AFRICAN DEVELOPMENT BANK

Financial Sector Development Support Project – Phase III

Country: Kingdom of Morocco

APPRAISAL REPORT

OFSD/OSGE DEPARTMENTS

September 2014

Translated Document

Table of contents

LIST OF TABLES – LIST OF BOXES i

LIST OF ANNEXES i

FISCAL YEAR – CURRENCY EQUIVALENTS i

ACRONYMS AND ABBREVIATIONS ii

LOAN INFORMATION iii

PROGRAMME SUMMARY iv

PROGRAMME LOGICAL FRAMEWORK vii

I – THE PROPOSAL 1

II – COUNTRY AND PROGRAMME CONTEXT 1

2.1 Recent Socioeconomic Development, Prospects and Constraints 1

2.2 Government’s Development Strategy and Medium-term Priority Reforms 4

2.3 Status of Bank Group Portfolio 5

III – RATIONALE, KEY DESIGN ELEMENTS AND SUSTAINABILITY 5

3.1 Linkages with CSP, Assessment of Country Readiness and Underlying Analytical Elements 5

3.2 Donor Collaboration and Coordination 7

3.3 Outcomes and Lessons from Similar Completed or On-going Operations 7

3.4 Linkages with Other Bank Operations 7

3.5 Bank’s Comparative Advantages 8

3.6 Application of Best Practice Principles on Conditionality 8

IV – PROPOSED PROGRAMME 8

4.1 Programme Objectives 8

4.2 Programme Pillars and Components, and Expected Outcomes 8

4.3 Financing Requirements and Arrangements 13

4.4 Programme Beneficiaries 14

4.5 Impact on Gender 14

4.6 Impact on the Environment 14

4.7 Impact of the Business Environment 15

V – IMPLEMENTATION, MONITORING AND EVALUATION 15

5.1 Implementation Arrangements 15

5.2 Monitoring and Evaluation Arrangements 16

VI – LEGAL INSTRUMENTS AND LEGAL AUTHORITY 16

6.1 Legal Instruments 16

6.2 Conditions Precedent to Bank Group Intervention 16

6.3 Compliance with Bank Group Policies 17

VII – RISK MANAGEMENT 17

VIII – RECOMMENDATION 17

_________________________________________________________________________________ This report was prepared by Mr. E. DIARRA, Principal Financial Economist, OFSD/MAFO and Mr. A. TARSIM, Senior

Economist, OSGE, following missions to Rabat in October 2013 and April 2014. It also benefited from contributions by experts

in ORNA, MAFO and ORPF Departments, two financial sector specialists (consultants), as well as exchanges with technical

and financial partners.

List of Tables

List of Boxes

Box 1: PBO General and Technical Conditions

Box 2: Measures Precedent to PADESFI-III Presentation to the Board of Directors

List of Annexes

Fiscal Year

January - December

Currently Equivalents

(April 2014)

UA 1 = 12.60 Moroccan Dirham (MAD)

UA 1 = 1.12 Euro (EUR)

UA 1 = 1.55 US Dollars (USD)

Table 1 Budgetary Balance and Financing Needs

Annex 1 Letter of Development Policy

Annex 2 Programme Matrix of Measures

Annex 3 : Note on Relations with the IMF

ii

Acronyms and Abbreviations

ACAPS : Insurance and Social Welfare Supervisory Authority

AfDB : African Development Bank

AMC : Microcredit Associations

AMMC : Moroccan Capital Markets Authority

BAM : Bank Al Maghrib (Central Bank of Morocco)

BCP : Banque Centrale Populaire

BNDE : Banque Nationale pour le Développement Économique

bp : basis point

CAM : Crédit Agricole du Maroc

CCG : Central Guarantee Fund

CDG : Deposit and Management Fund

CDVM : Securities Ethics Board

CEC : Credit Institutions Committee

CFC : Casablanca Finance City

CIF : Cost Insurance and Freight

CIH : Housing and Hotel Credit Fund

CMI : Interbank e-Money Centre

CNCA : National Agricultural Credit Fund

COMOFIM : Morocco Monetary and Financial Code

CPIA : Country Policy and Institutional Assessment

CSP : Country Strategy Paper

DAPS : Directorate of Insurance and Social Security

E-gov : E-government

EU : European Union

FCPR : Venture Capital Mutual Investment Fund

FDI : Foreign Direct Investment

FOGARIM : Real Estate Mortgage Guarantee Fund

FSAP : Financial Sector Assessment Programme

GDP : Gross Domestic Product

GFCF : Gross Fixed Capital Formation

IGF : Auditor General’s Office

IMF : International Monetary Fund

INDH : National Human Development Initiative

IPO : Initial Public Offering

IVT : Treasury Securities Dealer

LOF : Organic Law on Finance

MAD : Dirham

MAROCLEAR: Central Securities Depository

MEF : Ministry of Economy and Finance

MIC : Middle Income Country

MRE : Moroccans Resident Abroad

OPCR : Venture Capital Investment Agencies

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OPCVM : Transferrable Securities Investment Agencies

PADESFI : Financial Sector Development Support Programme

PARAP : Public Administration Reform Support Programme

PARCOUM : Medical Coverage Reform Support Programme

PASFI : Financial Sector Support Programme

PEA : Equity Savings Plan

PEE : Education Savings Plan

PEL : Housing Savings Plan

PFI : Public Financial Institutions

RC : Risk Capital

SBVC : Casablanca Stock Exchange

SICAV : Société d’Investissement à Capital Variable (Venture Capital

Investment)

SME : Small- and Medium-sized Enterprises

UA : Unit of Account

VAT : Value-Added Tax

VSB : Cities without Slums

VSE : Very Small Enterprise

VSME : Very Small- and Medium-Sized Enterprises

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LOAN INFORMATION Client Information

BORROWER KINGDOM OF MOROCCO

EXECUTING AGENCY: Ministry of Economy and Finance

(Treasury and External Finance

Directorate)

Financing Plan

Source

Amount

Instrument

AfDB

EUR 100 million

AfDB loan

Information on the AfDB Financing

Loan currency

Euro

Interest rate type: Floating base rate with a free-fixing

option Base rate (floating) 6-month Euribor

Contractual margin 60 basis points (bps)

Lending margin : Bank lending margin in relation to the 6-

month Euribor. This margin is revised

every year on 1 January and 1 July. Commitment fee In the event of disbursement delays

compared with the initial schedule

(specified in the loan agreement), a

commission of 25 bps per annum will be

applicable to the undisbursed amounts.

This fee will increase by 25 bps every six

months up to a maximum of 75 bps per

annum. Other charges None

Tenor 20 years maximum

Grace period 5 years maximum

Activities Date

1. Identification and preparation October 2013

2. Concept Note approval 15 March 2014

3. Loan agreement negotiation September 2014

4. Board presentation October 2014

5. Effectiveness October 2014

6. Disbursement October 2014

7. Supervision December 2014

8. Supervision March 2015

9. Completion report June 2015

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PROGRAMME SUMMARY

Programme Overview

1. Programme Name: Financial Sector Development Support Programme – Phase III

(PADESFI - III)

- Geographic coverage: Nationwide

- Overall duration: 12 months

- Programme cost: Not applicable

- Financing: EUR 100 million (AfDB)

- Programme type: Sector budget support

2. PADESFI III is an extension of PADESFI I and II approved by the Bank in 2009 and 2011.

The outcomes of the previous programmes were positive (Technical Annex 3), notably with the

increase in the population’s banking access rate from 35% in 2008 to 57% in 2012, and a doubling

of credit to SMEs/VSEs over the same period. Furthermore, these outcomes were obtained within

a healthier financial governance context, especially with a reduction in the risk portfolio in both the

banking and micro-credit sectors. Thanks to the considerable progress in implementing reforms, the

loan for this programme will be disbursed in a single tranche.

Expected Programme Outcomes and Beneficiaries

3. PADESFI-III’s goal is to create the required conditions for inclusive economic growth by

consolidating the financial sector and fostering broader financial inclusion. Its specific objective is

to strengthen financial sector development, particularly by improving access of the population and

enterprises to financial services, deepening the sector and strengthening its governance.

4. The overall expected outcomes following programme implementation are: (i)

improvement of the population’s access to financial services; (ii) improvement of access of

enterprises, especially VSMEs, to financing; (iii) strengthening of the financial sector governance

mechanism; and (iv) deepening of the capital market. Compared to the two previous programmes,

PADESFI-III specifically targets greater financial inclusion of the most vulnerable population

segments (youths and women) and SMEs/VSEs operating in regions outside the Casablanca – Rabat

axis.

