Docuent of

The World Bank

FOR OFICIAL USIE ONLY

Rept No. 13511

PROJECT COMPLETION REPORT

MOROCCO

AGRICULTURAL SECTOR ADJUSThENT LOAN(LOAN 2885-MOR)

SEPTEKBER 12, 1994

Agriculture Operations DivisionCountry Department IMiddle East and North Africa Regional Office

This document bas a restricted distribution and may be used bv recipients only in the performance oftheir official duties. Its contents may not otberwise be disclosed witbout World Bank authorization.

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CURRENCY EQUIVALENTS

Currencv Unit: Moroccan Dirham

EXCHANGE RATE

Appraisal year average (1986) US$1 = DH 9.1Intervening years average (1987-1991) US$1 = DH 8.4Completion year average (1992) US$1 = DH 8.5

FISCAL YEAR

January - December

WEIGHTS AND MEASURES

Metric System

FOR OFFICIAL USE ONLYTHE WORLD BANK

Washington, D.C. 20433U.S.A.

Office of Diurctor-GeneralOperations Evmlustbon September 12, 1994

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Morocco -Agnicultural Sector Adjustment Loan (Loan 2885-MOR)

Attached is the Project Completion Report on Morocco Agricultural Sector Adjustment Loan(Loan 2885-MOR). The Borrower prepared Part II.

The loan was very ambitious. Including the conditions of negotiations, 56 legal conditionswere to be met in 13 areas: cereals, sugar, milk, edible oils, seeds, irrigation, fertilizer, livestocksupport services, animal feed, public expenditures, forestry, agricultural research, and a food-securityprogram. It foresaw eliminating import licensing and other administrative constraints on agriculturalimports while moving crop pricing close to parity with world prices. In domestic marketing, it aimedto eliminate government monopolies and other constraints. It involved substantial parastatal reforms.

Implementation was slow and difficult. Rather than 18 months it took 44. The PCR explainsthat some of "the subsector reforms tackled under ASAL-II" came up against strong resistance fromgroups both outside and within the Government. Protracted delays ensued as the Governmentworked to define sector deregulation plans acceptable to both the Bank and its own constituencies."

Nevertheless, nearly all legal conditions of the loan were met. But certain follow-on measurestranscended or reversed actions taken. For example, rather than continue to administer fertilizerprices but with lower subsidies, the Government stopped setting fertilizer prices. Treatment of luxuryflour is a case of reversal: it was to be a fully liberalized commodity, but the Government introduced"moderation accords" with bakers and millers that in effect established ceiling prices. On balance,however, the agricultural economy was substantially liberalized, and its taxation-hithertoexcessive-substantially reduced.

Since loan appraisal, Morocco's agriculture has performed impressively. Over 1985-90agricultural growth was 5 percent per annum, while private investment soared, and farm wagesincreased by about half in real terms. Presumably, Morocco's ongoing structural adjustment, includingthat fomented by the ASAL, underlies this extraordinary outcome.

The PCR is more than adequate. It is unusually analytic in showing how the Borrower'snational politics affected loan design and implementation.

The project outcome is rated as satisfactory, institutional development as substantial andsustainability of the reforms as likely.

An audit is planned.

Robert Picciottoby H. Eberhard Kdpp

Attachment

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

t

ABBREVIATIONS

ASAL Agricultural Sector Adjustment LoanASIL Agricultural Sector Investment LoanC+F Cost plus freightCIF Cost, insurance, and freightCNCA National Agricultural Credit Bank

(Caisse nationale de credit agricole)CMRP Cereals Market Reform Project

(Projet de Reforme de la Commercialisation des Cereales) (PRCC)CPI Consumer price indexCY Calendar yearDH DirhamDPAE Economic Affairs and Planning Directorate

(Direction de la Planification et des Affaires Economiques)DRC Domestic resource cost coefficientEEC European Economic CommnunityFAO Food and Agriculture Organization of the United NationsFDA Agricultural Development Fund

(Fonds de developpement agricole)FERTIMA National Fertilizer Marketing Company

(Fertilisants marocains)FOB Free-on-boardGATIT General Agreement on Tariffs and TradeGDP Gross Domestic ProductGNP Gross National ProductGOM Government of MoroccoIM Initiating MemorandumIMF International Monetary FundINRA National Agricultural Research Institute

(Institut national de la recherche agronomique)ITPA Industrial Trade Policy Adjustment LoanOED Operations Evaluations DepartmentONICL Office for Cereals and Leguminous Crops

(Office national interprofessionnel des c6rales et des legumineuses)ORMVA Regional Office for Agricultural Development

(Office regional de mise en valeur agricole)MARA Ministry if Agriculture and Agrarian Reform

(Ministere de l'Agriculture et de la R6forme Agraire)MCI Ministry of Commerce and Industry

(Ministere du Commerce et de l'Industrie)MTASAP Medium-Term Agricultural Sector Adjustment ProgramNPC Nominal protection coefficientPCR Project Completion ReportPERL Public Enterprise Rationalization LoanPAR Performance Audit ReportPR President's ReportSAL Structural Adjustment LoanSONACOS National Seed Company

(Societe nationale de commercialisation des semences)TOR Terms of referenceUSAID United States Agency for International Development

KINGDOM OF MOROCCO

SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN(LOAN 2885-MOR)

PROJECT COMPLETION REPORT

TABLE OF CONTENTS

Page No.

PREFACE ......................................................................... i

EVALUATION SUMMARY ............................................................. iii

PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE .................................... 1Economic Background ........................................................... 1The Medium-Term Agricultural Sector Adjustment Program (MTASAP) ............................. 2Bank Support for the MTASAP: ASAL-1 ............................................... 3The Second Agricultural Sector Adjustment Loan (ASAL-2) .................................... 5

Preparation of ASAL-2: Economic and Sector Work ................................... 5Implementation Record ..................................................... 6

Administration of ASAL-2 ......................................................... 11Disbursements .......................................................... 11Co-Financing ........................................................... I 1Reporting Requirements ..................................................... 12Follow-on Operations ...................................................... 12

Impact of ASAL-2 .............................................................. 12General Agricultural Sector Growth Patterns ........................................ 13

Protection Patterns .............................................................. 13Investments ............................................................ 14Government Budget ....................................................... 14Subsector Deregulation ..................................................... 15

Institutional Reforms ............................................................ 17Conclusions .................................................................. 19

Economic Issues ......................................................... 19Lessons Learned ......................................................... 21

PART 11: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE ............... .................... 22

PART III: STATISTICAL INFORMATION ..... ...................... 25

KINGDOM OF MOROCCO

SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN(LOAN 2885-MOR)

PROJECT COMPLETION REPORT

PREFACE

This is the Project Completion Report (PCR) for the Second Agricultural Sector AdjustmentLoan in Morocco, for which loan 2885-MOR in the amount of US $225 million was approved onNovember 24, 1987. The Moroccan Govermnent obtained parallel financing in the form of a loanfrom the African Development Bank of US $150 million. The loan's effectiveness date was extendedtwice, for a total of four-and-a-half months beyond the loan's anticipated start-up, and closed twoyears behind schedule, on April 1, 1992.

Parts I and Im of this PCR were prepared by the Agriculture Operations Division of theMiddle East and North Africa Region of the Bank; the Borrower contributed Part II.

Preparation of this PCR is based, inter alia, on the Initiating Memorandum, the President'sReport (P-5637-MOR), the loan agreement, minutes from negotiations, supervision reports,correspondence between the Bank and the Borrower, and internal Bank documents.

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KINGDOM OF MOROCCO

SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN(LOAN 2885-MOR)

PROJECT COMPLETION REPORT

EVALUATION SUMMARY

Objectives

1. After being buoyed by a sharp rise in international commodity prices, when revaluation of its largephosphate reserves led to dramatic improvement in its terms of trade, Morocco suddenly found itself inbalance-of-payments crisis by the end of the 1970s when commodity prices collapsed. Ambitious publicspending programs launched in the early 1970s proved unsustainable ten years later. Thus, Morocco began adialogue with the international financial community over its economic future, including important policyadjustments in its industrial and agricultural sectors (with World Bank support), as well as in stabilizing itsmacroeconomy (in tandem with the International Monetary Fund).

2. In agriculture, a Medium-Term Agricultural Sector Adjustment Program was defined by theGovernment. The World Bank and other multi- and bilateral donors funded this program, beginning in 1985,with the first Agricultural Sector Adjustment Loan (Ln. 2590-MOR). Under this first operation, the focuswas on reducing public expenditures in the agricultural sector (including fertilizer, animal support services,and input subsidies), building interministerial consensus regarding agricultural sector policy reforms andinvestment priorities, and strengthening the economic analysis capability of the Ministry of Agriculture andAgrarian Reform. The record of the follow-on operation, the Second Agricultural Sector Adjustment Loan, isthe focus of this report. Its overall objectives included: 1) liberalization of the agricultural and food pricing,marketing and trade regime; 2) promotion of agro-industrial exports; and 3) design of medium-term publicinvestment strategies for both irrigated and rainfed agriculture.

