Document of The World Bank

For Official Use Only

Report No. MA-72127

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED LOAN

IN THE AMOUNT OF EUR 151.1 MILLION (US$200 MILLION EQUIVALENT)

TO

THE KINGDOM OF MOROCCO

FOR A

FIRST TRANSPARENCY AND ACCOUNTABILITY DEVELOPMENT POLICY LOAN

(Hakama)

September 30, 2013

Poverty Reduction and Economic Management 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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KINGDOM OF MOROCCO—GOVERNMENT FISCAL YEAR January 1st–December 31st

CURRENCY EQUIVALENTS

US$1 = 8.4077 Moroccan Dirham (MAD) as of August 31, 2013 US$1= 0.7553 Euro as of August 31, 2013

LIST OF ABBREVIATIONS AND ACRONYMS

AAA Analytical and Advisory Activities AfDB African Development Bank AREFs Regional Education and Training Offices AtI Access to Information CFAA Country Financial Accountability Assessment Ci-Gov Inter-ministerial subcommittee on e-Government services for Citizens CMD Modulated expenditure control CPS-PR Country Partnership Strategy - Progress Report CSO Civil Society Organization DPL Development Policy Loan EU European Union FDI Foreign Direct Investment FSAP Financial Sector Assessment Program GDP Gross domestic product GFS Government Financial Statistics GID Integrated Financial Management Information System (Gestion Intégrée de la Dépense) HR Human resources IBRD International Bank for Reconstruction and Development ICRR Implementation Completion and Results Report ICT Information and communications technology ICPC Anti-Corruption Agency (Instance Centrale de Prévention de la Corruption) IGF Inspectorate General of Finance (Inspection Générale des Finances) IMF International Monetary Fund LG Local Governments M&E Monitoring and evaluation MAD Moroccan Dirham MAGG Ministry of General Affairs and Governance (Ministère des Affaires Générales et de la Gouvernance) MEF Ministry of Economy and Finance MENA Middle East and North Africa MICNT Ministry of Industry, Trade and New Technologies (Ministère de l'Industrie, du Commerce et des Nouvelles Technologies) MFPRA Ministry of Civil Service and of Administrative Modernization (Ministère de la Fonction Publique et de la Modernisation de l’Administration) MoE Ministry of Education MoA Ministry of Agriculture MTEF Medium-Term Expenditure Framework NGO Nongovernmental organization OBL Organic Budget Law OECD Organization for Economic Co-operation and Development PARL Public Administration Reform Loan PARAP Public Administration Reform Support Program

PEFA Public Expenditure and Financial Accountability PER Public Expenditure Review P-ESW Programmatic Economic Sector Work PETS Public Expenditure Tracking Surveys PFM Public Financial Management PPD Public Procurement Decree PPPs Public-private partnerships PSIA Poverty and Social Impact Analysis SGG Secretary General of the Government SoEs State owned Enterprises TA Technical assistance TGR General Treasurer of the Kingdom (Trésorerie Générale du Royaume) TOFT Table of Treasury Financial Operations

Vice President: Inger Andersen Country Director: Simon Gray

Sector Director: Bernard Funck Sector Manager: Guenter Heidenhof

Task Team Leaders: Fabian Seiderer and Khalid El Massnaoui

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT FOR A

FIRST TRANSPARENCY AND ACCOUNTABILITY

DEVELOPMENT POLICY LOAN (Hakama)

TO THE KINGDOM OF MOROCCO

TABLE OF CONTENTS I.  INTRODUCTION AND COUNTRY CONTEXT 3 

A.  RECENT POLITICAL AND SOCIAL DEVELOPMENTS 3 B.  RECENT ECONOMIC DEVELOPMENTS IN MOROCCO 5 C.  MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 8 

II.  THE GOVERNMENT’S PROGRAM 8 A.  STRENGTHENING TRANSPARENCY AND ACCOUNTABILITY IN THE MANAGEMENT

OF PUBLIC RESOURCES 12 B.  FOSTERING OPEN GOVERNANCE 13 C.  GOVERNMENT CONSULTATIONS 14 

III.  BANK SUPPORT TO THE GOVERNMENT’S PROGRAM 15 A.  LINK TO THE COUNTRY PARTNERSHIP STRATEGY (CPS) 15 B.  COLLABORATION WITH THE IMF AND OTHER DEVELOPMENT PARTNERS 16 C.  RELATIONSHIP WITH OTHER BANK OPERATIONS 16 D.  LESSONS LEARNED 17 E.  ANALYTICAL UNDERPINNINGS 19 

IV.  PROPOSED SUPPORT PROGRAM 20 A.  POLICY AREAS AND PROGRAM DEVELOPMENT OBJECTIVES (PDO) 20 B.  OPERATION DESCRIPTION 23 

V.  OPERATION IMPLEMENTATION 35 A.  POVERTY AND SOCIAL IMPACTS 35 B.  ENVIRONMENTAL ASPECTS 36 C.  IMPLEMENTATION, MONITORING, AND EVALUATION 36 D.  FIDUCIARY ASPECTS, DISBURSEMENT, AND AUDITING 36 E.  RISKS AND RISK MITIGATION 38 

ANNEXES

ANNEX 1: DPL POLICY MATRIX .................................................................................................................... 41 ANNEX 2: LETTER OF DEVELOPMENT POLICY ....................................................................................... 45 ANNEX 3: MACROECONOMIC DEVELOPMENTS (2001-2011) AND DEBT SUSTAINABILITY ......... 61 ANNEX 4: FUND RELATIONS NOTE ............................................................................................................... 67 ANNEX 5: COUNTRY AT A GLANCE .............................................................................................................. 69 ANNEX 6: IMPLEMENTATION OF THE CORPORATE GOVERNANCE CODE IN 10 SOEs..….….…75

Boxes

Box 1: Good Practice Principles for Conditionality 22 

Figures

Figure 1. Growth shifted to higher path and is less volatile and less dependent on agriculture (in percent) 6 

Tables

Table 1. Annual subsidies in percent of GDP .................................................................................................... 7 Table 2. Baseline Medium Term Macroeconomic Indicators ............................................................................ 9 Table 3. Financing Requirements of the Central Government (in percent of GDP) ........................................ 10  The First Transparency and Accountability DPL (Hakama) was prepared by an IBRD team consisting of: Fabian Seiderer (TTL, MNSPS), Khalid El Massnaoui (co-TTL, MNSED), Jean Pierre Chauffour (Lead country economist, MNSPR), Lida Bteddini (MNSPS), Philippe de Meneval (MNSFP), Salim Benouniche, Abdoulaye Keita, Khadija Karidi (MNAPC), Lamyae Hanafi (MNAFM) Ibtissam Alauoi (MNAEX), David Bontempo (MNSED), Michael Hamaide (MNCA1), Tracy Hart (MNSEE), Sanaa Bouchikhi (MNCMA) and Mavo Ranaivoarivelo (MNSPR); Guenter Heidenhof (Sector Manager, MNSPS), Bernard Funck (Sector Manager, MNSPR), Joelle Businger (Country Program Coordinator, MNCA1), and Yolanda Tayler (Sector Manager MNAPC) provided guidance and advice throughout the operation. The legal adviser for this operation is Jean Charles De Daruvar (LEG). Peer reviewers are Ndiame Diop, (Lead economist, EASPI), and Nick Manning (Head, Governance and Public Sector Management Practice). Michael Hamaide provided key input and comments during the preparation phase. The team worked under the supervision and guidance of Simon Gray (Country Director, MNC01), Manuela Ferro (Director, MNSPR), and Guenter Heidenhof (Sector Manager, MNSPS). Special thanks are due to the Ministry of General Affairs and Governance, the Ministry of Economy and Finance, the Ministry of Interior, the Ministry for Civil Service and Administrative Modernization, the Ministry in charge of relations with Parliament and Civil Society Reform and the Secretariat General of the Government for their cooperation.

i

MOROCCO

FIRST TRANSPARENCY AND ACCOUNTABILITY

DEVELOPMENT POLICY LOAN (HAKAMA)

LOAN AND PROGRAM SUMMARY

Borrower Kingdom of Morocco

Implementing Agency Ministry of Economy and Finance (MEF) and line ministries

Financing Data

IBRD Loan

Amount: EUR 151.1 million (US$ 200 million equivalent).

Term: 29 years, including a grace period of 7 years; Flexible interest rate

Operation Type The proposed loan is the first Development Policy Loan (DPL) in a programmatic series of two single-tranche operations.

Main Policy Areas

The DPL will support the government’s policy reforms in two key areas:

i. Strengthening transparency and accountability in the management of public resources; and

ii. Fostering open governance.

