5 1.7 1.7 1.6 1.6 Monopolies & PEs 1.0 1.3 1.3 1.1 1.4 1.2 1.2 1.1 1.1 Other nontax receipts 1.0 1.5 1.1 1.1 1.1 0.5 0.5 0.5 0.5

Total Expenditures, incl.net lending 29.9 27.6 28.6 30.8 29.4 28.6 28.3 28.4 28.2 Current Expenditure, incl. Transf. to Loc. Gov. 26.0 23.5 24.0 25.3 23.1 22.6 22.2 22.3 22.1

Current Expenditure 24.1 21.5 21.6 22.6 20.8 20.3 19.8 19.8 19.6 Consumption 18.7 16.0 15.8 15.4 16.6 16.1 15.8 15.8 15.8

Wages & salaries 11.7 10.9 10.6 10.2 10.3 10.4 10.1 10.1 10.0 Other goods & services & transfers 6.9 5.0 5.2 5.3 6.4 5.6 5.6 5.6 5.7

Consumer subsidies 2.1 2.3 2.7 4.6 1.7 1.8 1.6 1.6 1.6 Total Interest 3.3 3.2 3.1 2.6 2.4 2.4 2.4 2.4 2.3

External Debt 0.5 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 Domestic Debt 2.9 2.8 2.7 2.2 2.0 2.0 2.0 2.0 1.8

Transfers to Local Gov. 1.9 2.0 2.4 2.7 2.3 2.3 2.4 2.5 2.5 Total Capital expenditures, incl. net lending 3.9 4.1 4.6 5.5 6.3 6.0 6.1 6.1 6.1

Balance of other special accounts 0.9 0.6 1.5 1.7 1.2 0.3 0.2 0.2 0.2 Budget Def (-)/Surplus (+) (commit. basis) -5.2 -2.0 0.2 0.4 -2.2 -4.6 -2.9 -2.5 -2.3 Total financing 5.2 2.0 -0.2 -0.4 2.2 4.6 2.9 2.5 2.3

Domestic (incl. arrears) 4.1 1.6 -1.2 -2.1 0.4 2.5 0.8 0.6 0.4 External (incl. grants and privatization) 1.2 0.4 1.1 1.6 1.7 2.0 2.1 1.8 1.8

Source: Moroccan Government and staff estimates

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E.2: Selected Macroeconomic Indicators (in percent of GDP) 2007 2008 2009 2010 2011 2012 2013 2014 Est Proj Proj Proj Proj Proj I. National Accounts

Gross Investment 32.5 36.3 33.8 34.3 34.5 34.5 34.6 34.7 Gross National Savings 32.4 31.1 28.2 29.5 30.3 31.2 32.2 33.3 Government Investment (National Accounts) 2.3 2.7 3.2 3.0 3.0 3.0 3.0 3.1 Private Investment (incl. SOEs) 30.2 33.6 30.7 31.3 31.5 31.5 31.6 31.7

Of which SOEs 8.0 9.6 11.6 14.4 15.0 15.0 15.0 15.0 II. Central Government Finances

Total revenues 27.4 29.7 26.0 23.7 25.1 25.6 25.7 25.8 Tax revenue 24.9 27.4 23.5 22.0 23.4 24.0 24.1 24.2 Current Expenditure. Of which 21.7 22.8 20.8 20.3 19.8 19.8 19.6 19.5

Wages 10.7 10.2 10.3 10.4 10.1 10.1 10.0 10.0 Capital Expenditure 4.6 5.5 6.3 6.0 6.1 6.1 6.1 6.2 Global Balance 0.2 0.4 -2.2 -4.6 -2.9 -2.5 -2.3 -2.2

III. Balance of Payments Imports GNFS 46.0 52.1 41.7 44.7 45.2 45.6 45.9 46.4 Exports GNFS 36.2 37.6 28.6 31.5 32.8 34.1 35.6 37.1 Trade Balance -22.3 -24.7 -20.8 -21.0 -20.4 -19.4 -18.4 -17.4 Tourism receipts 9.1 9.5 8.1 7.2 7.5 7.9 8.2 8.5 Workers' remittances 8.9 7.7 6.9 7.1 7.4 7.6 7.9 8.1 Current Account Balance -0.1 -5.2 -5.6 -4.8 -4.2 -3.4 -2.5 -1.4 Foreign Direct Investment, net 6.2 4.1 3.0 3.2 3.4 4.4 5.4 6.4 Reserves (months of GNFS imports) 8.8 6.6 7.4 6.7 6.1 5.6 5.3 5.3