Implementation Experience

3. Implementation of ASAL-2 was difficult, although the Bank was probably overly-optimistic about thespeed at which the reform program could be implemented. All conditions of the loan were ultimately metaccording to the letter of the loan agreement. However, the subsector reforms tackled under the ASAL-2were some of the most politically sensitive (cereals, sugar, oilseeds), and the unexpected force with whichagricultural and agro-industrial interests lobbied the Government as it worked to define sector deregulationplans acceptable to both the Bank and its own constituencies led to protracted delays in implementation. Thisresulted in a loan period of forty-four months, rather than the eighteen months which had originally beenanticipated. Even after the closing of the ASAL-2 operation, major sections of the deregulation plans haveyet to be implemented.

4. The loan agreement specifically lists 56 conditions to be met in fourteen different substantive areas(agricultural trade, cereals, sugar, edible oils, milk, targeted compensatory programs, fertilizer, seeds,irrigation water, livestock support services, animal feed, public expenditures, forestry, and agriculturalresearch).

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5. Fertilizer distribution has been liberalized and subsidies eliminated, and certified seed distribution andmany livestock support services have been privatized. Recovery of irrigation water charges has improvedsigning country. The Economic Affairs and Planning Directorate of the Ministry of Agriculture has beenstrengthened noticeably by a ten-year institutional support and training project financed by USAID.Agricultural imports have been liberalized, although the implementation texts for the new Foreign Trade Law(passed in December 1992) are still being finalized. Delays in publication of these texts have held upimplementation of new formulae for defining domestic producer prices for agricultural commodities. Thesubsidy on a limited amount of low-quality wheat flour continues, despite much attention paid to the targetingof compensatory programs to ameliorate the effect of its expected elimination on Morocco's most vulnerablepopulations. The persistence of the subsidy has, in turn, prevented complete deregulation of marketing andinternational trade in bread wheat. Progress in reforming the sugar and edible oils sectors has been slow.Agreements by the Government under the Second Structural Adjustment Loan - SAL 2 (Ln. 3463-MOR) withregard to imports, import pricing and other internal deregulation measures for these commodities, however,should ultimately bring the necessary pressures to bear on these two sectors.

Impact

6. The usual caveats pertaining to an impact assessment of a sector adjustment operation apply to ASAL-2: it is difficult to separate the influences of actions under the Loan from other forces occurring at the sametime. Nonetheless, certain observations are in order.

7. Pricing policy. The biggest single impact of ASAL-2 has been the reversal of the Government'ssectoral pricing policy. Economic and sector work undertaken by the Government at the beginning of ASAL-1 indicated that domestic price policy taxed agricultural producers prior to the MTASAP (except for sugarproducers, who were strongly protected) and protected producers in other sectors (e.g., industry). Actionstaken by the Government since the introduction of the MTASAP have led to the nominal and effectiveprotection of all agricultural producers which has obviously caused distortions within the agricultural sector,but resulted in more of a balance in protection rates across sectors. Protection of agriculture has beenformalized through 1) the safeguard clause for cereals (under the ASAL-2), 2) the reference price formulaefor sugar and oil seeds (SAL-2), and 3) tarification of current quantitative restrictions for meat and milkimports (also SAL-2).

8. Government investments. The MTASAP did not succeed at assuring target investment allocationsexpressed as a percentage of the total Government budget, at reordering MARA's priorities away from large-scale irrigation. The latter, however, is not surprising given the prevalence of droughts in recent years.

Sustainability

9. ASAL-2 represented the second and last phase of what was envisioned as a five-year ("medium-term")reform process. However, unfinished reform business argues in favor of an on-going adjustment presence inMorocco. After ASAL-2, the Bank has focused on strengthening MARA's investment portfolio by financinga tranche of the investment budget with an Agricultural Sector Investment Loan (Ln. 3403-MOR). A secondASIL is currently under preparation, and will include a policy reform component. Other Bank operations(such as the SAL-2, already mentioned above) have continued the dialogue with regard to reforms inMorocco's agricultural sector and the proposed Private Sector Development lending program, particularly theagro-industries component, should carry on with deregulation for sugar and oil seeds.

Lessons Learnd

10. Certain clear lessons have emerged from the ASAL-2 experience. First the overall loan package,including the President's Report, the Loan Agreement the minutes of negotiation etc., needs to be coherentand consistent. Lack of consistency leads to mixed messages and difficulties in implementation. Second, theprocess of reform is a long one, one which can not easily be scheduled into a two-, four-, or even eight-yearoperation. The more broadly defined MTASAP, of course, is predicated on this notion. In retrospect,however, even a medium-term (i.e. five-year) operation may be overly short-sighted. Consideration shouldbe given from the beginning, therefore, to a much longer period of Bank support for adjustment. Finally,intersectoral operations need to have clear owners and constituents or they will not achieve their objectives.

KINGDOM OF MOROCCO

SECOND AGRICULTURAL SECTOR ADJUSTMENT LOAN(LOAN 2885-MOR)

PROJECT COMPLETION REPORT

PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE

Economic Background

1. The Kingdom of Morocco embarked on sectoral and structural adjustment in advance of mostother World Bank clients. This is due to several factors: 1) as a resource-rich country, it hadrelatively easy access to international commercial capital in the 1970s and by the 1980s, the servicingof the ensuing debt burden was pressing hard on Morocco's balance of payments which had becomestrained by plummeting terms of trade and drought; and 2) pressures on the Government budget weremounting due to a host of complex Government interventions in the economy. Despite its "headstart" or perhaps because of it, the road to sectoral and structural adjustment in Morocco was not aneasy one, as the Government had to contend with potentially volatile public reactions to some of itseconomic reforms.'

2. Morocco's agricultural policies over the last twenty years have been affected by a number ofexogenous developments, inter alia a rapid rise in energy prices, the rapid expansion and subsequentdramatic contraction of the international phosphate market in the 1970s (Morocco controls at least60% of the world's phosphate reserves), a tightening of Morocco's traditional export markets, andrecurring droughts. Under the influence of its relatively easy access to capital resources, theGovernment embarked on an ambitious public spending program. This included the introduction ofsubsidies, both on agricultural inputs and on basic foodstuffs, to maintain living standards, combatinflation, control profit margins, and encourage production or the adoption of certain technologies.These developments, coupled with the fiscal burden of military expenditures incurred since 1975 withthe recovery of the Saharan provinces, led to a drastic degradation of the country's fundamentaleconomic accounts by the late 1970s.

3. Following the usual trends for middle-income countries, the structure of the Moroccaneconomy has shifted increasingly towards manufacturing while the relative share of agriculture invalue-added and trade over the last twenty years has fallen. This was due as much to a decelerationof growth in the agricultural sector as to the expansion of other sectors. Of concern to Moroccanpolicy makers was the widening of the food gap and its consequences for the agricultural tradebalance. Food production in the late 1970s and early 1980s did not keep pace with demand,increasing due to rapid population growth, income growth, urbanization, and declining real foodprices. This necessitated substantial increases in food imports. As public sector finances grewincreasingly strained, mounting cross-indebtedness among the parastatals and Government agenciesresponsible for implementation of agricultural price policy threatened to strangle the public sector-dominated commodity markets and render the official pricing system ineffective.

I Food riots erupted several dmes in tde early 1980s in Moroccan cities in response to the government's announced intention to riseprices on surategic consumer goods (wbeat flour, vegetable oil, sugar, petroleum).

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4. In 1980, the Government initiated economic policy reform discussions with both theInternational Monetary Fund and the Bank. However, partly in response to food riots in 1980, theGovernment suspended discussion on a structural adjustment loan which was then under preparation.

5. Nonetheless, over the period of the 1980s, Morocco nade substantial progress in the reformof its macroeconomy. The official exchange rate between the Dirham and the U.S. Dollar went from3.94 DH/US$ in 1980 to 8.5 DH/US$ (1989), while the real effective exchange rate index fell from134.1 (1980, 1985=100) to 90.8 (1989), thereby reducing the penalization of exports and thefavoring of imports. The current account balance, in deficit by as much as 12.7% of GDP in 1982,reverted to surplus during 1987 and 1988 before returning to a slight deficit again in the 1990s.Inflation, which measured more than 12% in 1981, was brought under control (averaging 2.7% from1987 to 1989, albeit rising to 6.7% in 1990). These improvements have set the macroeconomic stagefor a revitalization of the agricultural sector through the Medium-Term Agricultural SectorAdjustment Program (MTASAP).