Key Outcome Indicators

Pillar I: Strengthening transparency and accountability in the management of public resources, through:

A more open and transparent budget process, specifying the programmatic allocation of resources and the corresponding performance objectives and indicators for 5 ministries;

A more consistent implementation of public procurement rules across the public sector evidenced by the increase from 1571 to 3345 in the number of procuring entities subject to the new procurement rules;

Real time information on budget execution in 80% of municipalities through the roll out of an integrated expenditure management information system (GID).

Pillar II: Fostering open governance through:

Enhanced access to budget information evidenced by a higher score in the Open Budget Index as well as through adoption by Cabinet of a law on access to information;

Strengthening citizen voice and engagement through the adoption by cabinet of an organic law on petitions and a 20 percent increase in citizens having voiced their opinion to officials measured by the Gallup survey;

Improved citizen access to key administrative documents, evidenced by a five-fold increase in the number of birth certificates ordered online and delivered by registered mail.

ii

Program Development Objectives and Contribution to the Country Partnership Strategy (CPS)

The First Transparency and Accountability DPL is the first operation in a new governance programmatic series initiated after the adoption of a new Constitution in Morocco, on July 1, 2011, in the regional context of the Arab Spring.

The objective of this DPL series is to support the concretization of key new constitutional governance principles and rights, aimed at increasing transparency and accountability and enhancing citizen engagement and access to information. The DPL is a key component of the Country Partnership Strategy (CPS) (FY2010-FY2013), as confirmed by the CPS Progress Report discussed by the Board in May 2012. It contributes to the first and second pillars of the CPS: (i) promoting macroeconomic stability through a more transparent and performance-oriented budget policy, and (ii) improving service delivery through increased voice and accountability of public administrations, SOEs and local governments. This DPL is fully aligned with the cross-cutting objective of the CPS to strengthen governance as well as with the MENA priorities and with the Corporate Goals. Governance is a pillar of the region’s engagement framework and open governance is a key indicator serving as “driver” of the Bank’s twin goals to boost shared prosperity and reduce extreme poverty.

Risks and Risk Mitigation

The program faces the following risks:

Political Risk. The King’s proactive launch of a wide reform program, resulting in a new constitution, elections, an opposition-led government did appease sociopolitical tensions. However, these could quickly resume in the absence of tangible results in the implementation of the constitution and the lack of visible improvements in the people’s socio-economic conditions.

Macroeconomic and fiscal risk. Morocco faces three major macroeconomic risks: (i) the persistence of unfavorable external conditions that impact negatively its fiscal and external accounts; (ii) the continued accommodation of strong social demands for public sector employment and subsidies; and (iii) delays in the implementation of key fiscal and structural reforms.

Governance and Institutional Capacity Risk. The governance risk is moderate given the strong emphasis on governance reforms in the new Constitution and the government’s development program. There is however a risk of resistance, within the administration, to these structural public sector reforms that imply increased transparency and accountability. The wide scope and depth of the current reform process may negatively affect existing institutional capacity constraints. The constitutional reform implies a fundamental overhaul of the existing legal and regulatory framework, requiring the preparation of 40 laws, including 19 new organic laws. A MENA Transition Fund governance project is providing the necessary technical assistance support to the implementation of these key reforms.

Another risk identified in earlier operations is the lack of coordination in governance reforms within the government. In order to address the risk of fragmentation and duplication, the government has mandated the Ministry of General Affairs and Governance (MAGG) to play such coordination role in this area.

Overall the risk of delays in implementing the supported actions is high and exacerbated by the negotiations to form a new government coalition and majority in parliament following the withdrawal of the second coalition partner on July 10, 2013.

Operation ID P130903

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IBRD PROGRAM DOCUMENT FOR A FIRST TRANSPARENCY AND ACCOUNTABILITY

DEVELOPMENT POLICY LOAN (HAKAMA) TO THE KINGDOM OF MOROCCO

I. INTRODUCTION AND COUNTRY CONTEXT

A. RECENT POLITICAL AND SOCIAL DEVELOPMENTS

1. The proposed First Transparency and Accountability Development Policy Loan (Hakama),1 in the amount of US$ 200 million, is the first in a programmatic series of two operations aiming to support the Moroccan government, formed following the November 2011 elections, in bringing about the expected changes in governance and implementing the new constitution. The proposed series supports structural reforms strengthening economic governance across the public sector and new policies fostering more inclusive and open governance. The DPL has been prepared jointly with the European Union (EU) and the African Development Bank (AfDB), leveraging a further US$ 250 million in support of common key policy actions such as the budget, procurement and open governance reforms. The programmatic approach is warranted by the scope and depth of the government’s governance reform program, the implementation of which will require time, assistance, and flexibility. This operation is complemented by the Transition Fund2 project supporting the implementation of Morocco’s new governance framework. This US$ 4 million grant provides technical assistance for the implementation of structural reforms fostering public engagement, performance based budgeting and fiscal decentralization.

2. While Morocco has been able to reduce extreme poverty, vulnerability remains high and is fueling a sense of deprivation and discontent. It is estimated that 3 percent of the population is living in extreme poverty and 173 percent is living just above the poverty line of US$1.25 per day. Morocco has made progress toward the achievement of its millennium development goals (MDG) but still faces major socioeconomic challenges. Despite substantial social spending (37 percent of total public expenditures excluding debt payments), inequality remains important, as evidenced by the high and steady Gini coefficient (0.41) measuring the concentration of wealth. Socioeconomic disparities and access to basic public services remain major issues, as evidenced by the very high rate of adult illiteracy (30 percent for men and 66 percent for women) and the fact that less than half of the first graders complete primary schooling in rural areas. Several public opinion surveys4 have confirmed citizens' negative views on the quality of government services. This situation illustrates persistent challenges in the effectiveness of Morocco’s development policies and public expenditures as well as the underlying governance challenges. Limited voice and participation in the design of public policies and insufficient accountability for their implementation are considered important constraints. Weaknesses in the accountability framework and insufficient checks and balances expose public institutions and policies to capture, discretion and corruption. This in turn undermines the quality of institutions and the delivery of public services, as shown by the recent diagnostic studies undertaken by Morocco’s Anti-corruption Institution (ICPC) in the health and transportation sectors.5

1 The term hakama is the Arabic translation for “governance.” This name was chosen by the government to signal a break with past administrative reform programs and to raise the visibility of the reform program among citizens. 2 www.menatransitionfund.org 3 Source : Haut Commissariat au Plan (HCP) 2007 4 The surveys conducted by the Arab Center for the Rule of Law and Integrity and the report from the Economic and Social Council’s on the governance of public services, published in October 2011, substantiate these perceptions. 5 Corruption diagnostic studies conducted by ICPC in the transport and health sectors in 2011: http://www.icpc.ma/wps/portal

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3. In the wake of the transitions in the MENA region, Morocco experienced demonstrations across the country calling for greater civic rights, accountability, and transparency as well as for jobs and improved social conditions. The Moroccan transition has taken shape through a gradual and generally peaceful process. Social discontent, which has been voiced across the country since February 2011, stems from perceived weaknesses in governance, the lack of social and economic inclusion, and a high unemployment rate, particularly among the young. Public perception of privileges and corruption remains high, as evidenced by Morocco’s low ranking on the Transparency International’s index (88th out of 176 countries in 2012)6.

4. In response to popular demands, the King announced a comprehensive program of political, institutional, and social reform in March 2011 that led to the revision of the Constitution. The new Constitution, adopted on July 1, 2011 aims at strengthening the country’s governance framework through an increased separation and balance of powers between the King, the Government and the Parliament. In addition, it reinforces the principles of good governance, human rights, and protection of individual freedoms as well as increased institutional responsibility and accountability. The main changes reflected in the new Constitution are: (i) strengthening the role of Parliament through greater legislative powers and increased oversight over the government; (ii) elevating the role of the Prime Minister to that of Head of Government, to be proposed by the political party winning parliamentary election; (iii) enhancing the independence of the Judiciary; (iv) strengthening human rights, including the right to access public information; (v) strengthening the accountability of institutions, including the National Council for Human Rights, the Competition Council, the Central Instance for probity and fight against corruption, and (vi) establishing far-reaching regionalization as a democratic and decentralized system of governance. The constitution foresees a period of five years to implement all these provisions, most of which are de-jure. While the de-facto implementation of these potentially far reaching changes might take more time and witness resistance, they generated very high expectations among the population.