5. The programme’s end beneficiaries are the Moroccan people as a whole. The programme

will especially benefit the key intermediate stakeholders namely: (i) the private sector, especially

SMEs/VSEs which, thanks to reforms to be implemented, will have easier access to financial

services to foster their growth; and (ii) households as economic agents, particularly youths and

women, whose bank use rate will further improve as a result of greater coverage of the national

territory by the banking networks, in addition to easier access to loans and other financial payment

and transfer services. This facilitation of access to financial services, particularly for SMEs, VSEs

and households, will help to generate income and create jobs for these population segments and

categories, thereby encouraging more inclusive growth.

Needs Assessment and Relevance

6. The programme is necessary for the following main reasons: (i) Morocco’s effort to

promote inclusive growth calls for the pursuit and better targeting of financial inclusion for the

benefit of the population and businesses, since financial inclusion is one of the key vectors of socio-

economic inclusion; (ii) the double need to diversify and improve Morocco’s economic

competitiveness requires the mobilisation of considerable resources to finance the required

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investments, on a sound basis; (iii) the turbulence of the international financial system calls for

greater vigilance in financial sector governance through the implementation of credible norms and

standards that could prevent systemic crises and maintain financial stability; and (iv) it is still

necessary to continue the process to rehabilitate and deepen the financial sector in light of the

national and international socio-economic context, and the related challenges. Moreover, since the

Moroccan banking system is the country’s main source of economic financing, it is imperative to

further diversify the financial system by strengthening other system segments, for instance the

capital markets.

7. Therefore, the programme specifically aims to accelerate reforms in the Moroccan

financial sector. It focuses on the challenges that the government plans to address, as soon as

possible, with a view to consolidating and amplifying the achievements of the first two phases of

the programme. In this regard, it specifically tackles challenges related to the financial inclusion of

VSMEs, women, youths and rural dwellers.

8. The programme adopted is relevant. The main conditions of success of the programme

have been fulfilled: proper ownership of the programme by the country; fulfilment of the general

and technical prerequisites for this type of programme; compliance with good practice principles

for the application of conditionality, including the implementation of measures precedent to

submission of the programme to the Board of Directors; and design of a results-based monitoring

and evaluation mechanism. PADESFI’s area of intervention, namely the financial sector, is relevant

to the priorities of the government’s programme as reflected in the Letter of Development Policy,

and to those of CSP 2012–2016 for Morocco.

Bank’s Value Added

9. With about ten years of experience in financial sector reforms in Morocco following the

series of four financial sector adjustment programmes and the two previous financial sector

development support programmes, the Bank has drawn relevant lessons that it has put to good use

in formulating PADESFI-III. Moreover, to amplify the outcomes of previous programmes, the Bank

financed, using MIC grants, four institutional support projects currently in the implementation

phase, respectively on: (i) strengthening financial markets supervision; (ii) improving the national

guarantee system; (iii) preparing the Moroccan Monetary and Financial Code; and (iv) modernising

the organisational framework of the “Debt” Pole of the Treasury Directorate. Within the PADESFI-

III framework, the Bank will also support other projects to be financed with MIC grants, with a

view to generating a considerable leverage effect in terms of outcomes and impacts. In so doing, it

will bring substantial value added to this programme.

Institution and Knowledge Building

10. PADESFI-III will contribute to institution building of the public administration and

private sector, including associations. Studies and draft texts examined while formulating this

programme contribute to knowledge building. The same applies to the sharing of experience

acquired in other countries.

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RESULTS-BASED LOGICAL FRAMEWORK Country and Programme Name: Morocco – Financial Sector Development Support Programme – Phase III (PADESFI-III)

Programme Objective: Contribute to creating the necessary conditions for inclusive economic growth. Its specific objective

is to strengthen financial sector development.

RESULTS CHAIN

PERFORMANCE INDICATORS

MEANS OF

VERIFICATION

RISKS/MITIGATION

MEASURES Indicators (including ISC)

Baseline

Situation in

2012

2015 Target

IMP

AC

T

The financial sector is

developed and contributes to economic

financing

Average real GDP growth

rate

2.7% 4.8% Reports of the

Ministry of Economy and

Finance (MEF);

Bank Al-Maghrib (BAM)

Proportion of private sector credit compared with total

credit to the economy

53% 55%

OU

TP

UT

1. Improved access by

the population to

financial services

Increase in the number of

students using the

“Enseignement Plus”

banking service

Number of “Mobile Banking” subscribers

Proportion of micro-credit extended to women

Bank use rate

73

0

49%

57%

110 (i.e. a 50%

increase in 2015

compared to 2012)

150 000

55%

62%

CCG Reports

MEF/ABB Report

BAM Report

MEF/BAM

Risk

- An unfavourable

international economic

situation hampering the

achievement of the

expected programme impacts

Mitigation Measure

- Budgetary Watch Committee

- Committee to

coordinate the supervisory bodies of

the financial sector for

overall sector systemic risks

2. Easier access to financing for VSEs and

SMEs

Number of women benefiting from the ILAYKI

guarantee product

0 175 CCG Report and/or MEF data

3. The financial sector

governance mechanism is strengthened

Proportion of bank-held non-

performing loans

5% (6.6% as of

end July-2014)

5.5% (after a 6.6%

increase as of end-July 2014)

BAM Reports

4. The capital market is

deepened

Stock market capitalisation

(in MAD billion)

MAD 445

billion

A minimum

stabilisation to the

tune of MAD 450

billion

CDVM Report

OU

TC

OM

ES

COMPONENT 1. IMPROVE THE POPULATION’S ACCESS TO FINANCIAL SERVICES Risk

Wavering government’s determination to

implement reforms

Mitigation Measures

The authorities have

expressed a high

commitment to implement structural

reforms in the

financial sector

1. a – Improve the

population’s access to financial services

Bank use by students on

scholarship through the launching of the “MINHATY

Card” product by Al-Barid

Bank (ABB)

Product non-

existent

The “MINHATY

Card” is launched by ABB before end-

2014

MEF/ABB Report

Improved access of the

population to financial

services nationwide

following the launching

of the “Mobile Banking”

product by (ABB)

Product non-existent

The “Mobile

Banking” product

is launched by

ABB before end-

2014.

MEF/ABB Report

Establishment of the Moroccan Financial

Education Foundation

Adoption of the financial

education action plan by the

Foundation

Financial education action

not coordinated

The Foundation is set up before end-

2014

Action plan adopted

before end-2014

Report of the Moroccan

Financial

Education Foundation

1.b – Strengthen the micro-credit sector

Launching of the study to

upgrade the microfinance institutional environment

Study non-

existent

Call for Expression

of Interest for the study to upgrade the

microfinance

institutional environment in

Morocco is launched

by the Ministry of Economy and

Finance before end-

2014

MEF’s letter

attesting to the Call for

Expression of

Interest to conduct the study

COMPONENT 2. IMPROVE ACCESS TO FINANCING FOR VSES AND SMES

viii

RESULTS CHAIN

PERFORMANCE INDICATORS

MEANS OF

VERIFICATION

RISKS/MITIGATION

MEASURES Indicators (including ISC)

Baseline

Situation in

2012

2015 Target

2. a – Improve

VSE/SME access to credit

Introduction of an

“ILAYKI” guarantee

product dedicated to women entrepreneurs

No credit

guarantee product

dedicated to

women

ILAYKI product set

up before end-2014

CCG and MEF

report

Launching of guarantee

products targeting export-

oriented enterprises

No guarantee

product

dedicated to export-oriented

SMEs

Products set up

before end-2014

CCG and MEF

report

2.b – Develop guarantee activity at the

regional level

Extension of guarantee activity at the regional level

by opening new CCG

business centres in other cities of the Kingdom

2 regional centres

At least six business centres operational

by end-2015

CCG and MEF report

COMPONENT 3. STRENGTHEN THE FINANCIAL SECTOR GOVERNANCE MECHANISM

3. a – Strengthen the capital markets

supervision mechanism

Adoption of text (s) on the composition of the AMMC

Board of Directors and of

the Order extending AMMC’s prerogatives in

terms of authorisations

Law passed and implemented

Text (s) on composition of the

AMMC Board of

Directors and edict listing the functions

requiring

authorisation signed before end-2015

MEF report

3. b – Strengthen

banking system stability

Adoption of the Banking

Law by the Cabinet

The former Law dates back to

2006

Draft law passed

before end-2014

MEF report

COMPONENT 4. DEEPEN THE CAPITAL MARKETS

4. a – Diversify

financial instruments

Draft law on covered bonds

adopted by the Cabinet

Instrument non-

existent in the market

Draft law adopted

before end-2015

MEF report

Draft law on OPCIs adopted by the Cabinet.