The Medium-Term Agricultural Sector Adiustment Program (MTASAP)

6. Given the aborted attempt at a SAL, a decision was made in the Bank to proceed morecautiously, on a sectoral, rather than macroeconomic, level. Two sector studies were undertaken,examining the patterns of protection and comparative advantage in industry and agriculture. Thesestudies were useful for the breadth and depth of sector information they revealed as well as for thedialogue they inaugurated. Each of them fed directly into comprehensive sectoral reform programs.The first study, lasting three years (1980-83) and carried out jointly by the Bank and the MoroccanMinistry of Comnerce and Industry, provided the underpinnings for two Industrial Trade and PolicyAdjustment (ITPA) Loans (Loan No. 2377-MOR, 1983-85 and Loan No. 2604-MOR, 1985-86).2The second study, carried out in the then Ministry of Agriculture and Agrarian Reform (MARA)3from 1984-85, was launched in tandem with implementation of the first phase of the Government'sagricultural sector reform program.4

7. In response to the intensifying economic contradictions and mounting fiscal pressures of thelate 1970s and early 1980s, the Kingdom of Morocco launched a broad, medium-term (five years)

The final product of the study was World Bank, Morocco: Industrial Incentives and Export Promotion, Report No. 4893-MOR,January 1984. The MA loans, I and I, are reviewed in a combined project completion report dated May 5, 1988. See also BrendanHorton, Morocco: Analysis and Reform of Economic Policy, EDI Development Policy Case Series, Number 4 (Washington, DC: EconomicDevelopment Institute of The World Bank, 1990).

'MARA was renamed the Ministry of Agriculture and Agricultural Development in October 1993 but will be referred to as MARAthroughout this report because that was its name during the implementation period of the loan.

4 ASAL-1 was prepared largely on the basis of 1) already existing sectoral analysis done under the aegis of preparation of the ill-fated1980 SAL and 2) Bank examination of the fertilizer subsector. On the former, see World Bank, Memorandum on Morocco's AgriculturalSector: Identification of Issues and Bank Strate v, Repon No. 2667a-MOR, May 2, 1980. On the latter, see World Bank, Morocco:Memorandum on Fertilizer Demand and Pricint, Report No. 4526-MOR, June 30, 1983. The prices and incentives study produced a finaldocument, Ministry of Agriculture and Agrarian Reform and Associates for International Resources and Development, La Politicue de orixet d'incitations dans Ie secteur atricole, Rapport final. Janvier 1986, which was subsequently incorporated into World Bank, Kingdom ofMorocco: Airncultural Prices and Incentives Study, Report No. 6045-MOR, May 1986.

program in 1985 for the adjustment of its agricultural sector.5 Four broad areas of reform wereidentified: 1) restructuring of the public investment program, 2) realignment of the agricultural priceand incentives framework to promote economic efficiency and resource mobilization, 3) strengtheningof public sector services and inputs delivery, including partial privatization and improved costrecovery, and 4) development of an institutional capacity for analysis, implementation and monitoringof agricultural policy and resource use planning.

8. Within these broad areas, the MTASAP touched on virtually every aspect of agriculturalsector operations and development in the key subsectors of the Moroccan agricultural economy. Theoverall level of MARA's investment budget and the process of investment planning were examined,along with broad inter-subsectoral (rainfed versus irrigated agriculture) and individual subsectoralpriorities. Patterns of agricultural sector comparative advantage and concordant or discordantprotection policies (nominal and effective) were reviewed for cereals, pulses, citrus, vegetables, dairy,meat, oilseeds, and sugar crops, as was the evolution of agricultural sector terms of trade vis-a-visthose for industry. The effect of untargeted consumer subsidies on agricultural production patternswas explored, and alternative targeted subsidies were proposed in a spirit of cost-reduction andefficiency improvement. The efficiency of Government support services (agricultural extension,research, livestock services including animal health care and breeding services, fertilizer marketing,seed production and marketing, cereals marketing, milk marketing, agricultural export marketing,institutional credit delivery, and irrigation management) was assessed and action plans proposed. Theneed to strengthen policy planning and analysis capabilities in MARA was underscored. Finally,Morocco's land tenure and natural resource conservation and management systems were evaluated andproposals made for their modernization.

9. Detailed action programs were defined for a subset of the above-mentioned subsectors,including irrigation, livestock, research and extension, inputs marketing, forestry, cereals, and landtenure. These programs provided the basis for the definition of policy reform conditionalities underthe original Agricultural Sector Adjustment Loan (hereafter, ASAL-1).

Bank Support for the MTASAP: ASAL-1

10. Implementation of the MTASAP was designed to take place in several phases, the first ofwhich was carried out under the ASAL-1 to Morocco, which ran from 1985 to 1987.6 ASAL-1 isrecognized as having been an exceptionally well-prepared operation, the specific accomplishments ofwhich, when considered as a stand-alone operation, were considered "marginal" by OED.'However, ASAL-1 was not a stand-alone operation. It generated an analytic framework for theagricultural sector which supported a follow-on operation (ASAL-2) and provided important on-the-ground experience in "process" issues along the way. OED goes on to state that "the impact of the

' Presented in the government's letter of development policy in preparation of the First Agricultural Sector Adjustment Loan.See the World Bank President's Report (PR) on ASAL-1, Report No. P-4032-MOR, Annex IV, May 28, 1985. See also pp. 14-38 whichsummarize a complete presentation of the prgram in a Technical Support Volume to the PR.

I ASAL-1 disbursed S100 million from 1985 through 1987. See the World Bank's President's Report on ASAL-1. May 28, 1985(Report No. P-4032-MOR); 'ASAL (2590-MOR) Project Completion Report,' June 22, 1988; and World Bank, Operations EvaluationDepartment, 'Program Performance Audit Report: Morocco - ASAL (Loan 2590-MOR),' June 26, 1989.

OED audit, p. 15.

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specific conditions [of ASAL-11 ... is significant..." and that the overall program has beenworthwhile.

11. Hallmarks of ASAL-1 include 1) its contribution to fiscal savings for MARA by reducing oreliminating public sector intervention in livestock sector support services, animal feed priceregulation, fertilizer distribution, irrigation cost subsidies, etc., 2) its insistence on the establishmentof an interministerial coordination committee to facilitate the building of consensus across ministrieswith regard to agricultural sector policy reforms and investment priorities, and 3) the support it gaveto the Agricultural Prices and Incentives study underway, thereby legitimizing the role of economicanalysis in the policy reform dialogue and helping to assure the prominence of such analysis in thefuture work plan of the Direction of Economic Affairs and Planning within MARA.8

12. ASAL-1 has been criticized, however, for its bias in favor of fiscal savings and its lack ofprogress in areas of sectoral reform and investment which would have cost the Government money orled to restructuring of monopoly market situations.9 Other sector reforms, however, were an orderof magnitude more complicated and more politically sensitive, and the Bank held off on them until ithad better ammunition in the form of a completed sector analysis.'" Publication of the AgriculturalPrices and Incentives Study led directly into the initiating memorandum (IM) for ASAL-2, released inJune 1986. ASAL-1 also proved unable, despite its interministerial coordinating committee, toresolve the inevitable tensions which crop up between technical ministries, with their own sectoralinterests to defend, and financial and planning ministries, which defend and control access toGovernmental budget resources. Even more distressing, the perception by MARA of excessive fiscalcost reduction bias in ASAL-1 introduced an element of tension into what had been an unusuallyproductive, cooperative working relationship between Bank staff and MARA leadership.

A separate, long-term technical assistance project. Planning, Economics, and Statistics for Agnculture, also funded by USAID (1983-93), assigned four expatriate advisors (two economists and two statisticians), beginning in 1985, to the DPAE for the purpose inter alia ofon-site training in economics and quantitative analysis, reform of sample survey and cost of production survey methodology, andmodernization of MARA's computer capacity. The project has umned 28 M.A. and Ph.D. degree students from DPAE at U.S. universitiesin economics, statistics, and computer sciences.

' See the PAR, pp. 17-18, as wel as the PCR, pp. 51-52. The Government's perspective on this issue is reflected in a public addressmade by a high-placed MARA official: 'The assessment drawn from three years of executing the adjustment program has permitted us toreach the folowing conclusions: measures that constrain the agricultural sector or increase the cost of production, have been generallyimplemented, while those which have a compensatory aspect were not executed ... In fact, the structural adjustment program has beenexecuted only partially, and, due to this fact, it has resulted in a significant reduction of governmental budget transfers to the agriculturlsector, which risks increasing the costs of production and a consequent reduction in farmer revenues. Furthermore, this incomplete programexecution could accentuate the under-protection of the sector and deteriomte much more the terms of tmde between agriculture and the restof the economy.' See Mokhtar Naanani, 'Moroccan Experience in Stiuctural Adjustment for the Agricultural Sector,' discourse deliveredat FAO/Rome, October 1988, pp. 5-7.

0 To do otherwise meant risking the future of an increasingly respectful collaboration between MARA and the Bank. The Bank hadincurred the wrath of MARA at one point in early 1985 when, as international sugar prices were at their nadir, it was recommended thatMorocco reduce support for its sugar sector, given its lack of economic viability (on average) when measured at those low prices. Theissue was smoothed over by the Bank's resorting to both a longer-term and a more disaggregated perspective on the sugar sector, calculatingDRCs on the basis of 1981-1984 international pnce averages and for each individual sugar mill.