5. An initial step of the transition was the renewal of Parliament and the subsequent change in

Government, which brought to power a coalition government led by the moderate Islamist Justice and Development Party (PJD). The important changes introduced in the mandates and functions of Parliament required its dissolution and elections were held on November 25, 2011. These were won by the PJD, which had traditionally been in active opposition and has seen its support increase steadily in recent years. The PJD won 27 percent of the vote, almost twice the winning percentage of the second largest political party. On July 9, 2013 the main coalition party withdrew from the government and negotiations are ongoing to form a new government and majority in Parliament. While this situation is unlikely to reverse the governance reforms supported by this DPL, most of which are anchored in the new constitution, it may affect the pace of their implementation.

6. To date, the government has placed a strong emphasis on governance reforms, social inclusion, and

the promotion of the civil rights introduced by the new constitution. The government is facing two important challenges. First, delivering on the agenda of profound and comprehensive governance reforms while managing the population's high expectations and dealing with likely resistance to reform stemming from vested interests and political opposition.7 The government is hard pressed between its electoral promises of change and increasing resistance from the establishment, which feels bolstered by the domestic and regional political situation. Second, reducing inequality and generating greater economic opportunities in the context of strong fiscal constraints and an unfavorable global economic environment, affecting particularly the manufacturing sector and jobs. The government program (2012-2016), which was approved

6 http://www.transparency.org/ 7 Some aspects of the PJD’s reform agenda may face resistance from the opposition, whose influence in Parliament has been strengthened, as well as from key constituents whose mandate will change, including the upper chamber of parliament, and labor unions, which are renegotiating the social contract.

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by the newly-elected Parliament on January 19, 2012, aims at addressing these challenges, notably by: (i) implementing the governance-related legislative and institutional changes derived from the constitution; (ii) strengthening the transparency and performance orientation in public financial management in order to improve the allocation and operational efficiency of public expenditures as well as the fiscal situation; and (iii) adopting specific policies to improve local governance and public service delivery and reduce the corruption and discretion that negatively affect public services and economic opportunities. The recent constitutional changes and the government program represent the road map for Morocco’s transition process.

7. This DPL series proposes to support the current transition process and policy reforms that: (i)

strengthen transparency and accountability in the management of public resources; and (ii) foster open governance. The series adopts a holistic and integrated approach to enhance its impact. It is supporting governance reforms across the public sector covering the central government, SoEs and agencies, local governments as well as inter-governmental relations. The Bank has provided policy advice and technical assistance for the design of most policy measures and laws supported by this DPL, with the support from the MNA multi-donor trust fund. The Transition Fund governance project will support the implementation of these structural reforms. While building on the long-standing engagement with public administration reform, under the Public Administration Reform Loan (PARL) series, this program supports the concretization of the performance budgeting reform through the adoption and implementation of the new organic budget law and procurement decree. This DPL series also delves into new reform areas derived from the constitution such as access to information, public petitions, as well as into the governance of SoEs and local finances.

B. RECENT ECONOMIC DEVELOPMENTS IN MOROCCO 8. In recent years, Morocco has been hit by a series of adverse exogenous shocks. Like other emerging

countries, Morocco has suffered from the 2008 global financial crisis, although the limited financial integration of Morocco into global financial markets has contained the direct contagion effects. More serious were the effects of the subsequent food and fuel crises. With the price of Brent crude oil averaging more than US$110 per barrel in 2011-2012 and no domestic oil production, Morocco has been confronted with a major deterioration of its terms of trade. This deterioration was compounded by a significant increase in its food import bill in 2012 as a result of a severe domestic drought at a time of soaring international food prices, especially of wheat. Finally, with a strong trade exposure to the EU, Morocco has been adversely affected by sovereign debt crises in the Eurozone and by the subsequent slowing down of economic growth.

9. These internal and external shocks combined with significant economic rigidities have exposed the fragility of the Moroccan economy in 2012. Gross domestic product (GDP) grew at a positive but modest 2.7 percent, compared to 3.4 percent expected in the 2012 Budget Law. This performance reflected the continued vulnerability of the agriculture sector (which declined by 8.9 percent) to erratic rainfalls, keeping total growth volatile, although less intense in the 2000s than before (Figure 1). The non-agricultural sector grew at a healthier rate of 4.5 percent; however mostly driven by debt-creating domestic demand. Public consumption increased by 7.9 percent and household consumption by 3.6 percent, the latter benefiting from wage rises and relatively low prices of non-food products. Investment increased at the more moderate rate of 2.7 percent, mostly driven by programs of social housing, public works, and industrial equipment.

10. Over the first quarter of 2013, overall GDP growth reached 3.8 percent, thanks to a 17.7 percent jump in agricultural production as a result of favorable weather conditions. This offset the slower growth of non-agricultural economic activities (1.9% GDP), which continued to suffer from the slowdown of foreign demand but also from a sluggish domestic demand. In particular, domestic investment dropped by 2 percent as compared to the first quarter of 2012.

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Figure 1. Growth shifted to higher path and is less volatile and less dependent on agriculture (in percent)

‐10.5

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GDP Trend 1991‐2000 Trend 2001‐2012

11. The Government and the Central Bank (BAM) continued to demonstrate their commitment to control inflation. Notwithstanding higher world prices of imported commodities, inflation has been kept low thanks to price subsidies benefiting basic food and fuel products. Partly as a result of the Government’s price controls, the consumer price index averaged 1.3 percent in 2012 as compared to 0.9 percent in 2011. However, some inflationary pressures emerged since the beginning of 2013 (up 2.34 percent during January-July 2013) due mostly to the impact of price increases in transportation (up 4.3 percent), education services (up 6.1 percent), and to a lesser extent food (up 3.2 percent).

12. Morocco’s unemployment rate has been stubbornly high hovering around 9-10 percent in recent years—or about one million jobless people—despite years of respectable economic growth and declining participation rates. The unemployment rate has stabilized in 2013 first semester (9 percent) compared to the same period in 2012 mostly driven by the creation of jobs in the domestic trade sector and public administration, and to a lesser extent in the manufacturing sector. Less than half of the Moroccan population is actually active (i.e., either employed or looking for a job), which is one of the lowest participation rates among emerging economies. Participation rates declined steadily from 55.3 percent in 1999 to 48.4 percent in 2012. This overall weak participation is mainly explained by the very low participation of the youth (32.5 percent) and women (24.8 percent).

13. The gradual pace of public finance reforms coupled with the economic turmoil in Europe and continued high prices of commodities have eventually had their toll on Morocco’s fiscal accounts. Data released by the Moroccan authorities in early February 2013 indicate that the worsening of government finance in 2012 had been more pronounced than expected.8 The budget deficit widened to 7.6 percent of GDP in 2012, a slippage of more than 2 percentage points of GDP from the deficit adopted in the Budget Law.9 The deficit would have been even higher (by some 0.6 percentage point of GDP) had the Government not decided to increase the prices of liquid fuel products in June 2012.10

14. In early 2013, the universal subsidy system and an increasing wage bill continue to test Morocco’s record of fiscal prudence. Fiscal data released for the period January-June 2013 indicate a worsening of the main indicators. Revenues recorded one of the worst performances, receding by 1.1 percent compared to an increase of 8.3 percent during the same period of the previous year. At the same time, main expenditures

8 For overall consistency of indicators, all ratios to GDP have been calculated using the estimated nominal GDP released by the the HCP in February 2013 instead of the projected GDP envisaged in the Budget Law 2012. 9 The budget deficit does not take into account privatization receipts. 10 The prices of oil products increased by 19.6 percent for gasoline, 14 percent for gasoil, and 13.4 percent for industrial fuel.

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items continued to increase. In particular, despite the government’s decision to rein in non-wage recurrent expenditures and capital outlays, both increased significantly over the period, by 27.2 percent and 9.2 percent, respectively. However, these figures do not reflect the government’s decision in late March to cut budgeted investment by 25 percent and to limit transfers to SOEs for the remainder of the year. On a brighter note, subsidies declined by about 28 percent during the first 6 months of the year as a result of lower prices and volumes of imported petroleum products. At current international prices, total subsidies should remain within the Budget Law target of 4.5 percent of GDP (instead of 6.6 percent of GDP in 2012). The wage bill increased by 5.6 percent over this period, reflecting last-year’s salary increases and new hiring of civil servants. As a result, the budget deficit worsened to 7 percent of GDP over January-June 2013, almost one percentage point of GDP higher than during the same period in 2012.11

Table 1. Annual subsidies in percent of GDP

Commodities 2007 2008 2009 2010 2011 2012 Food 0.8 1.1 0.7 0.7 0.9 0.9 Fuels 1.7 3.5 1.1 2.9 5.2 5.7 Total Subsidies 2.5 4.6 1.7 3.6 6.1 6.6

Source: Ministry of Economy and Finance 15. Even though the accumulated fiscal deficits have been mostly financed on the domestic market, there

have been no apparent signs of significant private sector crowding out—thanks to the relaxation of monetary policy by the BAM. In 2012, the Treasury issued the equivalent of 6 percent of GDP in domestic bonds and sold part of its capital in “Banque populaire” for an additional 0.4 percent of GDP. To fill the financing gap, the Government raised US$1.5 billion bonds on international financial markets in December12. As a result, the central government debt increased by 5.9 percentage points of GDP in 2012 to reach 59.6 percent of GDP. While the central government is mostly indebted in its own currency (with only a debt of about 14 percent of GDP denominated in foreign exchange), the level and pace of deterioration of the debt are worrisome. In just 4 years, Morocco’s central government debt increased by 12 percentage points of GDP. Clearly, without meaningful corrective measures, Morocco’s current fiscal stance increasingly put at risk the sustainability of Morocco’s medium term macroeconomic framework.