Instrument non-existent in the

market

Draft law adopted before end-2014

MEF report

4. b – Boost the capital market

Adoption by the Cabinet of the draft law amending the

Stock Exchange Act aimed

at introducing sub-funds dedicated to Mutual Funds

and SMEs

Adoption by the Cabinet

of the draft law modifying

Law 41-05 concerning

venture capital mutual

investment bodies

The current law does not allow

for the

introduction of new sub-funds

to respond to

sector needs

The current law

excludes certain

types of

enterprises from

venture capital

classification

Draft law adopted before end-2015

Draft law adopted

before end-2014

MEF report

Financing: AfDB loan of EUR 100 million

1

MANAGEMENT’S REPORT AND RECOMMENDATION TO THE BOARD OF

DIRECTORS CONCERNING A LOAN PROPOSAL TO THE KINGDOM OF

MOROCCO FOR THE FINANCIAL SECTOR DEVELOPMENT SUPPORT

PROGRAMME – PHASE III

I. THE PROPOSAL

1.1. Management hereby submits the following recommendation concerning a EUR

100 million loan to the Kingdom of Morocco to finance the third phase of the Financial

Sector Development Support Programme (PADESFI-III). This is a sector budget support to

be implemented for a 12-month period ending 31 December 2015. It is a continuation of the

two previous phases of the programme implemented in 2009 and 2011, respectively, the

achievements of which it intends to consolidate and deepen. The operation is also a continuation

of the series of four financial sector adjustment programmes that the Bank and other multilateral

donors, particularly the World Bank and European Union, have supported. PADESFI-III is

based on the strategic orientations of government’s medium-term development programme. Its

design has taken into account the principles of the Paris Declaration on Aid Effectiveness and

those of good practice principles for the application of conditionality. It also complies with the

Bank’s strategy for Morocco

1.2. PADESFI-III aims to help create the requisite conditions for inclusive economic growth.

It is intended to consolidate and deepen the reforms already initiated under PADESFI-I and

PADESFI-II, by means of the same four main thrusts: (i) improvement of the population’s

access to financial services; (ii) improvement of access to financing for businesses; (iii)

strengthening of the financial sector governance mechanism; and (iv) deepening of capital

markets. The range of measures supported by the programme is presented in the reform matrix

(Annex 2).

II. COUNTRY AND PROGRAMME CONTEXT

2.1 Recent Socio-economic Developments, Prospects, Constraints and Challenges

Recent Political, Macro-economic and Social Trends

2.1.1. Morocco has made considerable progress in terms of political liberalisation and

installation of a solid democratic base. In this regard, it continues to enjoy a high level of

political stability. On the one hand, the constitutional reform largely approved during the 1 July

2011 referendum helped to consolidate the principle of balance of power and to deepen the

democratic process; on the other, the formation of a new coalition government on 10 October

2013 guaranteed continuity after the end of the first coalition government. The mission of the

new government is to build a consensus on difficult reforms (subsidies, pension) to allow for

more rapid progress in the preparation of economic policy.

2.1.2. On the macro-economic front, Morocco has demonstrated resilience and recorded

good performance with an annual growth rate averaging 4% yearly over the 2010 – 2013

period, despite a very difficult international and regional context. Within the framework of

the second Precautionary and Liquidity Line (PLL) with Morocco dated July 2014, the IMF

underscored that “the authorities have taken significant measures to reduce vulnerabilities…and

strengthen the resilience of the economy." This economic performance is mostly attributable to

sound macro-economic policies, sustained structural reforms and sector strategies geared

towards accelerating the diversification and transformation of the Moroccan economy. Hence,

after a relatively difficult 2012, the macro-economic outcomes improved overall in 2013 and

the growth rate stood at 4.4%, compared to 2.7% in 2012, despite a slowdown in world growth.

Furthermore, thanks to a prudent monetary policy, inflation remained low between 2010 and

2

2012 (1.3%), rising only slightly up to 1.9% in 2013, despite the increase in the prices of some

subsidized energy products. These rates are generally in line with Bank Al-Maghrib projections.

For 2014-2015, inflation will remain low at around 2.5%.

2.1.3. As regards public finances, Morocco’s budgetary framework remains sustainable,

despite external and internal shocks. After a net deterioration of the budgetary balance in

2011 and 2012 (-6% and -7% of GDP), the strong commitment of the authorities to re-balance

public finances was confirmed by the reduction of the budget deficit down to 5.5% in 2013.

This improvement is largely the result of measures taken by the authorities in mid-2012 and in

2013 to reduce expenditures on subsidies and salaries, and address budget vulnerabilities. To

that end, the authorities are determined to pursue the reduction of the budget deficit to 5.1% of

GDP in 2014 and 3.6% of GDP between now and 2013.

2.1.4. Furthermore, despite being weakened by the impact of successive crises, Morocco’s

external position remains strong and viable in the medium term. After a deterioration of the

current account deficit in 2011 and 2012 (-8% and -9.7% of GDP, respectively), the current

account balance rebounded in 2013. The current deficit dropped to 7.6% of GDP. International

reserves also rose in 2013 and for more than a year remained above 4 months of imports (4.3

months) after the 16.7% and 10.7% decline recorded end-2012 and end-2011, in that order. This

performance is partly attributable to sustained foreign investment (an increase of nearly 23.4%

in 2013 compared to 2012) and access to international bond markets that helped to mobilise

USD 750 million under favourable conditions. It is also due to the impact of falling imports,

the good performance of emerging sector-related exports (aeronautics and automobile), as well

as the stability of tourism receipts and remittances from Moroccans abroad.

2.1.5. On the social front, Morocco’s recent development performance is characterized

by the positive outcomes of the key social indicators (several Millennium Development

Goals achieved before 2015) and by considerable challenges. According to latest data from

the survey of household living conditions, the poverty rate fell from 21% in 1985 to 6.2% in

2011, with the sharpest drop recorded in the rural area (from 26.8% to 10% over the same

period). The water and sanitation access rates increased both in urban and rural areas (100% in

2011 for the former; from 70% in 2005 to 92% in 2011 for the latter). The electricity access

rate is also high and the electrification plan appears to have produced the expected results. Thus,

the rural electrification rate stood at 98.1% in 2012 (compared to 22% in 1996). According to

the latest Human Development Report (2013), Morocco occupies the 130th position (out of 186

countries), with a Human Development Index (HDI) of 0.592. Morocco’s position has remained

unchanged since 2012 and analysis confirms that education is still a major constraint to

improving the country’s human development. Despite the huge budgetary resources allocated

to the social sectors (above 50%) and efforts by the government, development outcomes in

areas such as education remain below expectations, with regional disparities and gender

imbalances.

2.1.6. With Morocco’s strong performance and renewed overall growth, the national

unemployment rate remains below 10%. However, youth unemployment continues to be a

challenge (in 2013, the national unemployment rate stood at 9.2%, with unemployment among

youths aged 15 to 24 at 16.3%, among graduates at 16.3% and among persons without formal

qualification at 4.5%). The labour market faces several weaknesses, particularly the inadequate

number of jobs generated by the economic growth, the mismatch between training and labour

market needs, and the limited scope of active employment promotion programmes.

2.1.7. In a risk-prone environment, Morocco’s growth prospects are favourable and the

GDP should grow by 5% in 2015, despite a deceleration in 2014 (3.5% growth rate) due to

insufficient rainfall during the last three months of 2013. Budget and external deficits will

continue to decline in 2014 (5.1% and 6.8%, respectively). This performance is attributable to

the tireless pursuit of reforms aimed at re-balancing the budgetary and external accounts,

3

strengthening competitiveness and ensuring more vigorous and job-generating growth. In this

regard, Morocco’s efforts to improve the business climate and attract direct foreign investment

have borne fruit. The business climate has improved significantly in recent years. According to

the latest Doing Business 2014 report, the country moved up 8 positions in the annual

classification – from 95th to 87th.

2.1.8. In light of the challenges brought about by the current context, the government is

strongly engaged in a structural reform process to strengthen competitiveness, speed up

diversification, modernise the productive base and facilitate integration in the global

economy. In that connection and as underscored by the diagnosis of Morocco’s growth being

prepared by the Bank and the country’s authorities, there is need to deepen reforms with a view

to enhancing the business climate and transparency, improving the functioning of the labour

market to attract foreign direct investment and promoting a strong growth in employment. It is

also urgent to speed up justice, fiscal and pension scheme reforms, reform the Organic Law on

the Finance Act and concretize advanced regionalisation. Lastly, to boost growth and

employment, it is also imperative to achieve broader financial inclusion that would specifically

grant greater access to credit to small- and medium-sized enterprises.