The Second Agricultural Sector Adiustment Loan (ASAL-2)

Preparation of ASAL-2: Economic and Sector Work

13. While ASAL-1 may have been prepared in somewhat of a knowledge vacuum, ASAL-2operated under no such constraint. Beginning in early 1984, economists worked in residence with ahigh-level working group of MARA division leaders for 19 months, elaborating price and non-pricemeasures which affected producer incentives."' In the process, Government officials gained a muchsharper understanding both of their own agricultural sector and of a discrete number of analytic toolsused to measure incentive structures. Bank staff supervised the study quite closely, albeit on aninformal basis. Also, two separate Bank exercises examined interactions among cereals in a dynamicmodel of the grain subsector and targeted food subsidy programs which could replace the generalconsumer subsidies in effect at the time.'2

14. The prices and incentives study underscored several contradictions in patterns of protectionand comparative advantage. First, farmers in irrigated areas benefitted to a far greater degree thantheir rainfed counterparts from indirect protection via subsidies on inputs (irrigation water, fertilizers,seeds, agro-industrial by-products used for livestock feeds in the intensive dairying subsector, etc.)and from higher rates of nominal protection on sugar crops (cane and beet), a large percentage ofwhich are grown under irrigated conditions. Second, nominal protection rates contradicted Morocco'sagricultural comparative advantage (sugar crops, for which DRCs were well above 1.00 or evennegative due to negative economic value-added, were particularly highly protected, while traditionalexport crops such as citrus, in which Morocco had strong comparative advantage, were taxed).Third, consumer subsidies on bread wheat flour and vegetable oil resulted in a shift in domesticdemand away from commodities in which Morocco had a traditional comparative advantage (durumwheat, used in couscous and bread production, and olive oil) and in favor of imported goods.

15. The study also went on to identify a host of constraints which impeded efficient subsectoroperation. Government policy determined not only producer prices for major commodities (cereals,sugar crops, oilseeds, cotton, citrus, export vegetables, meats, milk), consumer prices for many of theprocessed products derived therefrom (two grades of wheat flour, granulated and loaf sugar, vegetableoils, and milk), and prices of significant agricultural inputs (inter alia fertilizers and other agro-chemicals, irrigation water, machinery rental rates, seeds, credit, veterinary services, animal feeds), italso fixed marketing, processing, and transport margins, and regulated international trade in theseproducts via quantitative restriction and licenses.

16. It was expected in the IM that negotiations for ASAL-2 would occur in February 1987, foreffectiveness conditions to have an impact on the 1987/88 agricultural campaign. Timing of variousstages of ASAL-2 p-eparation was to be made contingent on 1) fulfillment of second tranche releaseconditions for ASAL-1 (ASAL-2 appraisal), 2) agreement between the GOM and the IMF on astabilization package (ASAL-2 negotiations), and 3) resolution of the issues which held up second

" Technical assistance for this study was provided under USAID's Planning, Economics, and Statistics for Agriculture Project.

"2 World Bank, KinRdom of Morocco: Agricultural Prices and Incentives Study, Annex V: Simnulation of the Moroccan Grains Markets:An Econometric Dynamic Model, and World Bank. Compensatory Programs for Reducing Food Subsidies, Report No. 6172-MOR, April1986.

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tranche release of ITPA-II (ASAL-2 Board presentation). Conditions for ASAL-2 tranche releaseswere designed to fit the timing of the agricultural season(s).

17. As with ASAL-1, ASAL-2 financed a positive list of essential agricultural imports'3 at alevel which corresponded to estimated needs of a two-to three-year period. The IM originallyproposed a loan of $100 million (ceiling of $150 million), to be released in two tranches overeighteen months. In fact, ASAL-2 became a $225 million loan, released in three tranches over forty-four months." Reasons for the protracted schedule of the operation are discussed in paras. 18-30below.

Implementation Record'5

18. In fact, ASAL-2 was not negotiated in February as anticipated, but rather in September 1987.The delay in negotiation foreshadowed the protracted implementation of ASAL-2. It seems that theconfidence gained by Bank staff as a result of its careful preparatory sector work in 1984 through1986 may have led to overconfidence in their own ability to supervise adequately such a complicated,politically sensitive reform package.'6 While many of the linkages between policy and economiceffect were well understood by 1986, Bank staff underestimated both the ability of key Moroccanpressure groups, especially in agro-industrial subsectors, to organize against reforms perceived not tobe in their interests and the ability of Moroccan policy makers to leam the analytic tools being taughtthem well enough to negotiate strategic compromises from the Bank.

19. The delay in ASAL-2 negotiations was due in part to the Bank's own internal preoccupations(1987 reorganization). However, of greater importance was mounting donor concern with Morocco'smacroeconomic instability in mid-1986. Public consumption had risen dramatically, without anyincrease in public revenues, which led Morocco to resort to open market operations and an increase inpublic sector payment arrears. Credit issued by the Central Bank was necessary to cover theGovernment's budget deficit. Thus, the IMF's stand-by for 1986 became inoperative, the Bank'srelease of ASAL-l's second tranche was upheld, and the appraisal of ASAL-2, scheduled for June1986, was canceled. For its part, the Government had specific concerns relating to fertilizer priceincreases required by ASAL-1'7 and the estimated fiscal burden of any new targeted compensatory

' Herbicides and pesticides (subject to Bank approval overall and with regard to usage and storage regulations), seed, veterinarymedicine, spare parts for agncultural and agro-industrial machinery and irrigation equipment, animal feed, and fuel imports for agriculture(not to exceed 25 % of the total loan amount). For an actual breakdown of tde loan amount, see para. 31.

" By the time the loan was negotiated, it was apparent that two to three years' worth of agricultural input imports amounted to a muchlarger overall figure. Also, there had been a gap in such financing between the end of ASAL-I and the projected start of ASAL-2. Finally,there was some desire on tde part of the Bank to reward' the Goverment of Morocco for the fact that all eight pre-negotiations conditionsas weU as three effectiveness conditions had already been meL Thus, the total amount requested was $225 million, to be disbursed in threetranches in order that the conditions, now designed to span two agricultural seasons, might be timed properly. Aside from including theimport of purebred breeding cattle and excluding coverage for ferilizer imports (see para. 32), there was no change in the positive list ofimports authorized under ASAL-1.

" This is examined here in some detail as the process of agricultural sector reform was such a central point of the ASAL-2 operaion.

' Recognizing this, an internal memorndum written immediately after negotiations argues for the need to enlist and coordinatetechnical support of ASAL-2 from other operational divisions.

17 The Govermment argued that due to a 35% decrease in averge world fertilizer prices, the effect on the GOM budget of the fertilizersubsidy was defacto much less, thus mitigating in favor of something less than a 20% increase per ASAL-l 's conditions.

program."8 MARA was also concerned that the Ministry of Finance would not uphold its obligationto commit a minimum of 15 % of the overall budget to MARA's investment budget, a condition ofASAL-2 negotiations. As discussed in para. 42, this condition in fact was not met, which led some inMARA to feel the Bank had let them down (see para. 27).

20. By appraisal, the Government agreed to faster liberalization of the agricultural importprogram (shifting commodities from a list of goods whose importation was banned (List C) or ofgoods for which import licenses were required (List B), to a list of goods which could be freelyimported, subject to import tariffs (List A)'9). The Government also promised to reduce consumersubsidies more quickly than had originally been anticipated; for example, the vegetable oil packagingsubsidy had already been lifted, thereby increasing slightly the consumer prices of edible oils. TheGovernment also agreed to the notion of creating an "inferior good" in the cereals subsector in orderto better target the flour subsidy.'

21. By negotiations, the timing of tranche release had to be reformulated to take account of theseven-month delay. Three tranches were designed, rather than two, to allow for conformity with theagricultural calendar.2' The minutes of the negotiations indicate that several concessions were madeby both the Bank and the Moroccans at that time since it was perceived that, without them,negotiations would have completely broken down. Neither side wanted to call it quits as each feltthere had been enough delays already. The concessions by the Moroccan delegation, if they beenimplemented as intended, would have strengthened the overall loan package (e.g., for sugar, seepara. 23). The concessions made by the Bank (paras. 22-24) would later haunt staff supervising theoperation.

22. The first concession by the Bank was the agreement to change language regardingderegulation of the edible oils subsector. Originally, it was intended that complete deregulation of thesubsector would occur by the final tranche. During negotiations it was agreed that consultants wouldbe hired by second tranche to prepare an action plan, and implementation of the plan would start bythird tranche. Part of the problem was the lack of high ranking participation from the Ministry ofComnerce and Industry at negotiations. There was no one with whom the Bank could seriouslydiscuss the program on edible oils (or sugar for that matter). The reluctance on the part of the GOM

' At the time, USAID was considering pulling its food aid out of tde Entraide Nationale program, after a long record of suppor Inaddition, limitations of U.S. Government food aid policy regarding monetization of food aid were of concern. Though die World FoodProgram was quite interested in expanding its program in Morocco, the Government of Morocco was concerned that the direct effect of anynew compensatory program might aggravate overall budget pressures. 2

" In fact, the Government finessed this condition slightly, by creating a new list (List A*) of goods, the importation of whicb stillrequired government approval. Official Bank files never noted this new distinction.

> The Government agreed to increase the milling ratio for subsidized bread wheat flour, from 77% (originalfarne ordJnaire) to 80%.This higher proportion of wheat bran in the flour, it was believed, would create the effect of a 'dirtier flour," and one which consequentlywould be less attractive to higher income consumers. Ironically, in developed countries 'whole wheat flour," a higher extraction flour, isperhaps more highly prized by consumers of higher income. Nonetheless, LSMS data show that, in fact, lower income groups purchaserelatively more of the bread made from this higher extraction rate flour than do higher income groups.