IV. Indicators of Credit Capacity of CG Public Debt of CG 53.5 47.2 47.1 48.4 47.6 46.1 44.5 42.9 Total interest payments/Tax revenues 12.6 9.7 10.1 10.9 10.3 10.1 9.4 8.8

Memo:

External debt stock/GDP 27.3 23.4 25.0 26.0 25.8 24.9 23.7 22.2 Consumer price (%, yearly average) 2.0 3.7 1.0 2.0 2.0 2.0 2.0 2.0 GDP Growth (%) 2.7 5.6 5.0 3.0 4.4 5.1 5.2 5.4 Non Agriculture GDP growth (%) 6.5 4.2 1.9 4.5 4.8 5.6 5.8 6.0 Unemployment (%) 9.8 9.6 9.0 9.0 9.0 9.0 9.0 9.0

Source: Moroccan government and staff estimates

67

E.3. Morocco: Public Debt Sustainability and External Financing Requirements (IN PERCENT OF GDP)

Fiscal Sustainability Analysis

Main Scenarios (1) Fiscal Sustainability Analysis

Alternative Scenarios (2)

Morocco: External Financing needs 2008 2009 2010 2011 2012 2013 Financing Requirements 8.2 6.8 5.9 4.2 3.8 3.7 Current account deficit 5.2 5.0 4.0 3.2 2.7 2.1 Long term amortizations 3.9 2.0 1.9 2.0 2.2 2.1 Reserves Changes of Monetary Auth. -0.9 -0.2 0.0 -1.0 -1.1 -0.5 Financing sources 8.2 6.8 5.9 4.2 3.8 3.7 Official capital grants 1.3 0.4 0.5 0.4 0.4 0.4 Private investment, (FDI+Portfolio) (net) 2.1 1.0 0.1 0.8 1.1 1.5 Long term Disbursements 5.1 3.9 5.2 2.9 2.4 1.9 Other capital flows (incl. errors and omissions in 08-09) -0.3 1.6 0.0 0.0 -0.1 -0.1 Source: Moroccan Government and staff estimates

(1) The two main shocks are A1. Key variables are at their historical averages; and A2. No policy change (constant primary balance). (2) The other shocks are: B1. Real interest rate is at baseline plus one standard deviations; B2. Real GDP growth is at baseline minus one-half standard deviation; B3. Primary balance is at baseline minus one-half standard deviation; B4. Combination of B1-B3 using one-quarter standard deviation shocks; B5. One-off 30 percent real depreciation in 2010; B6. Increase in “other debt-creating flows” in 2010 of 10 percent of GDP. Standard deviations for B1-B6 are calculated over the last ten years.

34.0

36.0

38.0

40.0

42.0

44.0

46.0

48.0

50.0

2010 2011 2012 2013 2014 2015

Base Line Key Variables at their Historical Averages No Policy Change

42.0

44.0

46.0

48.0

50.0

52.0

54.0

2010 2011 2012 2013 2014 2015

B1 B2 B3 B4 B5 B6

68

E4: MOROCCO AT A GLANCE

Morocco at a glance 9/16/10

M. East LowerKey Development Indicators & North middle

Morocco Africa income(2009)

Population, mid-year (millions) 31.6 325 3,703Surface area (thousand sq. km) 447 8,778 32,309Population growth (%) 1.2 1.8 1.1Urban population (% of total population) 57 57 41

GNI (Atlas method, US$ billions) 86.4 1,053 7,675GNI per capita (Atlas method, US$) 2,730 3,237 2,073GNI per capita (PPP, international $) 4,190 7,350 4,593

GDP growth (%) 4.9 5.5 7.4GDP per capita growth (%) 3.7 3.7 6.1

(most recent estimate, 2003–2009)

Poverty headcount ratio at $1.25 a day (PPP, %) 3 4 ..Poverty headcount ratio at $2.00 a day (PPP, %) 14 17 ..Life expectancy at birth (years) 73 71 68Infant mortality (per 1,000 live births) 32 29 45Child malnutrition (% of children under 5) 10 12 25