Financial Sector: Current Situation and Challenges

2.1.9. Morocco’s financial sector is among the most efficient on the continent. In terms of

absolute size, the financial sector in Morocco ranks third in Africa after South Africa and

Algeria. In relative terms (private credit/GDP), it is second after South Africa. Moreover, it

shows a good level of stability as emphasized in the latest IMF Article IV Staff Consultation

Report: "a rather prudent business model and relative insulation from the Eurozone debt crisis

have helped the financial sector remain systemically sound." The banking sector remains the

backbone of the Moroccan financial system, with total assets (Morocco activity) of MAD 1,096

billion, that is 125% of GDP in 2013, up by 5.3% compared to 2012. However, growth

deceleration in the sector at the domestic level was offset by strong performance internationally

largely because of the dynamism of groups such as the Attijariwafa Bank and the Banque

Marocaine du Commerce Extérieur (BMCE), which displayed strong international results

particularly in Africa.

2.1.10. Despite the relative increase in the loss ratio, the banking system remains generally

solid, profitable and adequately capitalized. Outstanding credit to the economy grew at the end

of 2013 by 3.2% against 5.4% in 2012, under the combined effect of domestic demand decline

and a more selective credit policy adopted by banks. For its part, the level of non-performing

loans has registered a one-point increase to level at 5.9%, relative to the previous year.

However, the provisioning rate remains at a satisfactory level (64%), the same as bank

capitalization with a 13.3% solvency ratio. Profitability remains relatively sound, with a 1%

rate of return on assets and a return on equity of 10.6%. Furthermore, the liquidity crunch that

beset the banking sector has been successfully addressed by BAM, which systematically met

all the financing needs of banks without any increase in its key interest rate (3%).

2.1.11. Implementation of the reforms planned under the first two phases of PADESFI

contributed to strengthen the resilience of the financial sector, its consolidation and

deepening. In this regard, one of the significant outcomes is increased access to financial

services owing mainly to the substantial growth in banking (60% in 2013 against 35% in 2008)

and greater spatial coverage (5 711 branches and 5 893 ATMs).

2.1.12. However, there are lingering challenges regarding the financing of certain segments

such as VSEs and access to finance and basic banking services for people on low or irregular

income, youths, women entrepreneurs and rural households. In this respect, the findings of

the Third Review Under the PLL Arrangement with the IMF notes that: "Broader financial

inclusion, including greater access to credit for small- and medium-sized enterprises, is also

4

needed to foster higher growth and boost employment.” Similarly, the lack of financial culture

among the population must be addressed if financial inclusion is to be further fostered. The

territorial dimension of financial inclusion is also a challenge to be overcome to allow better

access for households and rural VSEs to financial services. PADESFI-III has listed all these

weaknesses as reform priorities that the Moroccan government must address to promote

inclusive growth that will benefit the majority of the population. To this end, compared to the

previous two, this programme intends to further address the challenges of the most vulnerable

groups: women, youths and rural dwellers.

2.2 Government’s Development Strategy and Medium-term Priority Reforms

2.2.1. The government’s Economic and Social Programme for 2012-2016 aims to further

build a strong, multi-sector and multi-regional, competitive, and wealth- and employment-

generating economy in the medium term. Three main focus areas of this strategy stand out,

namely: (i) consolidating the territorial and regional dimension of development; (ii) improving

the competitiveness of the economy by promoting good governance and a business climate

conducive to fair competition; and (iii) actively assisting the productive sector through support

to investment policy, particularly for small- and medium-sized enterprises. The more equitable

distribution of the fruits of growth is also an important dimension of this strategy. The

implementation of this policy should primarily help to achieve, by 2016, a global growth rate

of 5.5%; contain the inflation rate at 2%; lower the unemployment rate to 8%; and increase

savings and investment, while controlling the budget deficit and the balance-of-payments

current account.

2.2.2. The economic and social programme implemented by the government basically aims

at preserving financial and macroeconomic stability. In this regard, the budget deficit will be

gradually reduced from 7.3% of GDP in 2012 to 3.6% in 2016. To achieve this, the government

plans to strengthen public resource management governance as well as implement a policy to

rationalize expenditure and improve revenue mobilization. Flaws in external balances will also

be comprehensively addressed, as part of an integrated approach aimed at removing barriers to

investment and competitiveness.

2.2.3. Regarding the financial sector, the main targets set by the government as part of this

programme are to: (i) improve financial inclusion particularly by strengthening the

microfinance sector and facilitating access by VSMEs to financing, and boosting the capital

market; and (ii) strengthen the supervision mechanism and financial stability of the financial

sector. By focusing on the same priorities, PADESFI-III, with its objectives and components,

addresses government concerns which also include other interests such as gender, youths as

well as regional balance and development. The Letter of Development Policy in Annex 1 of

this Report provides further details on these priorities.

2.3 Status of Bank Group Portfolio

The Bank’s active portfolio in Morocco comprises 33 on-going operations for a net

commitment of approximately UA 1.78 billion. Loans total UA 1.77 billion (99.7%) and cover

15 projects and programmes, with an average amount per operation of roughly UA 111 million.

The structure of the active portfolio reflects a high concentration of Bank interventions in

infrastructure, which represents nearly 90% of the commitments, particularly in energy and

transport (56% of commitments). One operation (Marrakech Water Supply Project) is currently

in the PPP category since March 2014 and is the subject of close attention to move it out of said

category. The portfolio also includes two non-sovereign operations totalling UA 177 million.

The overall performance of the Bank’s portfolio remains satisfactory, with an average score of

2.53 out of 3 in 2014. This score has been stable since 2012.

5

III. RATIONALE, KEY DESIGN ELEMENTS AND SUSTAINABILITY

3.1 Linkages with CSP, Assessment of Country Readiness and Underlying Analytical

Elements

3.1.1. Linkages with the CSP: PADESFI-III is fully consistent with the government’s 2012-

2016 Programme, which aims to further deepen economic and sector reforms to enhance

competitiveness and engender strong and sustainable, solidarity-based and employment-

generating growth. Furthermore, by helping to improve the business environment, PADESFI-

III is in line with some of Morocco’s sector strategies, in particular the new industrial strategy

and the business climate improvement action plan, the latter of which focuses on improving

access to financing for SME/VSE, among others.

3.1.2. Additionally, PADESFI-III is consistent with the guidelines of the 2012-2016 Country

Strategy and those of the Bank’s governance strategy. By supporting government’s efforts to

improve financial sector governance and financial inclusion of the population and businesses,

in particular SMEs/VSEs, the programme ties in with the first pillar of the CSP aimed at

strengthening governance and social inclusion. It is also in line with the Governance Strategic

Framework and Action Plan (GAP II), which focuses on improving the business environment.

It should be noted that PADESFI-III is listed in the CSP 2012-2016 under projects planned for

2014. Furthermore, the programme is consistent with the guidelines of the Bank’s Ten-Year

Strategy (2013-2022), particularly those relating to private sector development and financial

sector governance strengthening. The programme also aligns with the guidelines of the new

financial sector development strategy currently under preparation, which builds on financial

inclusion and the development of capital markets with the strengthening of governance as a

cross-cutting thrust. Lastly, by including specific products to promote women’s

entrepreneurship and the financial inclusion of youths, especially students, PADESFI-III

addresses the priorities of the Bank’s Gender Strategy (support for women’s economic

empowerment).

3.1.3. Assessment of country readiness and compliance with the Bank’s safeguard policy:

Morocco fulfils the pre-conditions both generally and technically to benefit from the budget

support instrument. In general, the country enjoys political and economic stability and the

government’s commitment to carry out reforms has been consistently demonstrated. In

economic terms, Morocco’s performance has been sound in recent years, reflecting efforts to

stabilize the macroeconomic framework and the implementation of reforms focused on

strengthening competitiveness, diversifying the productive base of the economy, social

inclusion and regional development. Moreover, in the Bank’s internal rating scale, Morocco is

rated in the "Very Low Risk" category with a stable outlook.

6

Box 1 - PBO General and Technical Conditions

Criteria Remarks on Current Situation

Government’s

determination to

fight poverty

The government’s programme for the period 2012-2016, approved by Parliament in January

2012, aims to further deepen economic and sector reforms in order to strengthen

competitiveness and engender strong and sustainable, inclusive and employment-generating

growth. To this end, the programme builds on: (i) governance improvement, (ii) the fight

against speculation, monopolies and rent-seeking; (iii) the enhancement of administrative

effectiveness (iv) business climate improvement; (v) support for investment and

strengthening of the territorial and regional dimension of development; and (vi) support for

small- and medium-sized enterprises. The implementation of these actions will help to

significantly promote employment and ensure equitable distribution of the fruits of growth.