'' A complete list of conditions to be met prior to loan negotiations, loan effectiveness, and the release of the second and third trmnchesof the loan are included in part m of this PCR, and discussed below. ASAL-l's experience with dated covenants having been less thanpositive, ASAL-2 included none. Only tranche release conditions were required to be met by the Borrower.

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team to accept anything further at negotiations was, in retrospect, indicative of overall resistance tothis component of ASAL-2.

23. A second concession by the Bank was the modification of the Bank's position regarding thesugar subsector. A second phase of a sugar industry study was to have started by negotiations; it didnot. In addition, real producer price decreases agreed upon for sugar crops were less thananticipated. The Bank had originally asked for a 5% real decrease, while the GOM would only agreeto 3 %. The latter did, according to the minutes, agree to begin the sugar sector deregulation programas of July 1, 1988, ten months later, although this did not become a formal condition because it wasnot a precise, monitorable action from a legal standpoint. No mention was made in the minutes orthe loan agreement of an obligation by the Government to share terms of reference for the secondphase of a sugar study with the Bank. A condition for release of the second tranche was thedevelopment of an action plan to ensure complete sugar sector deregulation by June 30, 1993,implementation of which was to have begun by third tranche release. This condition was addedbelatedly at negotiations to compensate for a lack of progress on the sugar study prior to that time.

24. The last concession by the Bank, considered a relatively minor change at the time, has lentthe weight of Bank approval to a considerable reversal in Government agricultural producer pricingpolicy and, in retrospect, created significant new distortions in the agricultural pricing policyframework, at least when considering short-to-medium run international commodity prices. In orderto wean the Government off its reliance on domestic cost-plus pricing for agricultural commodities, aformula based on a five-year moving average of international reference prices was proposed by theGovernment and accepted by the Bank to calculate domestic producer prices for the four majorcereals and the major oilseeds commodities.' According to minutes from negotiations, it wasagreed between the Bank and the Government that, pending stabilization of international grainmarkets,' Morocco would not be obliged to decrease in real terms its domestic producer price forcereals. In other words, if the theoretical official price (calculated as explained in footnote 22) wereless than the previous year's domestic price, is adjusted for inflation and a "domestic preferencepremium", then the latter would apply.' Moroccan policy makers have not exploited the safeguardclause fully, i.e., they have not always maintained the domestic price at the previous year's realvalue. Nominal prices, however, have never fallen. Thus, by virtue of this safeguard clause,Morocco has gone from being a net taxer to a net protector of both cereals and oilseeds (see analysisof evolving protection patterns, paras. 39-41 below), relative to actual world prices during the ASAL-2 period. This safeguard clause was accepted very reluctantly by the Bank and only because ofpersuasive arguments by the Ministry of Agriculture that it was temporary pending an agreement withGATT and domestic cereals market deregulation. Nonetheless, it remains in existence and hasallowed policy makers to essentially continue setting cereals prices administratively.

' For example, in the case of bread wheat, the reference price is equal to a five-year moving average of the (nominal) FOB price, U.S.Gulf, of hard red winter wheat #2 plus freight to Casablanca, converted into Dirhams at the official exchange rate at the time of thecalculation. To this price, a 25 % protection factor is added as well as the costs of moving the wheat from port to the mill, and from thisthe official storage margin is subtracted. This results in a 'theoretical official price' (Moroccan parlance). The difference between theacntal CIF price and the domestic price thereby calculated is then levied at the border.

D In 1987, the Kingdom of Morocco joined the GATT and became an active participant in the LDC block at the Uruguay Roundnegotiations.

2 The consumer price index is used for adjustment. The domestic preference premium is an additional protection factor of 10%.

25. ASAL-2's effectiveness date was extended twice, from March 4, 1988 to May 4 and then toAugust 4, 1988, due to lack of GOM progress on defining the scope of the deregulation plans for thebread wheat, sugar, and edible oils sectors. While completely finalized programs were not conditionsof effectiveness, but rather of second tranche release, certain elements thereof were (fixing domesticcereals prices according to international prices, authorizing the milling of high-extraction flour,decreasing the real producer prices of sugar beet and cane, and freezing the special premia paid tocertain sugar crop producers). In addition, it was presumably feared that lack of progress woulddelay second tranche release, for which defined programs were required.

26. A condition which was required for effectiveness was the condition that the Governmentprepare and furnish a plan to ensure adequate nutrition to Morocco's poorest populations (the so-called targeted compensatory program). During the first half of 1988, the Government tackled thisissue quite seriously. Having already decided in favor of an inferior good concept, the Governmentthen had to determine an overall production quota for the subsidized, inferior good' and specificallocations of that quota across the 70-plus bread wheat flour mills in Morocco, made according todemographics. With these details in place, the loan became effective July 26, 1988.

27. Given the full year of progress lost to these debates, it is not surprising that "disillusionmenton the part of some people [in the GOM] regarding the Bank" is noted in the first ASAL-2supervision report. So much energy and good will had already been expended that it should not havebeen too hard to anticipate that the next two tranche releases would be even more contentious, giventhat the conditions they set forth included the politically most difficult issues to resolve, i.e., not justtinkering at the margins but total deregulation of the three most important agricultural subsectors inMorocco. In part, the difficulties encountered stemmed from the fact that while ASAL-2 wasnegotiated with the entire Government, its primary client was perceived to be MARA. Yet many ofthe actors involved, particularly in sugar and edible oils, were clients themselves of the Ministry ofCommnerce and Industry, which, despite the Bank's best efforts to engage it, did not see itself asdirectly involved in ASAL-2.

28. The Bank recognized this to some extent, and began to pursue sugar sector reform not onlyunder the aegis of ASAL-2 but also via the Public Enterprise Rationalization Loan - PERL (LN 2820-MOR), especially PERL-2, then under preparation. While the existence of multiple layers ofresponsibility for sugar sector reform comes through in reading the ASAL-2 files, there is never anyformal acknowledgment therein that PERL-2 would "take over" on sugar issues, as indicated in thePAR for PERL-1L.' Th)ugh that was, at one point, the intention (including closure of uneconomicsugar mills and privatization of the remaining units), PERL-2 was dropped in December 1991 in partas a result of the Bank's impatience with Morocco over sugar sector protection issues. TheMoroccans were happy to drop the Loan because the SAL-2 and the second Large-scale IrrigationImprovement Project (Loan 3587-MOR) were subsequently increased in compensation. Bankmanagement wanted to drop it in order to bring the era of adjustment lending to close in Moroccowith the SAL-2, and the importance of the PERL-2 for the subsectors it covered was perhaps notrecognized. Receipt of an acceptable plan for reform of the sugar sector held up release of the

I It was decided to limit the production of subsidized ordinary, high-extraction rate flour to 10 million quintals, which represented acontraction of 40 % from its height in 1984. In addition, it was decided to elinmate the subsidy on luxury flour, which totaled 1.6 millionquintals in 1984.

2' OED, 'Draft Performance Audit Report: Morocco - Public Enterpnse Rationalization Loan ', Febniary 10, 1993, p. 20.

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second tranche of ASAL-2 until the end of 1989 (long after the agreed upon July 1988 deadline forbeginning implementation of said plan). In addition, the action plan for reform of the edible oilssector, not required as a second tranche release condition, but promised according to the minutes ofnegotiations before December 1988, had also not yet been submitted, although terms of reference forthe newly hired consultants had been agreed upon. The tranche was not released until January1990.27

29. As was the case for effectiveness, the closing date for ASAL-2 had to be extended severaltimes in order to accommodate on-going intra-Governmental debate over reforms necessary for thirdtranche release. Originally set for March 31, 1990, it was extended to April 1, 1991 and then April1, 1992. Unanticipated legal issues also arose, further complicating implementation of conditions.For example, the agricultural import liberalization plan called for use of a variable levy to taxstrategic agricultural commodities (cereals, sugar, edible oils, milk, meat, and their derivatives), yetMoroccan trade laws theretofore did not permit the use of such a tool.' Thus, a new foreign tradelaw had to be drafted, debated, passed by Parliament, promulgated into law, along withimplementation legislation.29

30. Approval of third tranche release came no more easily than that of the two previous tranches.Although much progress had been made in reform of the various subsectors, as described in aSeptember 10, 1990 communication from the Minister of Economic Affairs to the Bank's RegionalDirector,' approval for release of the tranche was still held up for lack of a viable oil sector plan,lack of an approved cereals market law (which blocked cereals sector deregulation), lack of a newforeign trade law (which compromised progress on agricultural import liberalization), and delay inderegulation of the sugar sector.3 ' In June 1991, the Department considered a waiver of the originalconditions, on the grounds that fourteen out of seventeen of the original conditions had been met andthe Government's expressed intention to continue reforms of bread wheat, sugar, and edible oils.Later this idea was dropped.32 By the fall of 1991, however, pressure from the Government wassuccessful in bringing about a compromise resolution. A plan for the deregulation of the edible oilssector was drafted that satisfied all parties concerned, and the third tranche of ASAL-2 was made

2 According to the files, the Government wished to use the second tranche for debt reduction purposes.

Variable levies were applied only to cereals in the past because this was permitted under the law governing ONICL.