16. The growing savings-investment gaps in the public sector have translated into widening external current account imbalances. Against the backdrop of sluggish external demand, notably from Europe, and deteriorating terms of trade, the trade deficit increased to 24 percent of GDP in 2012. Combined with declining tourism receipts (down 2.1 percent) and workers’ remittances (down 3.9 percent), the current account deficit widened to 10 percent of GDP. On the capital account side, net foreign direct investment (FDI) inflows grew by a healthy 22.8 percent during the period, thanks to foreign investors’ continued confidence in the Moroccan economy. However, total net external capital flows were not sufficient to finance the current account deficit, and net official international reserves declined by US$3.1 billion to reach the critical level of US$16.3 billion by end 2012, corresponding to 3.9 months of imports coverage. Reserves have stabilized since the fourth quarter of 2012 at around 4 months of imports.

17. During the first seven months of 2013, the external accounts of Morocco are estimated to have

improved thanks to the decline of world prices- especially that of fuels (down 6% during the period), and food –as well as the slowdown in domestic demand. However, tourism receipts decreased by 3.5% and

11 One needs to bear in mind that the 2012 budget execution started later than usual, which distorts somewhat the base on which increase rates are calculated. 12 Morocco also succeeded in topping up this operation with an additional US$ 750 million issued in May 2013 at similarly favorable terms and conditions.

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worker’s remittances receded by 0.8% over the period. Foreign investors continued to heavily invest in Morocco, with Foreign Indirect Investment (FDI) growing by 26.5% between January and July 2013.

18. To stimulate economic activity and contribute to the financing of the economy in a context of price

control and low inflation, the Central Bank (BAM) decided to reduce its policy interest rate from 3.25 percent to 3 percent in March 2012 and to lower the money reserve requirement for banks from 6 to 4 percent in September 2012. The BAM has maintained these rates during the first half of 2013. Together, with higher weekly liquidity injections by the BAM into the domestic banking system, these decisions had the effect of partially relaxing the liquidity constraints in the money market and helped finance the economy. As a result, the money supply increased by 5 percent at the end of June 2013 (compared to the previous year). Credit to the economy increased by 3 percent during the same period, primarily driven by credit to housing, which significantly increased by 5.2 percent thanks to the expansion of social housing programs supported by the Government. With increased access to credit and relatively low prices of housing equipment, the consumption credit also rose by 2.9 percent. At the same time, credit to corporate treasuries slowed down to 0.8 percent, partly as a result important late payments made by the public sector to reduce its large overdue arrears to the sector. Credit to business equipment edged up by 1.2 percent. Non-performing loans remained at an average 4.8 percent of total credit to the private sector.

C. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 19. Morocco’s room for macroeconomic maneuvering has narrowed considerably. The twin deficits that

have accumulated to finance the series of adverse external shocks since 2008 have largely exhausted the room for maneuver that Morocco had built prior to these crises through prudent macroeconomic policies and management (see Annex on Morocco’s macroeconomic developments over the last decade, 2001-2011). They unveiled two main weaknesses that are endangering Morocco’s external and fiscal sustainability in case of a further deterioration of its external or domestic environment. First, the slow structural transformation of the economy hinders the prospects of a rapid increase in competitiveness, exports, and quality job generation. Second is the pursuit of highly onerous fiscal policies, such as the universal subsidy system and tax exoneration programs. These two weaknesses are contributing to the reversal of the downward trend of public debt and the depletion of foreign reserves to critical levels.

20. Macroeconomic prospects in the medium term will greatly depend on the scope, depth and pace of

Morocco’s reform programs as well as developments in Europe – the main trading partner of Morocco. Morocco is expected to benefit from comprehensive reforms aimed to improve the economy’s competitiveness and the effectiveness of its sectoral policies. The current reforms to strengthen governance and justice, improve the efficiency of public investment, and deepen decentralization are critical to achieving long-lasting improvement in economic efficiency, productivity, and employment. Under these assumptions, economic growth should recover to around 5 percent by 2016. Inflation is projected to remain under control at 2.5 percent or below.

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Table 2. Baseline Medium Term Macroeconomic Indicators

21. However, should the underlying sources of growth be slow to materialize, growth prospects would

have to be adjusted downward. A continued sluggish world economy, particularly in Europe, would negatively impact the medium term macroeconomic outlook through reduced prospects for exports, including tourism, workers’ remittances and FDI flows. Similarly, sustained high commodity prices, a deterioration of the regional context and prolonged global financial uncertainties would have an adverse impact on Morocco’s prospects. 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.

22. In line with the new constitutional requirement, the Government has further committed to fiscal

stability and to progressively decrease the budget deficit to the medium term target of about 3 percent of GDP by 2017 through the implementation of a set of critical reforms. The key measures include: (i) reforming the universal subsidy system; (ii) implementing civil service reform, notably by introducing a ceiling on wage expenditures and a new remuneration system; (iii) accelerating the fiscal and pension reform agenda; and (iv) enhancing the efficiency of public as well as private investments. In May 2013, the

Projections 2010 2011 2012 2013 2014 2015 2016 2017 Part A: Main Macro Aggregates

Real annual growth rates GDP at market prices 3.6 5.0 2.7 4.5 3.0 4.6 4.9 5.0

Non-Agriculural GDP 4.5 4.9 4.5 3.0 4.3 5.0 5.3 5.4 GDP per capita 2.6 3.9 1.7 3.4 2.0 3.6 4.0 4.1 Total consumption 1.5 6.8 4.8 4.6 2.3 4.5 4.2 4.7 Gross domestic investment (GDI) -1.6 3.3 2.4 0.1 2.5 3.7 4.8 5.0 Exports (GNFS) 16.6 2.1 0.8 4.1 6.4 6.9 6.8 6.7 Imports (GNFS) 3.6 5.0 1.6 1.4 3.8 5.4 5.2 5.9

Nominal GDP growth 6.7 5.0 4.0 7.0 5.5 7.0 7.3 7.0 Savings-investment balance, as percentage of GDP

Gross domestic investment 35.0 36.0 34.5 33.7 33.4 33.1 33.1 33.0 of which Government investment 5.8 5.9 5.5 5.1 5.1 5.1 5.1 5.0

Foreign savings 4.5 7.9 10.5 8.3 7.1 6.1 5.5 5.1 Gross national savings 30.5 28.1 24.0 25.3 26.3 27.0 27.6 27.9

Government savings (Privatization receipts excl.) 1.8 -1.0 -2.6 -0.2 0.7 1.2 1.9 2.2 Non-Government savings 28.8 29.1 26.7 25.6 25.6 25.8 25.7 25.7

Gross domestic savings 28.0 25.0 22.6 20.4 21.5 22.4 23.1 23.6 Prices and money

CPI 0.9 0.9 1.2 2.4 2.4 2.3 2.3 1.9 Annual average exchange rate (LCU/US$) 8.4 8.1 8.1 8.5 8.6 8.6 8.6 8.6 Money growth 4.8 6.5 5.2 4.9 6.0 7.1 7.4 7.1

Part B: Government Finance Indicators Percentage of GDP

Total revenues (excl. privatization) 25.4 25.9 26.3 26.0 26.3 26.4 26.4 26.4 of which Tax revenues 23.2 23.4 24.1 23.6 23.8 23.9 23.9 23.9

Total expenditures (incl CST) 29.9 33.1 34.6 31.9 31.2 30.5 29.9 29.6 of which wages and salaries 10.3 11.1 11.6 11.3 10.9 10.7 10.5 10.4 of which subsidies 3.6 6.1 6.6 4.5 4.2 3.8 3.5 3.3