Macroeconomic

stability

Macroeconomic stability is illustrated by the performance recorded over the past few years

in an environment marked by a prolonged slowdown in the international economy. Despite

the drop in the growth rate from 5% in 2011 to 2.7% in 2012 essentially due to the sharp

decline in the agricultural sector, growth increased on average from 3.8% over the 1999-2005

period to 4.6% over that of 2006-2012, thanks to the deepening and implementation of

coherent macroeconomic and sector policies, and sustained structural reforms. The

government’s willingness to tackle the thorny issue of compensation charges has recently

resulted in measures indexing petroleum products, thanks to which the budget deficit

declined from 7.3% in 2012 to 5.5% in 2013. The success of Morocco’s outing on the

international capital market in 20131 after that recorded in 2012 as well as the renewal in

2013 of the Facility extended by the IMF attest to confidence in the economic and social

reform process, therefore to the Kingdom’s favourable economic and social prospects. The

IMF Article IV consultations and the third review of the PLL point to an overall improvement

in the performance of the Moroccan economy in 2013 compared to 2012 despite the adverse

global and regional economic environment. Fitch Ratings in November 2013 confirmed the

"Investment grade" rating assigned to Morocco with a stable outlook. S&P recently raised its

rating to "Investment grade". The ratings also reflect the progress made by the country both

economically and politically.

Satisfactory

evaluation of

fiduciary risk

Results of the PEFA, CFAA and CPAR assessments and the public expenditure review were

satisfactory. On the fiduciary level, the reliability of financial management is characterized

by a low level of risk, as confirmed by the Bank’s fiduciary assessment. The Public

Expenditure and Financial Accountability (PEFA 2009) report indicates that significant

improvements have been made in Morocco in the area of internal control by governments

and public agencies. Analytical review of the public procurement system (CPAR 2008),

which is an update of the 2005 report, concluded that the overall public procurement risk is

low. The exercise concluded that despite their simultaneity, the reforms within the PARAP

framework in the area of: (i) results-based budgeting; (ii) Medium-Term Expenditure

Framework (MTEF); (iii) fiscal devolution; (iv) expenditure control; and (v) strengthening

of the public procurement system, etc., were conducted at a steady pace and have increased

the efficiency and reliability of the country’s budget and accounting system. To overcome

weaknesses in public procurement, a new procurement code largely addressing such

weaknesses was adopted in 2013; this reform featured in PARGEF I approved by the Bank

in 2012. The effectiveness on 1 January 2014 of the new decree 2-12-349 of 30 March 2013

on public procurement introduced major innovations, including the simplification and

clarification of procedures, and improvement of complaints and redress mechanisms. Based

on these improvements, Morocco is the first country to sign an agreement with the Bank for

use of the country public procurement system in Bank operations.

Political stability

The Moroccan system is a constitutional monarchy and the institutions of the Kingdom are

strong and stable. Political changes take place through free and fair elections, and civil society

is very active. The recent constitutional revision and peaceful and successful political

transition following elections confirm the Kingdom’s stability.

Harmonisation

Support from multilateral and bilateral donors to the implementation of the government

programme has been constant. Furthermore, partnership between donors operating in

Morocco remains strong and this strength is illustrated in the area of economic and financial

governance through several joint operations between AfDB, the World Bank and the

European Commission (PARL, PASFI, PADESFI).

1 22 May 2013 Issue: (i) USD 500 million (4.25% coupon, 10-year maturity, issue price 100.263%); (ii) USD 250 million (5.50% coupon,

30-year maturity, issue price 99.032%).

7

3.1.4. Analytical work: PADESFI-III’s design was informed by the results of analytical

work conducted recently both at the Bank and in the country itself and other agencies and

external partners (Technical Annex 13). It is worth noting the work on financial inclusion in

Africa as well as Morocco’s growth diagnosis conducted by the Bank, the study on the national

guarantee system undertaken by the government and the report on the Financial Sector

Assessment Programme by the IMF and the World Bank in 20082, to mention but a few.

Specifically, the growth diagnosis conducted by the Bank highlights the need to revitalize the

capital market.

3.2 Donor Collaboration and Coordination

In general, all economic and financial governance programmes (PARL, PARGEF,

PADESFI) have been conducted with other co-financiers, including the World Bank and the

European Union, in accordance with the guidelines of the Paris Declaration on Aid Effectiveness,

in particular by supporting similar reforms on the basis of a joint matrix of measures. Under

PADESFI-III, collaboration with the World Bank, co-financier in the previous phases, is still

required even if, for reasons related to the respective schedules of the two institutions and the

slippage owing to the difference in their fiscal years, the WB is not involved in this operation.

Thus, the World Bank approved the first phase of the programme to support the development of

the capital market and SME financing to the tune of USD 300 million in March 2014. This

programme aims essentially to deepen capital markets and improve SME financing while

strengthening financial sector governance. Parallel financing from the World Bank as well as the

programme objectives it supports attests to full synergy between the two programmes financed by

the World Bank and AfDB. In addition, the Moroccan authorities, through the Treasury and

External Finance Directorate, ensure harmonization of various donor activities.

3.3 Outcomes and Lessons from Similar Operations

The Bank has financed several budget support programmes in Morocco. The

completion reports prepared for these programmes point to the country’s good performance in

implementing such operations and strong ownership by the authorities of the measures agreed

upon therein. The main difficulty identified relates to the duration of the process of approving legal

instruments, due mainly to the political will to conduct reforms in a participatory manner with all

stakeholders. PADESFI-III’s design gave particular consideration to this lesson, especially in

terms of reforms identification and sequencing. This approach ensures their effective

implementation at the earliest possible time. Similarly, to improve financial inclusion, previous

programmes have contributed to the development of new products whose mechanisms need to be

understood by the population whereas the latter, in their vast majority, has a weak financial culture.

This underscores the importance of the financial education component included in PADESFI-III.

3.4 Linkages with Other Bank Operations

By strengthening the financial sector in its economic financing role, PADESFI-III is a

medium to support the activities of other operations that the Bank is implementing in Morocco. In

addition, the proposed programme, which aims to strengthen governance and deepen the financial

sector, is a suitable framework for creating an enabling environment for business climate

improvement. As such, its impact will consolidate the public administration’s governance

achievements (PARL and PARGEF). Furthermore, by helping to improve the financial inclusion

of the population (especially the poor, youths and women) and SMEs/VSEs, PADESFI-III will

complement and enhance the impact of the Bank's other operations in the areas of social inclusion

(case in particular of ABB, whose counters are used for PARCOUM’s RAMED product), the fight

against poverty and risk coverage (case of agricultural insurance of the Green Morocco Plan

Support Programme, a key instrument for promoting green growth in Morocco). Similarly, the

four institutional support operations mentioned in the paragraph below will facilitate the attainment

of PADESFI-III’s objectives. Lastly, regarding the capital markets component, the programme is

2 The detailed list of such analytical work appears in the technical annex.

8

fully consistent with the AFMI (Africa Financial Markets Initiative) project currently being

prepared, the Casablanca Stock Exchange being one of the venues selected for the preparation of

the African Financial Markets Index.

3.5 Bank’s Comparative Advantages

The experience garnered by the Bank in the area of support to financial sector reforms in

Morocco since PASFI (1997-2002) and the new generation of reforms initiated in 2009 as part of

PADESFI, has helped to establish strong partnership relations with the Moroccan authorities.

Moreover, the two phases of PADESFI (PADESFI I and II) successfully implemented in 2009 and

2011 enjoyed significant leverage through four institutional support operations financed by MIC-

TAF grants, intended respectively to: (i) enhance the quality of capital markets monitoring; (ii)

improve the information and risk management framework of the national guarantee system; (iii)

provide better visibility to the regulatory and legislative framework for the sector through

preparation of the Moroccan Monetary and Financial Code; and (iv) enhance the effectiveness of

the Treasury debt institutional management framework. These actions conducted in the context of

high-quality dialogue with the government propelled the Bank to the rank of lead donor in

Morocco’s financial sector. In terms of its value added within the PADESFI-III framework, the

Bank plans to support the authorities in: (i) building the capacity of microcredit associations; (ii)

improving financial culture; (iii) building capacity in regulating insurance and pensions; (iv) the

joint listing of shares on the Casablanca Stock Exchange and WAEMU Regional Stock Exchange

(BRVM); and (v) improving women's entrepreneurship through the proposed establishment of a

Women’s Investment Fund. These institutional support operations are related to PADESFI-III

reforms and should be financed from MIC-TAF resources.

3.6 Application of Best Practice Principles on Conditionality

Best practice principles on conditionality, especially those related to ownership, the

coordinated accountability framework, adaptation of this framework to the context, choice of

disbursement conditions for results and predictability of financial support have been taken into

account in the design and preparation of PADESFI-III.