Adult literacy, male (% of ages 15 and older) 69 82 87Adult literacy, female (% of ages 15 and older) 44 65 73Gross primary enrollment, male (% of age group) .. 107 110Gross primary enrollment, female (% of age group) .. 104 106

Access to an improved water source (% of population) 96 88 86Access to improved sanitation facilities (% of population) 79 74 52

Net Aid Flows 1980 1990 2000 2009 a

(US$ millions)Net ODA and official aid 899 1,048 419 1,217Top 3 donors (in 2008): European Commission 12 29 117 484 France 135 217 155 163 Spain 0 33 -1 117

Aid (% of GNI) 4.9 3.7 1.2 1.5Aid per capita (US$) 46 43 15 39

Long-Term Economic Trends

Consumer prices (annual % change) 9.4 7.0 1.9 1.0GDP implicit deflator (annual % change) 15.2 -57.0 -0.6 1.8

Exchange rate (annual average, local per US$) 3.9 8.2 10.6 8.0Terms of trade index (2000 = 100) 80 75 100 118

1980–90 1990–2000 2000–09

Population, mid-year (millions) 19.4 24.2 28.5 31.6 2.2 1.6 1.2GDP (US$ millions)* 18,821 28,839 37,022 92,086 3.9 2.9 5.0

Agriculture & Fishing* 20.0 19.3 14.9 16.4 3.8 0.3 5.8Industry* 33.6 30.4 29.1 28.5 3.2 3.0 4.1 Manufacturing* 18.3 18.9 17.5 15.9 4.3 2.6 3.1Services* 46.4 50.3 56.0 55.1 4.3 2.9 5.1

Household final consumption expenditure 68.7 60.0 61.4 57.0 3.6 2.8 4.7General gov't final consumption expenditure 18.3 16.8 18.4 18.0 1.9 2.3 3.8Gross capital formation 22.2 28.7 25.5 36.0 4.4 3.4 8.9

Exports of goods and services 17.4 25.7 28.0 28.6 12.1 5.5 6.4Imports of goods and services 26.7 31.2 33.4 39.5 8.8 4.4 8.3Gross savings 18.6 28.3 24.3 31.0

Note: Figures in italics are for years other than those specified. 2009 data are preliminary. Group data are through 2008. .. indicates data are not available.a. Aid data are for 2008.(*) The new series of GDP started in 1998Development Economics, Development Data Group (DECDG).

(average annual growth %)

(% of GDP)

6 4 2 0 2 4 6

0-4

15-19

30-34

45-49

60-64

75-79

percent of total population

Age distribution, 2008

Male Female

0102030405060708090

1990 1995 2000 2007

Morocco Middle East & North Africa

Under-5 mortality rate (per 1,000)

-10

-5

0

5

10

15

95 05

GDP GDP per capita

Growth of GDP and GDP per capita (%)

69

Morocco

Balance of Payments and Trade 2000 2009

(US$ millions)Total merchandise exports (fob) 7,419 13,843Total merchandise imports (cif) 11,531 32,786Net trade in goods and services -2,085 -10,868

Current account balance -475 -4,551 as a % of GDP -1.3 -4.9

Workers' remittances and compensation of employees (receipts) 2,161 6,895

Reserves, including gold 5,138 24,094

Central Government Finance

(% of GDP)Current revenue (including grants) 23.6 25.9 Tax revenue 21.7 23.4Current expenditure 23.4 23.0

Technology and Infrastructure 2000 2008Overall surplus/deficit -4.8 -2.2

Paved roads (% of total) 56.4 62.0Highest marginal tax rate (%) Fixed line and mobile phone Individual 45 38 subscribers (per 100 people) 13 82 Corporate 35 30 High technology exports

(% of manufactured exports) 11.3 8.8External Debt and Resource Flows

Environment(US$ millions)Total debt outstanding and disbursed 20,674 21,842 Agricultural land (% of land area) 69 67Total debt service 2,610 2,594 Forest area (% of land area) 12.7 ..Debt relief (HIPC, MDRI) – – Terrestrial protected areas (% of surface area) .. 1.2

Total debt (% of GDP) 55.8 23.7 Freshwater resources per capita (cu. meters) 983 918Total debt service (% of exports) 20.3 7.8 Freshwater withdrawal (billion cubic meters) 12.6 ..