Deficit (-)/Surplus (+) (commit. Basis) -4.7 -6.9 -7.6 -5.6 -4.7 -4.0 -3.3 -3.0 Other

Total Debt of Central Government/GDP 50.3 53.7 59.4 60.0 60.6 59.6 58.0 56.3 Total interest payments/Tax revenues 9.9 9.7 10.0 10.9 10.6 10.1 9.6 9.0

Part C: Balance of Payments indicators Exports of G&S (US$, mln) 30,308 35,582 34,567 36,238 39,081 42,469 45,885 49,553 Imports of G&S (US$, mln) 40,192 49,482 49,508 49,989 52,101 54,931 58,240 62,153 Remittances (US$), change in % 3.5 12.8 -9.9 5.0 5.0 5.0 5.0 5.0 Current Account balance (in % of GDP) -4.5 -7.9 -10.5 -8.3 -7.1 -6.1 -5.5 -5.1 Net reserves (CB) in months of MGNFS 6.7 5.0 3.9 3.8 3.8 3.8 3.9 4.0

Source: Government of Morocco until 2012 and World Bank staff estimates

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authorities reduced the per-unit subsidy of wheat harvesting. In July, they adopted an ad hoc circulaire to make wage bill appropriations binding and limit the rollover of unspent investment appropriations. They also adopted a mechanism to index the domestic prices of fuel, gasoline, and diesel to world prices. The price indexation would kick in when the world prices exceed by plus or minus 2.5 percent of the reference price foreseen in the budget law. The Head of Government adopted a circular in July 2013 to that effect. Furthermore, the quota of subsidized wheat was reduced by 6 percent. These actions will help keep the 2013 subsidy bill closer to its budget target, while significantly reducing the vulnerability of the budget to international commodity price movements. They constitute major steps toward a comprehensive subsidy reform, which the authorities intend to adopt by the fall of 2013. Consistent with lessons from international experience, the broad reform is to include cash transfers to vulnerable groups to mitigate the social impact of the reform. Important analytical work and simulations have been done on the socio-economic impact of the subsidy reforms and different cash transfer mechanism but the decision has yet to be taken by the new government coalition. Finally, the Head of Government has introduced the principle of performance informed budgeting in the 2014 budget preparation circular (“Note de cadrage”), a prior action of this DPL.

23. The Government’s debt strategy is to diversify financing sources and take on a greater proportion of external financing (Table 3). In this context, new external financing schemes are being put in place beyond the classical multilateral and bilateral sources of financing. The government signed in February 2013 a grant agreement of US$1.25 billion over a five year period with the Kuwait Development Fund to support economic and social projects. In addition, the government signed in March 2013 a first installment of US$400 million grant of a total of US$ 1.25 billion committed by the Saudi Development Fund. Both grants are part of a broader cooperation agreement signed with the Gulf Cooperation Council countries last year committing US$5 billion over a five-year period. In August 2012, Morocco also benefited from a Precautionary and Liquidity Line (PLL) of US$6.2 billion approved by the International Monetary Fund (IMF). The PLL is part of the proactive approach of the Government to ensure new precautionary lines of credit to be able to cope in the event of an unforeseen severe deterioration of its external balances. The IMF concluded the first review of the PLL in February 2013 and the second review was successfully completed and presented to the IMF Board on July 31, 2013.

Table 3. Financing Requirements of the Central Government (in percent of GDP) Est. Projections 2012 2013 2014 2015 2016 2017 Financing required 19.6 18.5 17.7 16.2 15.5 14.5

Budget deficit (+) 7.6 5.6 4.7 4.0 3.3 3.0 Amortization 11.9 12.9 12.9 12.3 12.2 11.5

Domestic 10.6 11.7 11.6 10.9 10.7 10.0 External 1.3 1.2 1.3 1.4 1.5 1.5

Total Financing available 19.6 18.5 17.7 16.2 15.5 14.5 Domestic financing 15.4 13.3 13.2 12.1 11.9 11.1 External disbursement 3.0 3.8 3.2 3.0 2.5 2.4 Others (Privatization, grants,…) 1.1 1.4 1.3 1.2 1.1 1.0

Source: MoF of Morocco and World Bank staff estimates 24. In light of the recent measures taken by the authorities, the external position is expected to remain

sustainable over the medium term provided that key critical reforms under implementation continue to take hold. The current account deficit is projected to progressively edge downward to around 5 percent of GDP in 2017 benefiting from improved export potentials and a recovery of tourism activities and workers’ remittances. The latter would benefit from the anticipated progressive recovery in Europe, the main source of remittances flow to Morocco. This scenario critically assumes that Morocco would benefit from its continued reform efforts in trade and competitiveness, supported among others by the World Bank. These reforms, along with sector strategies already under implementation, would translate into higher productive private investments, including FDIs, and progressive gains in competitiveness of its exports,

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including tourism. Exports will also benefit from the healthy growth of major developing and BRICS countries, thanks to growing shares of Moroccan exports towards these countries. In this context, external debt is expected to follow an inverted U-path reaching a maximum at almost 37.7 percent of GDP in 2015 before steadily dropping thereafter, while net foreign reserves will remain at around four months of imports.

25. Balance of payments financing requirements constitute a moderate concern in the medium term, given

the country’s relatively low outstanding external debt, the financial support from the Gulf States, access to international financial markets at favorable conditions, and still adequate foreign reserves. As the current account deficits are projected to steadily improve in the medium term, financing large share of them through traditional multilateral and bilateral credit lines along with other private capital flows, including FDIs, should not be a major constraint. In addition, the Gulf Cooperation Council countries recently confirmed their program to invest US$5 billion over the next 5 years, mostly in the form of grant. Any remaining financing gap could be filled by tapping international financial markets. As noted above, the confirmed PLL from the IMF will continue to provide a potential line of credit over the period 2013-2014, although the authorities intend to continue to treat the PLL as precautionary.

26. A comprehensive public debt sustainability analysis indicates that the fiscal framework remains

sustainable although it would weaken under some medium term downside risks (see Annex 3). Indeed, when the debt sustainability analysis was run under the assumption of “no-policy-change” scenario, the debt stock increased steadily over the period 2013-2018. All the six bound tests proved sustainable over the medium term, although debt of three of the tests remained high within the range of 61-62 percent of GDP, which indicates that debt sustainability remains fragile to further deterioration in Morocco’s internal or external business environment.

27. In sum, while Morocco is facing growing economic and fiscal challenges, its macroeconomic policy

framework remains adequate. The macroeconomic framework is expected to remain sustainable in the medium term assuming that the recent key fiscal and structural reforms announced by the authorities (and envisaged in the 2013 Budget Law as described above) are implemented and amplified in a timely fashion. The projected macroeconomic outlook and the success of the structural reforms depend more than ever before on a robust fiscal consolidation, a prudent monetary policy, and comprehensive medium term reforms that supports external competitiveness. In particular, it is of utmost urgency that the government fully implements the recently announced reform of the subsidy system to ensure the sustainability and efficiency of public finance. Until now, the adverse effects of the global environment on Morocco have been weathered relatively well, thanks to strong economic fundamentals and sound macroeconomic policies carried out over the last decade. Yet, in contrast to when the international crisis struck in 2008, the Government today has much smaller margins for maneuver. Its commitment to deepen and expand the current reform efforts is key to the prospects for a sustainable recovery of investment, growth, and employment in the years to come.

II. THE GOVERNMENT’S PROGRAM

28. The 2012-2016 government program, which was presented to Parliament on January 26, 2012, is structured around five key pillars, which are: (i) deepening national identity and social cohesion; (ii) the rule of law and advancement of regionalization and governance; (iii) job creation and economic development; (iv) national sovereignty and social development; and (v) strengthening social services, including those aimed at Moroccans living abroad. The scope of the proposed DPL series focuses primarily on objectives outlined in the second component of the government program, which is described in more detail below.

29. The government program is anchored in the new constitution, whose implementation is the first

priority. Its second component focuses on the concretization of the constitution’s principles of good governance, human rights, protection of individual freedoms and accountability of institutions. The

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new Constitution establishes a democratic and highly decentralized system of governance, an independent judiciary, and lays the foundations for a new social contract, with laws guaranteeing both civic engagement and access to information. A section of the constitution, entitled “Liberties and Fundamental Rights,” in which freedoms of information (Article 27) and of the press (Article 28) are made explicit as fundamental rights is a direct response to recent protests and popular demands for better governance and avenues for civic engagement in decision making. Furthermore, the Constitution includes provisions for strengthening the role of the regions as key actors in leading social and economic development at the local level within the framework of the strategic Advanced Regionalization policy. In addition to improving the delivery of public services, these important constitutional changes present a unique opportunity to address more squarely the longstanding governance challenges affecting the country’s socioeconomic development policies.