IV. PROPOSED PROGRAMME

4.1 Programme Goal and Objectives

The goal of PADESFI-III is to help create the conditions for sustained economic

and inclusive growth in Morocco. Its specific objective is to strengthen financial sector

development by deepening and consolidating the achievements of PADESFI-I and

PADESFI-II. Its operational objectives are to: (i) improve the population’s access to financial

services; (ii) facilitate access to financing for businesses; (iii) strengthen financial sector

governance; and (iv) deepen the capital market.

4.2 Programme Components, Objectives and Expected Outcomes

COMPONENT 1: IMPROVE THE POPULATION’S ACCESS TO FINANCIAL

SERVICES

4.2.1. Reforms under this component aim to further target the population on the

sidelines of the financial system. In this regard, they consist mainly in: (i) fostering access to

financial services for persons on the fringes of the traditional banking system especially youths,

women and rural dwellers, by promoting financial education and developing new products

adapted to them, among others; and (ii) strengthening the microfinance sector, particularly by

improving the institutional environment.

9

Sub-component 1.a: Improve the Population’s Access to Financial Services

4.2.2. PADESFI I & II achievements: reforms undertaken since 2009 under the first two

phases of the programme were devoted to: (i) the establishment of the Postal Bank - Al Barid

Bank (ABB) - one of whose key missions is to facilitate household access to financial services,

thanks to which the use of banking services has risen by nearly 10 points; and (ii) the

introduction of financial products that promote access by the poor to social housing. At end-

December 2013, the number of accounts opened by customers in ABB stood at 5 926 371 and

its network had 1 827 branches. In addition, in 2013, the housing loans stock amounted to MAD

529 million for 1 662 households - barely two years after it was launched. Furthermore, the

involvement of the Caisse Centrale de Garantie [Central Guarantee Fund] (CCG) in financing

housing for populations covered by the "Cities without Slums" programmes has helped to

increase the number of beneficiaries to 97 600 up from 63 000 two years earlier, with a credit

volume of MAD 16 386 million.

4.2.3. Challenges: The inclusion process is progressing satisfactorily. However, it could be

further enhanced by promoting greater access to financial services for under-served populations

such as youths, women and rural dwellers. To this end, a range of products more tailored to the

needs of this category of clients should be put in place, particularly in terms of payment and

financially-accessible savings. This offer should also be supported by a financial education

programme designed to enable users of financial services to understand the requirements for,

and pricing of, various financial products available to them, as well as the associated rights and

risks.

4.2.4. Programme measures: measures retained under PADESFI-III concern the: (i)

revision of the format of the "Enseignement Plus" product, marketed by banks with the

guarantee of CCG, to better meet the needs of students of private higher education institutions

and schools; (ii) extension of the "MINHATY" credit card launched by ABB to all scholarship

students; (iii) launch of the Mobile Banking service by ABB (condition precedent to Board

presentation); (iv) measures to ensure the financial viability of the "Damane Assakane" Fund

and better risk hedging; (v) introduction of the "Employee Savings Plan" for mobilizing long-

term savings; and (vi) adoption of a Financial Education Action Plan (condition precedent to

Board presentation).

4.2.5. Expected outcomes: it is expected that the implementation of PADESFI-III measures

will translate into: (i) a 50% increase in the number of students receiving Enseignement Plus

credit in 2015 compared to 2012; (ii) access by all scholarship students to the MINHATY credit

card by end-2014; (iii) an increase in the number of housing loans with "Damane Assakane"

guarantee from 97 600 in 2012 to 150 000 at end-2015; (iv) the number of savers joining the

new “Employee Savings Plan” reaches 1 000 by end-2015; (v) subscription to the Mobile

Banking service by 150 000 clients by end-2015; and (vi) the number of beneficiaries of

financial education programmes reaches 10 000 by end-2015.

Sub-component 1b: Strengthening the Microcredit Sector

4.2.6. PADESFI I & II achievements: the set priority of the first two phases of the

programme was to support the monetary authorities to rehabilitate the microfinance sector. The

restructuring measures taken translated into the pooling of Microcredit Associations (CMA)

and the establishment of prudential standards to strengthen governance, internal control and

rules of classification, as well as provisioning of non-performing loans. The Credit Bureau was

also established and AMCs put under obligation to register with the Bureau. Consequently, the

portfolio at risk at 30 days fell from 9% in 2009 to 6.74% at end-December 2013. The number

of beneficiaries by end-December 2013, stood at 821 246 including 451 686 women (55% of

the beneficiaries). Total credit stock at the same date stood at MAD 4 877 million. The primary

beneficiaries are micro-enterprises, which received 93% of this stock, with one-third thereof

distributed in rural areas.

10

4.2.7. Challenges: on-going actions to reorganize the sector and adopt the new national

strategy place the microfinance sector on a path of recovery, in a manner that would give new

impetus to AMC activities and sustain income generation. To support these developments, there

is an urgent need for a comprehensive reflection on the strategic direction of the sector. This

underscores the need to conduct a study to better inform decision-making on the institutional

development of the sector.

4.2.8. Programme measures: the measure included in PADESFI-III focuses on the launch

of a study to improve the microfinance institutional environment. The study will lay down

future broad strategic directions that should energize the microcredit sector and put it on a sound

and sustainable footing.

4.2.9. Expected outcomes: improvement of the microfinance institutional environment.

COMPONENT 2: IMPROVE ACCESS TO FINANCING FOR VSEs/SMEs

4.2.10. To improve access to financing, the reforms planned under PADESFI-III aim to:

(i) further improve access to credit for VSEs/SMEs; and (ii) develop the guarantee activity

at the regional level to strengthen ties between the CCG and businesses located outside

major urban industrial centres, especially Casablanca. The reforms undertaken under the

first two phases of the programme particularly helped to revitalize the national guarantee system

to facilitate access to finance for VSMEs and to promote the mobilization of savings by

boosting guarantee activity, strengthening the regulatory framework and establishing a public-

private investment fund. The priority assigned to the third phase of the programme consists in

improving the financing of VSMEs, through the promotion of women’s entrepreneurship,

support to export-oriented companies, diversification of the financing products offered and

transfer of business.

Sub-component 2.a: Improve VSME Access to Credit

4.2.11. PADESFI I & II achievements: in terms of outcome of the action initiated to promote

VSMEs during the first two phases of the programme, the volume of CCG commitments in

favour of VSME exceeded MAD 2.5 billion for 2 050 beneficiaries.

4.2.12. Challenges: notwithstanding the satisfactory results noted, some target groups such as

women entrepreneurs deserve particular attention, as do the needs relating to certain specific

operations: (i) promotion of women’s entrepreneurship, including the provision of financial

products suited to that clientele and under favourable terms; (ii) support to export-oriented

enterprises, notably SMEs seeking to position themselves on foreign markets; and (iii)

broadening the scope of CCG intervention to include new activities corresponding to the

clients’ demands, such as lease financing, and facilitating the transfer of business.

4.2.13. Programme measures: measures under the third phase comprise: (i) the launching

of a guarantee product dedicated to women’s entrepreneurship, known as ILAYKI (condition

precedent to Board presentation); (ii) the launching of three new guarantee products that target

export-oriented enterprises (“Mezzanine Export” for investment financing, “Damane Export”

for operations financing, and the “Export Market Guarantee” to enhance access to international

markets); (iii) the inclusion of lease financing in the range of special investment guarantee

products (Damane Express, Damane Crea and Damane Dev); and (iv) the establishment of a

product dedicated to the transfer of business (“Damane Transmission”).

4.2.14. Expected outcomes: The results expected for 2015 comprise: (i) an increase in the

number of start-ups promoted by women (using ILAYKI) from 75 in 2013 to 175 in 2015; (ii)

total amount of loans co-financed under the “Mezzanine Export” facility attaining MAD 110

million, with MAD 400 million for the two other export-dedicated products; and (iii)

achievement of a cumulative volume of MAD 55 million in loans to finance the transfer of

business ("Damane Transmission").

11

Sub-component 2b: Develop Guarantee Activity

4.2.15. PADESFI I & II achievements: actions initiated during the first two phases of the

program helped to boost and consolidate the CCG’s role as exclusive player in the

implementation of the national guarantee system. The Bank supported CGG throughout the

implementation of its strategic plan for 2009/2012. Therefore, CCG was able to expand its

activities into new areas and reach new client segments, diversify the financial products it had

on offer and adapt its services to clients’ needs, while modernizing and reorganizing its

management methods. As a result, at end-December 2013, the volume of bank loans guaranteed

by CCG had doubled in comparison to 2010, reaching MAD 10.2 billion.