Foreign direct investment (net inflows) 260 2,514 CO2 emissions per capita (mt) 1.2 1.5Portfolio equity (net inflows) 30 520

GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 8.3 8.3

Energy use per capita (kg of oil equivalent) 355 460

World Bank Group portfolio 2000 2008

(US$ millions)

IBRD Total debt outstanding and disbursed 2,837 2,540 Disbursements 138 242 Principal repayments 307 262 Interest payments 190 125

IDA Total debt outstanding and disbursed 27 16 Disbursements 0 0

Private Sector Development 2000 2009 Total debt service 2 1

Time required to start a business (days) – 12 IFC (fiscal year)Cost to start a business (% of GNI per capita) – 16.1 Total disbursed and outstanding portfolio 29 153Time required to register property (days) – 47 of which IFC own account 29 153

Disbursements for IFC own account 1 145Ranked as a major constraint to business 2000 2008 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 7 0 Access to/cost of financing .. 84.4 Tax rates .. 62.6 MIGA

Gross exposure – –Stock market capitalization (% of GDP) 29.4 79.9 New guarantees – –Bank capital to asset ratio (%) 9.8 7.3

Note: Figures in italics are for years other than those specified. 2008 data are preliminary. 9/16/10.. indicates data are not available. – indicates observation is not applicable.

Development Economics, Development Data Group (DECDG).

0 25 50 75 100

Control of corruption

Rule of law

Regulatory quality

Political stability

Voice and accountability

Country's percentile rank (0-100)higher values imply better ratings

2008

2000

Governance indicators, 2000 and 2008

Source: Kaufmann-Kraay-Mastruzzi, World Bank

IBRD, 2,378IDA, 14IMF, 0

Other multi-lateral, 6,492

Bilateral, 6,701

Private, 4,626

Short-term, 1,631

Composition of total external debt, 2009

US$ millions

70

Millennium Development Goals Morocco

With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)

Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2008 Poverty headcount ratio at $1.25 a day (PPP, % of population) 2.5 .. 6.3 2.5 Poverty headcount ratio at national poverty line (% of population) 13.1 .. 15.3 8.8 Share of income or consumption to the poorest qunitile (%) 6.6 .. 6.3 6.5 Prevalence of malnutrition (% of children under 5) 9.0 .. .. 10.2

Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) 58 72 79 87 Primary completion rate (% of relevant age group) 51 48 57 81 Secondary school enrollment (gross, %) 38 38 38 56 Youth literacy rate (% of people ages 15-24) 55 62 67 76

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) 67 72 80 86 Women employed in the nonagricultural sector (% of nonagricultural employment) .. .. 20 19 Proportion of seats held by women in national parliament (%) .. 1 1 11

Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 85 .. 47 38 Infant mortality rate (per 1,000 live births) 66 57 40 32 Measles immunization (proportion of one-year olds immunized, %) 80 88 93 94

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) 332 228 228 227 Births attended by skilled health staff (% of total) 31 34 48 59 Contraceptive prevalence (% of women ages 15-49) 39 42 45 63

Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 15-49) .. 0.1 0.1 0.1 Incidence of tuberculosis (per 100,000 people) 110 113 95 88 Tuberculosis case detection rate (%, all forms) 75 74 75 73

Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 75 .. 80 93 Access to improved sanitation facilities (% of population) 58 .. 68 79 Forest area (% of total land area) 6.8 12.7 12.7 .. Terrestrial protected areas (% of surface area) .. .. .. 1.2 CO2 emissions (metric tons per capita) 0.9 1.1 1.2 1.5 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 9.7 8.2 8.3 8.3

Goal 8: develop a global partnership for development Telephone mainlines (per 100 people) 1.6 4.2 4.9 9.5 Mobile phone subscribers (per 100 people) 0.0 0.1 8.1 72.2 Internet users (per 100 people) 0.0 0.0 0.7 33.0 Personal computers (per 100 people) .. 0.3 1.2 5.7

Note: Figures in italics are for years other than those specified. .. indicates data are not available. 9/16/10

Development Economics, Development Data Group (DECDG).

Morocco

0

25

50

75

100

2000 2002 2004 2006 2008

Primary net enrollment ratio

Ratio of girls to boys in primary & secondary education

Education indicators (%)

0102030405060708090

2000 2002 2004 2006 2008

Fixed + mobile subscribers Internet users

ICT indicators (per 100 people)

0

25

50

75

100

1990 1995 2000 2007

Morocco Middle East & North Africa

Measles immunization (% of 1-year olds)