Bank and Govermment naivete regarding the magnitude of this task is reflected in the following March 1989 supervision reportstatement: 'MARA's position is that revising the legal texts is a matter of weeks...' Whie a draft foreign trade law was available for Bankinspection by mid-1989, this process, as of end 1993, is still not complete: Implementation legislation was finalized during the summer of1993, but much of it has not yet taken effect.

X Progress was made in continued liberalizanon of agricultural imports, complete liberalization of fertilizer pricing and distribution asof July 1990, parti liberalization in the edible oils sector (elimination of subsidy on oils packaging, freeze on oilseed producer prices,beginning of elimnation of governmental arrears in the edible oils sector), elimination of virtually all arrears in the cereals sector, a draftcereals market law before government, and partial liberalization in the sugar sector (introduction of a unique refining margin, progress inreducing arrears, limited increases in producer pnces, continued discussion regarding reference pnces and deregulation).

S' supervision report of November 6, 1990.

a An internal memorandum states: 'At present. [justification for the waiver is weak]. If we believe these reforms were and remainimportant (and those three subsectors clearly are important), then we should obtain, for the tanche release, something more substantial thanwhat is proposed." June 6, 1991.

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available to the Government on November 27, 1991. Disbursements were accelerated in order for theloan to close by the April 1, 1992 closure date.

Administration of ASAL-2

Disbursements

31. Disbursements under the loan began late, because of the above-mentioned delays innegotiations and effectiveness. A special dollar account was set up by the Borrower to accommodatedeposits and payments related to the operation. As the table below shows, the loan was used to fundthe importation of agricultural inputs, especially machinery for production and petroleum products.The total value was thought to meet the need for such imports over a period of two or three years.Up to $25 million of the loan was made available retroactively for purchases made prior to the loanagreement, provided they were made after January 1, 1987.

Disbursements(US$ Million)

Original Actual Actual Disburs.lLimits Disbursements Original Limits

Agricultural Machinery 100.00 91.10 91.1%Seeds and Seedlings 25.00 34.90 139.6%Agricultural Chemicals 20.00 21.00 105.0%Feeds & Vet. Medicines 23.75 21.70 91.4%Petroleum Products 56.25 56.25 100.0%

TOTAL 225.00 225.00 100.0%

32. Contracts were to be awarded through competitive bidding, except for contracts valued at lessthan $2 million, in which case the contract could be awarded to the best of at least three pricequotations. If the purchaser was a non-public entity, all contracts expected to equal less than $5million could be determined by existing procedures. Furthermore, it was agreed that the GOM couldfollow existing contracting procedures for petroleum and machinery purchases, even though theseprocedures did not involve competitive bidding.33 However, the loan did not allow for theimportation of fertilizers, precisely because the GOM did not agree to international competitivebidding procedures, an issue that arose during ASAL-1. The loan agreement specified that the totalvalue of petroleum imports could not exceed $56.25 million, or 25% of the total value of the loan.

Co-Financing

33. The African Development Bank, which had also participated in ASAL-1, contributed anadditional $150 million to the GOM in tandem with ASAL-2.

" Memorandum dated December 17, 1987 acknowledges that, although common practice, accepting existing govemmenml importingprocedures is less than ideal.

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Reporting Requirements

34. According to covenants listed in the loan agreement,4 the Borrower was required to furnishthe Bank with a number of regular reports. From time to time, the Borrower and the Bank were toexchange views on the progress achieved in carrying out the Program (including compliance withconditionality actions). Prior to each such exchange of views, the Borrower was required to furnishto the Bank for its review and comment a report on the progress achieved in carrying out thePrograrn. Two such reports were prepared and submitted.35 The Borrower was also required tomaintain records and accounts consistent with sound accounting practices, with audit reports to befurnished to the Bank. The first audit report, covering disbursements during the 1990 calendar year,was received in July 1991. Subsequent reports have still not been received despite numerousreminders by the Bank, although delays in the receipt of audit reports are not a rare occurrence forthe Bank in Morocco.

Follow-on Operations

35. The follow-on operation to the ASAL-2 was an Agricultural Sector Investment Loan (LoanNo. 3403-MOR). Under the ASIL, $50 million were approved in direct support of MARA'sinvestment activities. The ASIL is not an adjustment operation and focus primarily on reformsrelated to execution of the investment budget. Its successor, the ASIL-2 (which is currently underpreparation), will provide additional support for MARA's investment programn but will also supportan action program to further the subsector reform process begun under the ASALs.

IMpact of ASAL-2

36. The impact of any single Bank operation is clearly hard to disentangle from those of otheroperations, within the agricultural sector and without. Attributing aspects of agricultural sectorevolution to ASAL-2 in the absence of a testable counterfactual is also problematic. Furthermore,even disengaging the effects of more hospitable climatic conditions evidenced at the end of the 1980scompared with more drought-prone conditions at the beginning of the decade from policy effects is atask which has proven difficult for cereals supply function modelers in Morocco. Finally, many ofthe most significant reforms prepared by ASAL-2 have yet to go into effect, let alone have a chanceto affect the Moroccan economy, i.e., elimination of the consumer subsidy on bread wheat flour andconcomitant complete deregulation of the cereals sector, deregulation of the sugar subsector, andderegulation of the edible oils sector. Border pricing policies for sugar, oils, meat, and milk werejust negotiated last year under SAL-2, to be implemented for the first time by June 1994 (paras. 65-66). Thus, an assessment of the efficiency of these sectors' operations post-ASAL-2 is stillpremature. These caveats aside, however, some general observations about the evolution ofMorocco's agricultural sector during the ASAL-2 period are presented, along with some specificfeatures which are more directly attributable to ASAL-2.

37. The potential effects of agricultural sector liberalization are many. As a sector moves froma phase during which all aspects of production, marketing, and processing are managed to a

' See Aricle III of the Loan Agreement (Loan No. 2885-MOR) between the Kingdom of Morocco and the Bank, December 4, 1987.

" MARA, 'Rapport d'ex6cution n° I' (Jum 1989) and MARA, 'Rapport d'ex6cution n° 2' (Septembre 1990).

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significant extent by administrative directive within a fairly distorted prices and incentives frameworkto a phase in which market forces and prices are increasingly relied on to allocate resources withinand across activities, one expects to see changes in protection patterns and therefore changes inproduction, marketing, and trade patterns. As the sector becomes more dynamic, one would expectto see private capital drawn into the sector, not just replacing public capital, but supplementing it. Asinternational trade into and out of a country moves from parastatal agency domination to privatesector initiative, it is expected that a country's trade profile will evolve, both in terms of what istraded and with whom. As the Government reduces subsidies to producers for agricultural inputs andto consumers for basic foodstuffs, one would expect to see a positive effect on the Government budgetburden, as well as an effect on consumption patterns. Finally, as the ability of an agency tomanipulate information in meaningful, analytic ways is enhanced, one would expect to see animprovement in the level of analysis produced by that agency, and some effect on its stature bothwithin Government and vis-a-vis external partners. Not all of these effects are measurable inMorocco today, either due to reasons mentioned above or because the data are not available to do so.However, an attempt at quantification of some of these indicators is presented below.

General Agricultural Sector Growth Patterns

38. During the course of MTASAP (1985-90) the agricultural sector in Morocco grew by 4.9%per year, as measured by the real agricultural GDP for the country , compared with 3.8% real GDPgrowth overall. Nonetheless, over a longer period, other sectors have outperformed agriculture, as isnormal, and the sector now represents 17% of GDP, down from 23% in the early 1970s.Protection Patterns

39. Protection of cereals and oilseeds commodities significantly increased during the ASAL-2period, while overprotection of sugar crops abated somewhat, according to the Government's ownprices and incentives studies, which monitor these trends.6 Nominal protection coefficients forcereals averaged about 0.9 in 1984, 1.00 in 1988, and 1.10 in 1989. Sunflower producers were taxedin 1984 (NPC = 0.80), and protected in 1988 (NPC = 1.48). Moroccan sugar crop producers werehighly protected in 1984 (over 350%),37 but by 1988, NPCs had fallen somewhat.

40. The latest prices for bread wheat and sunflower clearly show that the rate of nominalprotection for these commodities is even higher today than it was in 1988. The NPCs for breadwheat continued to rise to 1.85 in 1991 before falling slightly to 1.66 in 1992. Domestic prices forbread wheat also exceed the reference prices that would result from the formula agreed on under theloan, due to application of the safeguard clause (see figure below). NPCs for sunflower haveincreased steadily, reaching 1.99 in 1992. Actual values are shown in Part HI.

I See MARA/AIRD/Agro Concept, Etude de la politiue de orix et d'incitatons dans le secteur asricole. Dhase nI. Rarmort Princip(January 1990), for protecoon coefficients based on 1988 prices, with reference to the original estimates, based on 1984 prices. SeeMARA/DPAE, Service des Etudes Econorniques March6s et Prix, Bureau d'Analyse des Politiques Agricoles, Etude de la volitigue de orixet d'incitanons dans le secteur agnicole. phase III. Cereales (June 1990), for coefficients based on 1989 prices.