4.2.16. Challenges: to accelerate and strengthen its drive, CCG must build on the

achievements of the first two PADESFI phases and put in place a new, more ambitious strategic

plan for the 2013/2016 period. The two major thrusts of the development plan relate to the

provision of products and the modernization of the institution. For the first aspect, the challenge

consists in consolidating and expanding the supply of guarantees dedicated to VSMEs,

supporting export enterprises and strengthening the supply of products intended for youths and

women, especially in rural areas. The second aspect concerns modernizing the institution's

management and its organization, as well as strengthening its risk management policy. The

adoption of a close customer relations policy (network strengthening) and improved

communication will also enhance CCG’s visibility.

4.2.17. Programme measures: measures proposed under this programme highlight the

strategic and regional dimensions of guarantee activities, with: (i) the adoption of the national

guarantee system strategy for the 2013-2016 period; and (ii) the opening of new CCG business

centres in the regions.

4.2.18 Expected outcomes: adoption and implementation of the new development plan for

the 2013/2016 period and CCG opening at least two regional centres before end-2015.

COMPONENT 3: STRENGTHEN FINANCIAL SECTOR GOVERNANCE AND

STABILITY

4.2.19. To strengthen the mechanisms for financial sector governance and stability,

PADESFI III reforms will aim at: (i) reinforcing the financial market supervision systems; and

(ii) increasing banking sector stability. With particular reference to the financial markets, since

the previous phases of the programme laid the foundation for new regulatory and control

frameworks that meet international standards through the adoption of new laws by the

government, this third phase will continue the institutional process to adopt these draft laws.

Sub-Component 3.a: Strengthen Capital Market Supervision and Control

4.2.20. PADESFI I and II achievements: the bill concerning the establishment of the

Moroccan Capital Market Authority (Autorité Marocaine du Marché des Capitaux -AMMC)

was drafted and submitted to the Cabinet. This instrument establishes the institution's

independence from the executive authorities and empowers it to conduct its mission, allowing

for convergence towards optimal international standards. The legislation concerning the

AMMC has been transmitted to Parliament.

4.2.21. Challenges: the actual challenge lies in continuing the institutional process for the

establishment of AMMC and the adoption of the new law by Parliament. Given the

government’s ambitious plans to make Casablanca an international hub, the establishment of

this regulating body is expected to strengthen its independence vis-à-vis the Executive and

politicians in general, and send out a strong signal to fully secure investor confidence.

12

4.2.22. Programme measures: the key measures include: (i) appointment of members of the

AMMC Board of Directors; and (ii) extension of AMMC’s prerogatives in respect of certain

functions carried out by agencies that it oversees.

4.2.23. Expected outcomes: the text(s) regarding the composition of the AMMC Board of

Directors and the decree on the list of functions requiring authorization should be signed before

end-2015.

Sub-component 3.b: Increase Banking Sector Stability

4.2.24. PADESFI I & II achievements: aware of the issues raised and challenges posed with

regard to financial stability, the government is endeavouring to put in place an appropriate

institutional framework. In this regard, the institutional process to review BAM statutes and the

banking law was initiated under PADESFI-II.

4.2.25. Challenges: one of the main challenges concerns pursuing the institutional process of

examining the bills on BAM statutes and the banking law up to their adoption by Parliament.

Under the financial stability component, macro-prudential oversight should be strengthened

through the establishment of a systemic risk coordination and monitoring committee. Similarly,

the launching of the second credit bureau should improve information on credit applicants'

solvency, lower costs and raise the standard of services provided by these establishments by

introducing additional services with high value-added.

4.2.26. Programme measures: priorities identified under PADESFI-III include two actions,

namely: (i) adoption by the Cabinet of the new banking bill before end-2014, to enhance the

solidity and stability of the banking sector by establishing a framework for macro-prudential

monitoring and management of systemic crises, strengthening prudential regulations and

supervision of financial conglomerates (condition precedent to Board presentation); and (ii)

launching of a second “credit bureau” so as to extend the services provided by these

establishments to include rating, while encouraging competition to reduce costs and improve

service quality.

4.2.27. Expected outcomes: the main outcome expected from this sub-component is the

lowering of the rate of outstanding debts held by banks from 6.6% at end-July 2014 to 5.5% at

end-2015.

COMPONENT 4: DEEPEN CAPITAL MARKETS

4.2.28. To deepen the capital markets, PADESFI-III reforms seek to: (i) diversify the

financial instruments; and (ii) revitalize the capital markets. This phase of the programme

will mainly pursue the institutional process of examining new texts that govern specific

financial operations and instruments.

Sub-component 4-a: Diversify Financial Instruments

4.2.29. PADESFI I & II achievements: the key reforms conducted under PADESFI I and II

to diversify financial instruments and strengthen financial market efficiency involved initiation

or continuation of the institutional process to adopt certain texts on financial operations or

instruments.

4.2.30. Challenges: the introduction of somewhat complex innovative products requires the

application of stricter regulations and provisions, notably in terms of operations control and

sanctioning of offenders, to ensure market security and integrity for these instruments.

13

4.2.31. Programme measures: the government envisages the following measures: (i)

adoption by the Cabinet of the bill on covered bonds before end-2015; (ii) preparation and

submission of the draft general regulations of the financial instruments futures market clearing

house (Stock market, Maroclear, AMMC and BAM) to stakeholders before 2014; and (iii)

adoption of the bill governing the property investment mutual funds (organismes de placement

collectif en immobilier -OPCI) by the Cabinet before end-2015.

4.2.32. Expected outcomes: the inception of OPCIs will enable investors to access new asset

categories in a more flexible manner and at less cost than in direct investment. The text on

covered bonds will broaden the scope of financial innovation by enabling issuers to obtain

financing on more favourable terms than the classic corporate funding. Investors could further

refine their capital allocation.

Sub-component 4-b: Revitalize Financial Markets

4.2.33. PADESFI I & II achievements: the key reforms conducted under PADESFI I and II

to boost the capital markets mainly consisted in launching and pursuing the institutional process

for adoption of certain texts.

4.2.34. Challenges: the reforms envisaged are very ambitious. The real challenge for the

Moroccan authorities is to step up the pace of reforms.

4.2.35. Programme measures: The measures under this sub-component consist in: (i) signing

the market agreement for the listing of foreign securities at the Casablanca Stock Exchange, (ii)

Cabinet’s adoption of the draft amendment to the law governing the stock market; (iii) Cabinet’s

adoption of the decree enforcing the law on Initial Public Offering; (iv) Cabinet’s adoption of

the decree enforcing Law 33-06 concerning debt securitisation; (v) signing by the Minister of

Economy and Finance of the decree approving the model securities lending agreement; and (vi)

Cabinet’s adoption of the bill modifying Law 41.05 governing venture capital investment

agencies (condition precedent to Board presentation).

4.2.36. Expected outcomes: the targeted measures should lead to: (i) at the least, the

stabilization of market capitalization in 2015 at its 2013 level of MAD 450 billion; and (ii) an

increase in the volume of venture capital investment from MAD 307 Million in 2012 to MAD

1 500 Million in 2015, i.e. an increase of 63%.

4.2.37. Status of implementation of programme reforms: following dialogue with the

government, it undertook to put in place a set of measures prior to presentation of the

programme to the Bank Group Board of Directors. These measures have been selected based

on their status and their structuring potential. Under the circumstances, it should be possible to

carry them out before presentation of the programme to the Board. These measures are shown

in Box 2 below:

Box 2: Measures Precedent to PADESFI-III Presentation to the Board of Directors

Measure 1: Launching of a mobile banking product by Al Barid Bank (ABB)

Measure 2. Adoption of a financial education action plan

Measure 3: Introduction of the "ILAYKI" guarantee product designed for women entrepreneurs

Measure 4: Cabinet’s adoption of the draft banking law

Measure 5: Cabinet’s adoption of the bill modifying Law 41-05 on venture capital agencies.

4.3 Financing Requirements and Arrangements

The estimated financing needs of the Treasury of Morocco for the 2014 period

represent approximately MAD 46.5 billion (MAD -57.1, excluding grants), i.e. EUR 4.14

billion (see table below). These needs will be covered by Morocco's own resources and external

funding. The external resource needs are estimated at MAD 15.4 billion, equivalent to EUR

1.37 billion. These external financing needs are expected to be covered by drawdowns on

external loans granted for investment projects and reform programmes. The proposed Bank

14

loan of EUR 100 million represents about 8.24% of the external financing needs for the 2014

period.