A. STRENGTHENING TRANSPARENCY AND ACCOUNTABILITY IN THE MANAGEMENT

OF PUBLIC RESOURCES 30. The government program places an emphasis on improving the effectiveness of public institutions and

on modernizing public financial management. The proposed budget reform is considered a strong lever for enhancing fiscal transparency and accountability, and for expanding the scope and reach of reforms initiated under the previous government’s public administration reform program. The deterioration of public finances on the back of rising expenditures and weak revenues increased the importance to improve the budget’s allocation and operational efficiency. The adoption of a more strategic and programmatic budget management combined with a stricter control of the wage bill and subsidies are seen as a way to improve the fiscal space over the medium term while consolidating public finances. The objectives of greater financial transparency and accountability are considered equally important and mutually reinforcing objectives.

31. The programmatic and results-focused budget approach is also an important instrument in enhancing

Parliament’s oversight function. Article 77 of the new Constitution stresses the importance of balanced public finances and asserts that amendments proposed by Parliament to the executive’s budget proposal cannot affect the fiscal balance. While reaffirming the significance of sound and sustainable public finances, the proposed programmatic and results-focused budget approach would give Parliament a greater say in the budget setting process, by: (i) providing more timely information on the main budget assumptions and perspectives,13 (ii) allowing for greater visibility in budget allocations to the different programs, their intended objectives, and corresponding performance indicators; and (iii) elevating the level of the vote to chapters (ministries) and broad type of expenditures (current, investment, debt payments, etc.). The new performance focus will also increase the government’s external accountability over the use of public resources both before Parliament and the greater public.

32. The government also aims to strengthen internal accountability in the public sector by improving

managerial responsibility and instilling a stronger performance focus while strengthening performance monitoring and evaluation. Although the government does not envisage performance-based pay at this stage, the new performance assessment framework is expected to gradually influence the civil service incentive structure, which is currently driven mainly by compliance and inputs. The civil service compensation framework is currently being revised and could include a variable and performance based element. Likewise, the reform of ex-ante financial controls aims to provide more managerial flexibility to administrations that strengthen their internal control framework.

13 As early as July, when the budget preparation process begins.

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33. Another priority of the government is to enhance transparency and competition in its contractual relations with the private sector through the reform of the procurement rules and the adoption of a legal framework for public-private partnerships. Such increased competition is expected to provide new economic opportunities to less connected firms and in turn increase the value for money of public spending and attract more private investment towards key public services in a context of constrained public finances.

34. The government is extending the reform agenda across the entire public sector and is devising

complementary strategies to improve corporate governance of SOEs and agencies. This holistic approach is in line with the Constitution and the new regionalization strategy adopted in February 2011, which recognizes the increasing role that SOEs and local governments play in terms of public expenditure management and service delivery. The Government thus adopted a code of corporate governance for SOEs on March 19, 2012 and started implementing in 10 pilot entities. This code introduces good practice principles and recommendations to ensure that better governance and accountability mechanisms are in place for SOEs and agencies. These principles include measures to ensure responsible and transparent management of SOEs, and to guarantee the reliability, integrity and effectiveness of these entities’ actions, ensuring the accountability and transparency of the decision making process, to meet the expectations and aspirations of the various stakeholders. Similarly, the Government is reforming the law regarding the governance and financial control of SOEs in order to improve the Government’s oversight while enhancing the managerial flexibility and accountability of SOEs that have improved their internal governance and control framework, and thus improving the internal management framework of SOEs, spending efficiency and risk prevention.

B. FOSTERING OPEN GOVERNANCE

35. The government program reaffirms the implementation of the new constitutional right to information

through a dedicated law, a draft of which is currently undergoing a process of national consultation. The access to information reform consists of a two pronged approach aiming at fostering the proactive disclosure of information that is of general interest while enabling the public to request any information that does not fall under limited and well defined exceptions. Considering the time needed to fully implement such a complex and structural reform, the proactive disclosure of information is essential, to show tangible results in the short term. The Ministry of Economy and Finance is committed to enhance fiscal transparency and has prepared a dedicated policy to formalize the regular disclosure of key budget information. Other ministries are working on similar initiatives to concretize the new right to information while the legal and institutional framework is put in place. A notable example is the Secretary General of the Government which is publishing draft laws for public consultation since 2009. Initially the publication was limited to texts that have an impact on trade and investment, in line with the government’s commitment in the context of their free trade agreement with the US. Since 2012, the SGG goes beyond this commitment and has started publishing a large number of draft legal texts on its website, before transmission to Cabinet.

36. Another new and essential constitutional right the government is committed to implement swiftly is

that of citizens to propose legislation and petitions (Articles 14 and 15 of the new Constitution). Along with the right to access information, these new rights are the foundations of the participatory democracy sought by the Constitution. They need to be formalized and specified in organic laws, which is a priority of the government’s legislative program. Given the importance of a broad consensus with the civil society on the scope and modalities to exercise these rights, the Government has launched a National Dialogue concerning civil society and its new constitutional roles in March 2013. This dialogue, which is comprised of an independent commission of 63 members from government, civil society, academia and the media, aims to concretize the principles of the new Constitution on public engagement into a legal and policy framework in a participatory manner. It plans to hold broad and inclusive consultations at the national and regional level on these different rights and policies over a period of one year before submitting its proposals to the

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government and to parliament. A more detailed description of World Bank support to this reform is included in the operation description section.

37. The government has a large e-government reform agenda to improve public service delivery, at the

central and local levels. E-government reforms are considered an important lever in the modernization of the public administration and in delivering administrative services to remote areas. In 2009, the government adopted the national strategy entitled Maroc Numeric 2013, which aims to develop a knowledge-based economy with a focus on information and communication technologies (ICT) and improve service delivery. An e-government inter-ministerial committee (CIGOV) was established to oversee the implementation of the e-government program, which is a priority of the Maroc Numeric 2013 strategy. The CIGOV met 11 times between February 2010 and June 2013. Services and projects were prioritized based on an international benchmarking and studies conducted by the government as well as on proposal from civil society. In the context of this e-government program, 31 projects have been launched, of which 10 are being implemented and scaled up. One such project is an Internet platform called Watiqa, enabling citizens to order birth certificates and other administrative documents online and to receive them through registered mail. This innovative application aims to reduce transaction costs for citizens as well as the risk of discretion and corruption linked to direct interaction with local officials.

C. GOVERNMENT CONSULTATIONS

38. The constitutional revisions of 2011 were developed through a consultation process that included all

political parties and the country’s main constituencies. This process was initiated by the King in March 2011, when he appointed two commissions in charge of the political transition and of revising all other provisions, respectively. The commissions held consultations over a month before presenting their proposals to the King. The consolidated draft was then submitted to a referendum on July 1, 2011. In an effort to engage the public, a civil society initiative was launched through an online platform (www.réforme.ma). This was meant to raise awareness among citizens over the proposed changes and to stimulate an open debate on the expected constitutional changes. It helped feed into the government led consultation processes. The open government rights and reforms on access to information and citizen engagement were strongly advocated by the civil society and integrated in the new constitution. The PJD’s electoral program emphasized good governance reforms and the implementation of the new constitutional rights. After winning the elections, these commitments were incorporated in the government program approved by parliament and in the subsequent legislative program.

39. The reforms supported by this operation have undergone and will undergo a consultative process with a broad range of stakeholders before adoption by Cabinet. This is notably the case of the public procurement decree, the law on the reform of the governance and financial control of SOEs, the draft law on public-private partnerships, and the draft law on access to information, which were subject to numerous consultation events, some of which supported by the Bank. These draft laws have been published on the website of the Secretary General of the Government to enable broad and inclusive public consultations. They received numerous comments from a large spectrum of stakeholders (individuals, civil society organizations, public institutions, national and international companies, as well as from international organizations, including the World Bank). Many comments were made online and are public. The draft laws have been revised following these consultations and presented to the Cabinet. Likewise, the government has confirmed its intention to post the revised organic budget law and the forthcoming petitions law online for public consultation. This online consultation will complement earlier face to face consultations both within the administration and with interested parties, as was the case for the budget reform, the procurement reform and the draft access to information law. Likewise, the regionalization reform is the outcome of several extensive consultation processes, conducted first by the Consultative Commission on Regionalization established by the King and tasked with the drafting of the strategy and then through constitutional consultations. Finally, the e-government measures are the result of a strongly participatory process, in which

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citizens can make comments and proposals online. The watiqa initiative, which is supported by this DPL, was proposed by citizen. This exemplifies the positive impact of consultations for the acceptance and the quality of policies.