" Due to the fact that the 1984 international sugar price was just over 5 cents per pound, the original prices and incentives study tookan average price, in 1983 dollars, of the 1981 through 1984 prices.

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CEREALS PRICES 41. Prices for inputs clearly increased over the260C loan period, both for tradables, as well as for240 domestic factors of production, bringing them much220 - closer to their opportunity costs. The minimum200- W agricultural wage, used as a proxy for actual wagesia 0° paid in the prices and incentives study, rose 85%

between 1984 and 1991, while the consumer and120- wholesale price indices over the same period rose,0oo by only 36% (to 1990). Fertilizer prices, in most

.- .I._._._. _._._. . cases, doubled between 1984 and 1992 (e.g., urea,oo0'70 IQAI la.w 14a lae*T is.. a'a up 103%; ammonium nitrate, up 69%; TSP, up* Reference 129%; potassium chloride, up 141 %).+ Producer* World, CIF

Investments

42. Investments in the agricultural sector grew by almost 10% per year in nominal terms(approximately four percent p.a. in real terms) from 1981 to 1991, with private sector performancefar outpacing that of the public sector. While the latter outspent the former in 1981 by a margin ofalmost 3: 1, those orders of magnitude were completely reversed eleven years later, with the privatesector outspending the public sector by better than 2: 1. Private sector sources of capital in Moroccanagriculture accounted for more than half of total investments as MTASAP was just getting off theground.3 '

Government Budget

42. Public expenditure targets. Under ASAL-1, a core program of priority public investments inagriculture was identified. 15% of the total GOM investment budget was to be allocated to MARA in1987/88; "sufficient" or "adequate" levels were to be maintained thereafter. In fact, the percentage oftotal budget appropriations to MARA's investment budget never amounted to more than 14% duringthe period 1986-1990 (11.7% in 1987; 12.9% in 1990). Details are presented in Part III.

43. One of the MTASAP objectives was to put greater emphasis on public investment operationsfor rainfed agricultural development, small-and-medium scale irrigation and forest development. Theevolution of MARA's investment budget allocations from 1984 to 1992 is shown in Part mI. In fact,the allocation to these subsectors varied extremely little over that period. The share of the budgetallocated to irrigation stayed roughly constant at just over 50%. Likewise, the share of irrigationinvestment going to large-scale schemes stayed steady at about 80%,3 and as a share of the totalbudget, the part going to forestry and land consolidation remained at around nine percent. It is

' Actual figures rre presented in Part m.

Large-scale irrigation here refes to the amount budgeted for the ORMVA which include a smnall amount of small-scale irrigationand rminfed developmem activitiee. Small-scale irrigation here is the amount budgeted for the DER which also includes a small amount ofadministrative expenditure. for both small and large-scale irrigation.

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perhaps overly optimistic to believe that a sector loan can really influence budgetary allocations acrossand within sectors in Morocco.

44. The burden of subsidies eased during the course of the 1980s. Producer (fertilizer, irrigationoperation and maintenance and capital, agricultural credit) and consumer (sugar, edible oils, dairyproducts, wheat flour) subsidies peaked in 1975 at 6.2% of GDP, due to the boom in internationalprices (producer subsidies equalled 2.4% of GDP, while consumer subsidies were 3.8% of GDP).'4By the early 1980s, these ratios had abated somewhat, to 2.2% of GDP for the four producersubsidies indicated above and 2.0% of GDP for consumer subsidies. From 1985 to 1989, the impactof consumer subsidies relative to GDP had been halved, to but 1.0% of GDP (average).4' Inaddition, fertilizer subsidies were eliminated by 1990 and irrigation cost recovery was improvedconsiderably (see paras. 54-55).

Subsector Deregulation

45. The overall philosophy of ASAL-2 was to reduce the degree of Government intervention inthe workings of the commodity fili&res, or subsectors, by instituting border policies to guaranteeadequate protection at levels comparable to those enjoyed in the industrial sector and disengaging theGovernment from direct interference in domestic market operations. Many aspects of the workings ofthe cereals, sugar, oilseeds, meat, and milk sectors were thus targeted for reform under MTASAP.Some of these were covered by the deregulation plans submitted to the Bank but were neverimplemented, some were never tackled at all. To some extent, an evaluation of actualaccomplishments under MTASAP suffers in ex-poste analysis due to the discrepancy between thebroad-sweeping actions (both tranche release conditions and the medium-term, or "wish list," actions)listed in the policy reform matrix of ASAL-2's President's Report and the actual, narrowly definedconditions for tranche release as defined in the loan agreement (see the tables in Part E). Aninventory of changes that were actually introduced in each sector, compared with the overallobjectives expressed in the PR, is presented below.

46. Cereals. Under MTASAP, the Government's objectives in the cereals sector were 1) toimprove incentives to the grain sector (harmonizing protection rates with those in other sectors) byensuring floor producer prices close to world market price trends,42 2) to introduce more dynamismin the grain marketing system and use external trade as the major regulation and stabilizationinstrument of the grain markets by eliminating the state's import monopoly and replace quotas withtariff barriers consistent with production incentives, 3) to increase the efficiency of the grainmarketing system to reduce unit costs between farm and consumer and encourage on-farm andintermediate storage by deregulating grain marketing and price formation mechanisms, and 4) toimprove the consistency between food and agricultural policies for grain, eliminating the negativeimpact of the consumer flour subsidy on production and reducing the budgetary costs of the dual

4 See A. Hasan Tuluy and B. Lynn Salinger, Trade. Exchange rate, and Aericultural Pricins Policies in Morocco (World Bank, 1989),pp. 106-108, for the penod 1960 to 1984.

'' International Monectay Fund, 'Morocco - Recent Economic Developments," March 5. 1991, Appendix VII.

42 The preoccupation at the time was to bring producer prices up, to correct for effective taxation of the cereals sector.

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pricing system.43 These reforms were to be implemented in phases: durum, barley, and maizewould be deregulated first, while deregulation of the bread wheat sector would have to await theelimination of the consumer subsidy.' It was expected that the flour subsidy would be eliminatedby 1990, according to the PR's list of medium-term actions to be taken.

47. The Government ostensibly disengaged itself from all aspects of domestic producer pricesetting and marketing regulation for durum wheat, barley, and maize. Minimum support prices nolonger exist as the Government makes no pretense of procuring these grains, and marketing,processing and storage regulations are no longer enforced. International trade in these threecommodities is also supposed to have been liberalized; according to the PR, the Government was tohave adopted "free external trade for maize, hard wheat and barley with tariff barriers set at levelswhich encourage production." However, international traders are still required to obtain Governmentapproval (ONICL and MARA) before importing (or presumably exporting, though that issue has notyet arisen) these grains.45 The 1992 External Trade Law will take effect for cereals by mid-1994and should finally eliminate all such requirements. For animal feeds, variable (in the case of maize)and fixed (in the case of durum and barley, the actual amount is adjusted periodically) levies areapplied to the C+F price at the border. These border policies are still in a state of flux, however, asthe Government experiments with policy definitions, introducing yet another element of risk intotraders' planning.

48. The Government also significantly reduced the amount paid out in consumer subsidiesalthough the medium-term goal of complete consumer flour subsidy elimination has not beenachieved. Luxury flour has been eliminated from the subsidy program, and production and marketingare supposedly now deregulated. However, "moderation accords" are still negotiated between theGovernment and members of the milling and baking profession to establish ceiling prices for luxuryflour and basic breads. Ten million quintals of subsidized bread wheat flour are still producedannually by Morocco's bread wheat flour mills. According to the Government, the continuedexistence of the flour subsidy justifies the persistence of a range of interventions in the bread wheatsector. Its is regulated by quotas, which are distributed according to estimates of consumer demandfrom each flour mill.

49. A program of targeted interventions (food-for-work programs, school feeding programs, andan anti-malnutrition campaign) designed to "compensate" 2 million vulnerable households for theelimination of the subsidy was supported by both USAID and the World Food Program and ran itscourse until 1992, despite the continued existence of the flour subsidy.

50. A program to strengthen ONICL's capabilities was also to be implemented by 3rd trancherelease. Had the policy environment been ready for 3rd tranche release within two years of the actualdate of loan effectiveness as planned, the delay in the start of the Cereals Market Reform Project

" See the ASAL-2 PR, Annex V.

The linkage between the flour subsidy and the targeted compensatory program (in 1987) and, later, the entire subsector reform havealways been insisted on by the Government. Untl elimination of the former, notbing, it was argued, could be done on the latter.

" With regard to this action, the Government's Rappon d'ex6cution of September 1990 states: *The system of quantitaive restrictionsfor durum, maize and barley has been eliminated, with nonetheless administrative intervention by ONICL." (p. 3, emphasis added) This isnot exactly the same as elimination of all barriers, replaced only by tariff protection, as stated in the PR.

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(CMRP) due to internal USAID constraints would have been problematic. As it turned out, in thisparticular instance, the third tranche release was delayed for other reasons and the arrival of CMRP'slong-term resident advisor in July 1991 did not hold up the release.