40. The DPL is supporting policy reforms aiming at fostering open governance, based on transparency and public participation. As such the access to information policy and draft law have been subject to large online and face to face consultations, including a national conference held in Rabat on June 13, 2013. This conference, supported by the Bank was opened by the Head of government and Parliament and convened 500 persons, including the private sector, civil society and international experts. It provided broad support for the policy and recommendations to strengthen the law and institutional arrangements. Likewise, the DPL supports the establishment of a national dialogue on the new constitutional rights on citizen engagement to develop the corresponding policies in a participatory manner, through national, regional and online consultations. The operation will specifically support the development of an organic law on public petitions to strengthen public voice. The support to these policies fostering public consultation and engagement is specified under section IV below. Beyond this DPL, the parallel Transition Fund project will provide technical and financial assistance for the development of a government wide public consultation policy, an online consultation platform foreseen by Ci-gov as well as to a training program for both public officials and civil society organizations.

III. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM

A. LINK TO THE COUNTRY PARTNERSHIP STRATEGY (CPS) 41. The proposed DPL is one of the key operations foreseen in the FY10-13 CPS presented to the Board in

January 2010. The CPS emphasizes two main tracks, namely: (i) continued support for the program areas undertaken to date and that remain relevant, with an enhanced focus on sectoral governance issues, consultation, and participation; and (ii) stepped-up Bank engagement in support of more ambitious priority reforms addressing cross-sectoral issues. These areas are: (i) economic competitiveness in support of growth and job creation (CPS Pillar 1); (ii) governance (the cross-cutting beam of the CPS); (iii) social protection and subsidy reform (CPS Pillar 2); and (iv) strengthening inclusion and voice, particularly regarding youth and women (covered under CPS Pillar 2).14 In response to the new constitutional provisions, the proposed DPL supports the reinforcement of transparency and citizen engagement by: (i) supporting the implementation of the new constitutional right to access to information and to petitions, which require specific legislation; and (ii) assisting government in increasing the transparency of the budget to stimulate policy discussions over the priorities and underlying strategies of government spending. In parallel, the Bank is providing technical assistance to the National Dialogue on public participation and on the design of a government wide public consultation policy and petitions law, through a grant from the Transition Fund. These reforms contribute to the government’s open governance agenda and to Morocco’s eligibility for the Open Government Partnership (OGP).15 The program is fully aligned with the priorities of the framework of engagement of the MENA region, and its pillar on governance. It supports directly one of the five key indicators on open governance that serves as “drivers” of the corporate twin goals to boost shared prosperity and reduce extreme poverty.

14 These areas of focus are all aligned with the MENA Regional Update presented to the Board in January 2013. 15 OGP was launched in September 2011 by Brazil, the USA and 6 other founding members. The Partnership provides a platform to share commitments and exchange experiences about reforms fostering a more open and inclusive mode of governance. To join, countries must meet minimum eligibility criteria and demonstrate commitments in four areas: (i) fiscal transparency, (ii) access to information through a law that guarantees the public’s right to information and access to government data, (iii) asset disclosures related to elected or senior officials, and (iv) citizen engagement in policymaking through public consultation. Three of these four areas are supported by this DPL series.

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B. COLLABORATION WITH THE IMF AND OTHER DEVELOPMENT PARTNERS

42. The World Bank and the IMF maintain close collaboration in Morocco. Regular contacts between the IMF and World Bank country teams are the norm, with discussions focused on respective work programs, country priorities, and recent developments and prospects, and reflecting the growing weight of DPLs in the Bank’s Morocco portfolio. Collaboration between the Fund and the Bank has been seamless, with a common understanding of the division of labor and a shared assessment of the critical macroeconomic challenges facing the country. The Fund participates in Bank project review meetings, where relevant. Similarly, Bank staff was consulted during the IMF’s PLL review missions in December 2012 and June 2013. Morocco’s next Article IV consultation is scheduled for December 2013.

43. The proposed DPL has been prepared in close cooperation with the European Union (EU) and the African Development Bank (AfDB). This close collaboration takes the form of joint missions, closely coordinated policy dialogue and technical assistance as well as of coordinated policy matrix. While each donor follows its own decision-making process and operational procedures, the teams make every effort to harmonize their approaches, methodologies, and phasing to the extent possible in the spirit of the Paris Declaration on donor coordination and alignment, of which Morocco is a signatory. The AfDB has adopted a programmatic series of two operations, while the EU has a four-tranche operation over four years, with a specific pillar on tax reforms, which it has supported in the past. Furthermore, technical assistance is closely coordinated among the three institutions around the pillars included in this program.

C. RELATIONSHIP WITH OTHER BANK OPERATIONS

44. This DPL series is complementary to the three following operations which support sector specific governance and service delivery reforms:

The First Economic Competitiveness Support Program DPL focuses on: (i) improving the investment climate, in particular by removing barriers to entry and simplifying the regulatory environment for doing business; (ii) furthering trade policy reform and trade facilitation; and (iii) improving economic governance by strengthening the competition agency's mission and prerogatives and increasing transparency and accountability in the granting of investment incentives. This DPL has numerous synergies with the proposed operation, in particular through mutually reinforcing measures on transparency, regulatory reforms, the corporate governance of SOEs, and procurement reform. These measures are geared towards improving the business environment and competitiveness agenda.

The Third Municipal Solid Waste Sector DPL supports four key objectives: (i) strengthening governance, particularly demand-side governance in the sector through improved accountability, transparency, and access to information by providing citizens and civil society with opportunities for public engagement and voice in the provision of solid waste services; (ii) anchoring the long-term institutional and financial sustainability of the sector in line with the new regionalization and decentralization agenda; (iii) upgrading the country’s environmental control and monitoring system; and (iv) developing a financially viable and socially inclusive waste recycling sector. The first component offers important potential synergies with the cross-sectoral governance reforms at both the central and local levels proposed by this operation. Reforms on transparency and access to information and local governance are mutually reinforcing and closely coordinated. There is also important complementarity between the local revenue generation supported by this DPL and the broader reform of local finances and intergovernmental transfers supported by Hakama.

The Governance framework implementation support project, financed by the Transition Fund, will support the implementation of key policy measures of the proposed DPL series, such as (i) the budget and public procurement reform, (ii) the national dialogue on public engagement and the petitions law, as well as (iii) the reform of the fiscal transfer and equalization system. Furthermore, the project foresees

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funding for a public financial management diagnostic (PEFA update), which will enable to measure the progress in the implementation of the program’s public financial management reforms and inform the DPL’s result framework.

45. In addition, a new justice sector technical assistance project, approved by the Board in June 2012, supports the institutional strengthening of the Ministry of Justice and of the Judiciary. This project supports, among others, the strengthening of the transparency and efficiency of courts, thereby reducing the uncertainty associated with the rule of law. It adopts a participatory approach to the establishment of modernization plans for the courts, thus reinforcing relevant reforms proposed under this operation. This operation thus complements the focus of this DPL on strengthening the Executive’s accountability and transparency as well as budgetary oversight by the Legislative.

46. The first pillar of the DPL and more specifically the budget and procurement reforms build on the past Public Administration Reform Loan Series (PARL I-IV), which support the inception and pilot testing of the reforms. The PARL series have supported the conceptual phase of the budget reform through the pilot testing of medium term expenditure frameworks in 5 ministries, the initiation of the reform on ex-ante financial controls as well as the development of e-procurement. While technically sound, these efforts have not yielded the intended results in the absence of the necessary legal changes. This is the priority of the present operation, which supports the revision of the organic budget law, the implementation of performance budgeting in ministries providing essential public services, the formal alleviation of ex-ante controls and the revision of the procurement decree to legalize e-procurement and reverse auctions.

D. LESSONS LEARNED

47. Key lessons can be drawn from the World Bank’s long-standing engagement with public administration reforms worldwide and in Morocco in particular, notably in terms of ownership and sequencing of reforms. These lessons are drawn from past transition experiences, notably in Eastern Europe and Asia and from an Independent Evaluation Group (IEG) evaluation of World Bank support for public sector reforms entitled “What Works and Why” (World Bank 2008) as well as from the past two public administration reform loans series (PARL I-IV) in Morocco and their Implementation Completion and Results Reports (ICR) published in March 2009 and June 2011, respectively. These lessons are also confirmed by the EU and the AfDB program evaluations conducted in 2010 as well as by the recent CPS Progress Report, presented to the Board in May 2012.

48. Other transition experiences, notably in Slovenia and Indonesia, show the importance of maximizing the short window of opportunity for transformational reforms before engaging in more technical and medium-term reforms. In Morocco, the first phase of the transition led to a new Constitution and a new government. The revision of the country’s governance structure and practices are high on the political agenda. This DPL adopts an opportunistic approach, seeking to seize the chance of supporting the key governance reforms and policies necessary to formalizing these new constitutional rights and bringing about the more open governance mode expected by the population. The alignment of the program’s objectives with the new Constitution and the government’s priorities also reinforces the ownership and appropriation of reforms and the likelihood of their success. The adoption of an explicitly Arabic name for the program (Hakama = governance) should further facilitate a broader understanding and awareness of the type of reforms it supports.

49. The IEG evaluation of public sector reforms highlights the important role political momentum, adequate sequencing of reforms and a realistic political economy analysis play in ensuring the success of reforms. The evaluation recommends being realistic about the time it takes to adopt public sector reforms and to achieve significant results, the need to understand the political context, identify prerequisites to achieving objectives, and focus first on the basic reforms that a country needs at this initial stage. The report also recommends the reconsideration of the balance between development policy and investment lending

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since development policy lending can help secure the enabling policy changes. Experience in Morocco through the PARL series confirms the important impact the political environment, the quality of the overall governance framework, and the strength of the institutional set-up have on the success (or failure) of such engagement. This is particularly true for strategic and complex reforms, such as expenditure management reforms, corporate governance reforms of SOEs, and the regionalization agenda, which have been on the reform agenda of the government for the past decade and have witnessed resistance. These reforms benefit from a more conducive political environment in the current transition phase. This DPL series proposes a phased approach supporting visible short-term measures signaling change in terms of transparency and participation, while supporting the design and implementation of new policies/ laws on budget management, access to information, and public petitions.

50. The political economy of reforms is a key factor of success and failure. The current transition represents an overall conducive environment for governance reforms. It was initiated by the king in response to the national and regional protests and calls for greater political and economic freedoms. The king reaffirmed his commitment to the transition process and governance reforms in his annual address to the nation in July 2013 (Discours du Trône). The moderate islamist party, PJD, who won the elections and is heading the government campaigned on a governance and social platform. While the ongoing change in the government coalition does not represent a risk of reversal of these reforms it may delay their adoption and implementation. At the level of the administration there will be likely resistance to reforms that substantially change the current mode of operation and require increased transparency and accountability. The government intends to address this potential resistance through different ways: (i) large internal and external consultations to enhance mutual understanding and support for the reform; (ii) training across the public administration to strengthen appropriation and capacity; (iii) non-financial incentives, such as public recognition of good performance (potential financial incentives, such as variable pay, are envisaged in the medium term in the context of a broader civil service reform); (iv) command and control through the development of a more robust monitoring and evaluation system (for the budget reform) and enforcement mechanisms (for the procurement and the access to information reforms).

51. Past engagement with public sector reforms in Morocco has shown the importance of managing expectations, both among the public and within government, and the need to effectively communicate these reforms. The previous reform program suffered from a lack of visibility and communication, both internally and externally, affecting the appropriation and implementation of reforms. For example, the budget reform preparation involved only a few staff in the Ministry of Economy and Finance and in line ministries. There was limited feedback to the line ministries on the instruments they were testing (MTEFs, performance indicators, etc.). The authorities have changed their approach and now engage in extensive consultations with Parliament and line ministries in order to take into account their views and ensure a better appropriation of the reforms. Likewise, more attention is given in the current program on training and communication initiatives. A dedicated training and communication plan for the budget reform is being developed with support from the EU.

52. Another key lesson, taken into account in this DPL series, is the importance of technical assistance for the design and implementation of these new policies. During the preparation of this DPL, the Bank has provided policy advice and technical assistance on 8 reforms supported by this operation. This support took the form of a monthly policy dialogue, policy notes, international benchmarking, advice and comments on the draft texts, consultation events as well as workshops and training. This support was made possible through additional resources from the Bank and the MNA multi donor trust fund. To support the implementation of this operation’s core reforms the Bank leveraged resources from the Transition Fund (TF) described above as well as from the IDF (procurement reform).

53. Other lessons learned from past DPLs in Morocco show the need to have strong inter-ministerial coordination structures in place to ensure the adequate steering of complex horizontal reforms. The reform program is currently coordinated by the Ministry of Economy and Finance and by the Ministry for

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General Affairs and Governance (MAGG) and monitored by the Office of the Head of Government. The reforms supported by this program, involve many additional ministries and agencies. This challenge is acknowledged by the authorities, who have agreed to set up a three-pronged steering structure, with: (i) an inter-ministerial steering committee for the government’s governance program; (ii) thematic inter-ministerial committees for technical and cross-cutting reforms, including budget reform, access to information, and e-government reforms; and (iii) a dedicated committee for the coordination of Hakama. All three levels are linked to ensure consistency and synergies.

E. ANALYTICAL UNDERPINNINGS

54. This operation benefits from a wealth of knowledge anchored in significant analytical and technical work, partly initiated under the previous public administration reform loans (PARL I-IV) and scaled up during the program preparation.

The public expenditure reviews (PER) conducted in 2012 in the health, education and justice sectors as well as the public expenditure tracking survey (PETS) in the health sector have confirmed the negative perception of citizen about the quality of public services. These analyses have highlighted common weaknesses in the governance and accountability framework of the public sector affecting the delivery of basic public services. More specifically the following challenges have been noted: (i) inefficiencies in the allocation of resources, (ii) weaknesses and delays in the implementation of public expenditures (with carryover of budget allocations up to 50%), (iii) uneven productivity of service providers (health centers, courts, schools), (iv) absenteeism, (v) and persistent disparities in the access to and quality of basic public services. This comprehensive analytical work has underlined the importance of governance reforms that strengthen the transparency and accountability of the public sector and improve citizen voice and participation.

The performance budgeting reform is considered an important lever to improve transparency and accountability in the use of public resources through a structured and public performance monitoring and evaluation system. The reform has benefitted from extensive analytical and technical support from the Bank. The Public Expenditure and Financial Accountability diagnostic (PEFA, 2009) highlighted weaknesses in the policy orientation of the budget and parliamentary oversight, which will be addressed by the introduction of a functional and programmatic budget structure. The above mentioned public expenditure reviews underlined cross-cutting challenges in budget execution and oversight, affecting the delivery of core public services. The development of a performance monitoring and evaluation system aims to help address these challenges by improving managerial accountability about the use of public expenditures and public service delivery. International benchmarking, policy advice and notes have notably been provided on: (i) the new organic budget law and programmatic classification, (ii) fiscal rules and multiannual budget programming, (iii) performance monitoring and evaluation, and (iv) on public agencies.

The procurement reform is another lever to reduce discretion and improve value for money as evidenced by the different procurement diagnostics (CPAR, Country System Assessment, GAC assessment). This reform has also benefitted from substantial advice from the Bank, since its inception, including on the preparation of the new procurement decree, the oversight and recourse body and on e-procurement. This work builds on earlier diagnostic studies and advice aimed at using Country Systems.

Access to information and public participation policies improve checks and balances and foster a more open mode of governance. The Bank supported the development of new policies on access to information and public participation through international benchmarking as well as through policy advice and notes on the legal and regulatory framework. An ongoing research on the economic benefits of access to public sector information provided further analytical underpinnings to this reform. The Bank supported international knowledge exchange on these reforms through a series of conferences and multi-stakeholder workshops in 2012 and 2013.

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Corporate Governance of SoEs and Public-Private Partnerships: Both the World Bank/IFC and the EU have provided substantial technical advice on the preparation of the corporate governance code in Morocco and the dedicated code for SOEs and government agencies. This includes the World Bank Corporate Governance ROSCs completed in 2002 and in 2011. The ROSC assessment benchmarked Morocco's legal and regulatory framework, practices, and enforcement framework, against the OECD principles. They provided the analytical underpinnings for the improvement of SoE’s governance structure, internal control framework, financial accounting and reporting system, and transparency. Likewise, the Bank, IFC and EIB have provided advice on the preparation of the new law on Public-Private Partnerships and capacity building to the department in charge of this reform (DEPP).

Regionalization: This reform agenda has been informed by analytical work from the Bank and the EU, including the MENA local governance policy review, the policy note on decentralization and devolution in Morocco prepared in 2010, the guidelines on devolution (Guide Méthodologique pour la Déconcentration, World Bank 2006). An ongoing diagnostic study on the fiscal transfer