51. Sugar. The Government's objectives in the sugar sector were 1) to improve the efficiency ofthe sector while pursuing the objective of self-sufficiency under economic conditions, and 2) to reducethe financial and economic costs of sugar production. While the letter of the individual trancherelease conditions was met, the medium-term goals of restricting further expansion of sugarproduction to the most efficient regions and achieving complete deregulation of the sector are still inthe process of being achieved. PERL-2 was to have continued to support this activity after ASAL-2.Dropping it from the lending program at the end of 1991, however, left this aspect of the reformwithout an on-going advocate. As described below in para. 65, SAL-2 picked up on border pricingpolicy reform for sugar, as well as on certain reforms related to domestic market deregulation in thesubsector.

52. Edible oils and oil crops. Again, objectives in this sector were originally defined under ascenario of net effective taxation of the sector. Thus, Government sought 1) to improve incentives tooilseed production, as well as 2) to increase efficiency within the sector by using external trade tostabilize and regulate the markets, and 3) to increase the efficiency of the sector in order to reduceunit costs between farm and consumer. Since the loan was prepared, producer protection for oilseeds has been increased substantially. As with the sugar subsector, structural reform efforts are stillon-going.

53. Livestock products: milk and meat. The Government sought an improvement in the efficiencyof feed resource use in the livestock sector as well as the development of a national dairy processingindustry capable of absorbing the totality of milk production marketed throughout the year undereconomically viable conditions. The specific conditions listed in the ASAL-2 loan agreement were allmet. New administrative formulae for the setting of feed prices (bran, dried sugar beet pulp) havebeen set according to ASAL-2 guidelines. The producer price of milk produced during the leanperiod relative to that in the peak period was raised to a level exceeding the ASAL-2 guidelines.Privatization of artificial insemination and veterinary stations occurred ahead of schedule. Free tradein milk and meat will be permitted, by mid-1994 subject to the application of ad valorem duties andtariff equivalents.

54. Invuts. The M'LASAP outlined a number of objectives regarding fertilizer, seeds, andirrigation water, including 1) improvement of input distribution systems, 2) the encouragement ofprivate and cooperative sector participation in input marketing and storage, and 3) the elimination ofdistortions within the agricultural sector caused by input subsidies. All conditions set out underASAL-2 were met, including some of the medium-term objectives (complete deregulation of fertilizermarketing and complete elimination of fertilizer subsidies by July 1990).

55. Regarding irrigation cost recovery, dated covenants for tranche release were no longerenforceable as compliance could only be supervised during the course of the operation which wasdelayed. Nonetheless, Bank staff reported that cost recovery was impressive even if it did not meetthe actual targets specified for calendar years 1987 and 1988. Achieving full O&M cost recoverythrough water charges was a primary objective of the first Large-Scale Irrigation Improvement Project(LSII - Loan 2656-MOR) and the overall O&M collection rate is estimated to have risen from 74% in1991 to 79% in 1992. Under the subsequent project, LSII-2 (Loan 3587-MOR), the level of water

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charges will be further increased so that a volumetric charge covers the entire estimated true O&Mcosts and a share of investment and depreciation costs.

56. Other actions monitored under ASAL-2 include 1) the streamlining and restructuring of theNational Agricultural Research Institute (INRA): discussions with the Government on this topic led tothe preparation of the Agricultural Research and Extension Project (Loan No. 3036-MOR); 2)implementation of a training and visitation extension system, which was applied on a pilot basis in 28extension centers; 3) modernization of seed multiplication activities and transfer of such to theNational Seed Marketing Company and the private sector: the Government, having determined thatlegislation establishing seed security stocks was not required, cut certified seed subsidies cut in half in1990-91, and eliminated them in 1991-92; 4) forestry sector: the Government sought to attaineffective self-sufficiency in industrial wood and partial sufficiency of fuel wood and foragerequirements, and therefore developed a policy package to decrease illegal cuttings, increase naturalforest regeneration, improve forest rangeland management, also a study on wood products andmarketing prospects was completed under ASAL-2, with a follow-on activity being the preparation ofthe Second Forestry Project (Loan No. 3156-MOR); 5) land policy reforms: activities accomplishedin this area included the preparation of cadastral mapping, land registration, a titling program, andland consolidation programs; 6) promotion of agro-industrial exports: a study on existing contractualrelationships and forms of organization in the agro-industrial sector was carried out by MARA toaddress problem of uncertainty in the supply of agricultural raw materials; as a follow-on activity,USAID funded the Morocco Agribusiness Promotion Project; 7) regarding the reinforcement ofeconomic policy analysis capability of MARA/DPAE, a number of studies were carried out by DPAEincluding the second and third Agricultural Prices and Incentives Studies, a multi-market(cereals/livestock) model, a national accounting study for agricultural sector, several linearprogramming models for selected ORMVAs, supply and demand function estimates for mainagricultural commnodities, and both national and regional cereals cost of production surveys; inaddition, a computerized budget system was implemented in DPAE for all of MARA; 27 traineesfrom DPAE were sent to the U.S. for long-term graduate economics study (M.A. and Ph.D. levels).

Institutional Reforms

57. As a result of the MTASAP, staff management in Morocco's Ministry of Agriculture andAgrarian Reform and its Economic Affairs and Planning Directorate (DPAE); have become muchmore skillful in their defense of Moroccan producer interests, both within the Government and vis-a-vis external partners. The MARA officials who have weathered these last nine years of adjustmentdiscussions, and there are a good number who have been present throughout the process,' havegreatly honed their ability to apply the standards tools of economic analysis in order to win sometimeseconomic, sometimes political, concessions vis-a-vis their opponents.

58. One example thereof is the Agricultural Development Fund (FDA), financed by trade taxreceipts levied on the five strategic agricultural food groups (cereals, sugar, oils, meat, milk) to theextent that their consumption is not subsidized. This fund is controlled primarily by the DPAE,providing credits for a number of programs. There is no other example in Morocco of a ministrywith its own extra-budget source of revenues for funding its own programs. As international prices

" Unlike the Bank, which has seen sevecal generations of technicians take up the reins of debate.

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continue their decline and the safeguard clause continues to maintain relatively high domestic prices,FDA is becoming a noticeable force within the GOM.

59. Another example is the particularly active role Morocco has played in the Uruguay Roundnegotiations. Morocco, which only joined GATT in 1987, was the first developing country tovolunteer to submit its trade policies for review under the GATT's recently initiated Trade PolicyReview Mechanism.47 Both MARA and the Ministry of Foreign Trade have been particularly activein this arena.

60. Such successes are testimony, in part, to the emphasis put on economic training at the verybeginning of the MTASAP. This is not to say that MARA/DPAE's apprenticeship in economicanalysis has been brought to conclusion. Many of the DPAE staff who were sent to the U.S. forformal training are just now returning to Morocco, only to find venues for using their new skills arequite limited, due to the strained capacity of top management. Reorganization of the DPAE and therecruitment of some new lieutenants with stronger economic skills might help top management moreprofitably harvest the still raw talents of its improved staff.

Conclusions

Achievements

61. Despite the numerous implementation delays, there was substantial progress under the loan.While care must be given in interpreting their cause, it is clear that many positive results wereachieved: over the MTASAP period from 1985-90, real growth in the sector was above that ofoverall GDP (4.9% p.a. compared to 3.8% p.a. for the overall economy); prices for almost all inputswere raised, bringing them significantly closer to their opportunity costs and reducing fiscal costs tothe Government; subsidies were reduced on consumer goods with a concomitant introduction oftargeted interventions for the poor; water charges were raised, improving irrigation cost recovery; andthe deregulation of individual subsectors was begun. Finally, the Ministry of Agriculture wassignificantly strengthened and its capacity for policy analysis considerably improved.

Economic Issues

62. The most critical unresolved economic issue at the end of ASAL-2 remains that of comnrnoditypricing. Morocco has conformed to the letter of the ASAL-2 conditions in its conversion to price-setting formulae which take international reference prices as their starting point. However, the spiritof ASAL-2 - at least when interpreted in a short-to-medium term sense - is directly violated by theimposition of the safeguard clause for cereals which allows domestic prices to be maintained at theirpast real levels, until such time as multilateral trade negotiations result in undistorted internationalprices for agricultural commodities. In taking the lead on this issue, Morocco has, in effect, pointedout the irony of pretending as if "an" international price exists for a commodity. In a world whereexporting countries compete amongst each other for shares of strategic foreign markets, offeringdiscounts of $30-35 per ton against an average quoted FOB Gulf price of $150 per ton, what is "aninternational reference price"? How distorted are FOB prices compared with actual costs of

47 See GATT. Trade Policy Review: The Kingdom of Morocco 1989 (Geneva, 1990).

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production in the most productive economies? Research will be carried out in MNIAG as part ofASIL-2 preparation to explore further some of these nuances.

63. Already at the time of the Bank review of ASAL-2's Initiating Memorandum, the Bank's thenSenior Vice-President for Operations warned of the lack of clarity in pricing objectives andmechanisms. While it was acknowledged then that Bank acceptance of continued administrative pricesetting woul