Table 1

Morocco: Budgetary Balance and Financing Needs (in MAD billion)

Chapters 2014

Total revenue (excluding Hassan II Fund), of which: 258.4

Tax Revenue 211.3

Non-tax revenue (grant 10.6 ) 47.1

Net expenditure and loans (excluding Hassan II Fund), of which 315.5

Current expenditure (including 15.4 of transfers to agencies and partly used for

capital expenditure)

262.2

Capital expenditure 53.5

Overall balance (commitment basis, excluding Hassan II Fund) -57.1

Arrears variation 0

Other revenue 0

Funding Requirements -46.5

Domestic financing 31.1

External financing 15.4

4.4 Programme Beneficiaries

4.4.1. The programme’s end beneficiaries are the Moroccan people as a whole. Their

living conditions will improve when the conditions for sustainable and inclusive economic

growth would have been fulfilled. Furthermore, especially from the standpoint of youths and

women, the programme will also have key intermediate beneficiaries, namely: (i) the private sector,

especially SMEs/VSEs which, thanks to reforms to be implemented, will have easier access to

financial services to foster their growth; and (ii) households as economic agents, particularly youths

and women, whose bank use rate will further improve as a result of greater coverage of the national

territory by the banking networks, in addition to easier access to loans. Thus, such improved

financial inclusion, particularly for SMEs, VSEs and households, not just generally but also in terms

of geographic coverage, will help to generate income and create jobs for these population segments

and categories, thereby encouraging more inclusive growth.

4.4.2. This population, especially the women, will in addition benefit from improved access

to microcredit3. The private and parapublic sectors will also benefit from the programme

through facilitated access to financing, owing to the availability of long-term resources on the

financial market.

4.5.. Impact on Gender

One of PADESFI-III’s objectives is to promote women's entrepreneurship, notably

through the special guarantee product known as ILAYKI. Thanks to this specific product, it is

expected that 175 women promoters will benefit from financing by the end of the programme.

In addition, the strengthening of the microcredit sector through improved governance of the

associations concerned and the formulation of a strategic vision for development of this sector,

will enable microcredit beneficiaries, mostly women, to finance small productive projects in

the agriculture and handicraft sectors, most often in the rural areas.

4.6 Impact on the Environment

The programme involves budgetary support exclusively in the financial sector. It

will have no environmental impact and is thus rated in Category III.

3 This sector has enabled the creation of over 2 000 direct permanent jobs and tens of thousands of indirect jobs since its establishment.

15

4.7 Impact on the Business Environment

By focusing on the improvement of SME/VSE access to financing, the modernization

of the guarantee system and enhanced supervision of the banking and insurance sectors and the

financial market, PADESFI-III will aid the development of an environment that is conducive

to private sector activity. Facilitating the access of SMEs/VSEs to financing is all the more

important as their priorities include sector strategies such as the industrial strategy and the

business climate improvement action plan. Moreover, the development of the capital market

and the promotion of the Casablanca Finance City project will help to attract new investments

and strengthen the activities of institutions with regional outreach.

V. IMPLEMENTATION, MONITORING AND EVALUATION

5.1 Implementation Arrangements

5.1.1. Institution in charge: the Ministry of Economy and Finance (Treasury and

External Finances Directorate) will steer PADESFI-III’s implementation. This Ministry

satisfactorily implemented the two preceding phases of PADESFI as well as the past Financial

Sector Support Programme. The institution in charge will mobilize other stakeholders to

implement the reforms. In a nutshell, a participatory and gradual approach has been selected

both for programme design and implementation, i.e. each given reform project will involve: (i)

extensive consultations with the stakeholders (BAM, banks, microcredit associations, DAPS,

insurance companies, CDVM, financial market actors, property development companies,

professional associations, etc.) to define the key thrusts of the reform project; (ii) preparation

and submission of relevant documents to project stakeholders (cf. Matrix of Measures in Annex

2); (iii) posting of the project on the government website for consultation by the public; and (iv)

an adoption process.

5.1.2. Financial management: owing to the nature of the operation, the resources will be

used in keeping with national public finance regulations. The Ministry of Economy and

Finance will be responsible for the administrative, financial and accounting management of

said resources. It will ensure that all public institutions and corporations (EPP) and the financial

sector bodies involved in this Bank operation are allocated their projected budget lines or other

appropriations (Special Treasury Accounts) as entered in the 2014 Finance Act. The entire

public expenditure network will be utilized. The risk assessment conducted by the Bank’s

fiduciary services is consistent with both the March 2011 Guidelines on the “Fiduciary Risk

Management Framework relating to the AfDB’s Reform-Support Operations” and the March

2012 Policy Document. It allows the Bank to consider implementation of PADESFI III. Indeed,

considering the most recent analysis on public finance management, procurement and

corruption, the level of the initial country fiduciary risk is moderate. This level of risk could be

further lowered to a low residual level to enhance the effectiveness of this budget support

operation, bearing in mind the reforms implemented over the past years and those in the

pipeline, which are geared towards the promulgation of Organic Law n°130-13 on the Finance

Act. The sector risk, which is assessed based on the supervision and control exercised by the

Public Corporations and Privatization Directorate (DEPP) on public institutions and

corporations (EPP), remains low thanks to the effective application of the different types of

control, including graduated control. Furthermore, in view of the current operation, the 2014

Finance Act clearly highlights, in its overall budget draft, Article 8500 paragraphs 21 and 22

on revenue, and Article 0000 paragraphs 10, 60 and 80 on expenditure.

5.1.3. Disbursements: considering the continuous dialogue and the progress attained in

implementing the agreed reforms as captured in the conditions precedent, the EUR 100 million

loan will be disbursed in a single tranche, subject to the Borrower’s fulfilment of the

general and specific conditions related thereto and stipulated in paragraph 6.2 herebelow.

16

At the Borrower’s request, the Bank will disburse the agreed amount, in foreign exchange, into

a Central Bank of Morocco (Bank Al Maghrib) account, which will subsequently credit the

Single Treasury Account (CUT) with the local currency equivalent of the amount received. The

Bank’s disbursement will be made under the 2014 fiscal year. Within 30 days following the

disbursement, MEF will submit to the donor a letter confirming the transfer and specifying that

the total amount of the loan has been received. This letter will be accompanied by notices on

the operations carried out by Bank Al Maghrib. The flow of funds (including currency exchange

and the duration of the transfer) will conform to the standard procedures governing public

finance.

5.1.4. Procurement of goods and services: given that this is a budget support programme,

its implementation does not raise any direct issues relating to the procurement of goods and

services.

5.1.5. Audits: internal audit: the internal auditing of PADESFI-III will be based on the

national ex-post internal auditing carried out by the Auditor General’s Office (Inspection

Générale des Finances – IGF), pursuant to its mandate. The IGF will conduct a special audit

of AfDB financial flows and support; it will also audit performance in terms of fulfilment of

conditions precedent PADESFI-III disbursement. The IGF’s report on the special audit of the

financial flows and performance will be submitted to the Bank within six months of the end of

the 2014 fiscal year. External audit: considering that loan resources are fungible with the State

budget, the external audit of PADESFI-III resource utilization will be covered during

consideration of the 2014 Budget Reconciliation Act by the Audit Bench of the Moroccan Court

of Public Finance Accounts. The report of the Court of Public Finance Accounts (declaration

of consistency) will be published within the timeframe stipulated in the organic law.

5.2 Monitoring and Evaluation Arrangements

The agreed macro-economic monitoring and matrix of measures framework will be

the PADESFI-III common monitoring/evaluation frameworks (Annex 2). MEF will be in

charge of data collection as well as monitoring/evaluation coordination, and will make the

information available to the Bank. In this regard, MEF will produce quarterly reports with a

view to providing more comprehensive information on the status of programme

implementation. Supervision missions will be conducted during the programme

implementation period to evaluate the implementation status. At the end of the programme, a

completion report will be prepared jointly with the government.

VI. LEGAL INSTRUMENTS AND LEGAL AUTHORITY

6.1 Legal Instruments

The Loan Agreement is the legal instrument that will be used for this programme. The

two parties to this agreement are the African Development Bank and the Government of the

Kingdom of Morocco.

6.2 Conditions Precedent to Bank Group Intervention

6.2.1. Conditions Precedent to Presentation of the Programme to the Board

During dialogue with the government, it was agreed that the government will fulfil the

conditions precedent prior to presentation of the programme to the Bank Board of Directors.

These conditions precedent are presented in Box 2 under paragraph 4.2.37.

17

6.2.2. Conditions Precedent to Loan Effectiveness

The effectiveness of the loan shall be subject to fulfilment of the conditions stipulated

in Section 12.1 of the General Conditions Applicable to Loan Agreements.

6.2.3. Conditions Precedent to Disbursement

The disbursement of the loan in a single tranche of EUR 100 million shall be subject to

fulfilment of the conditions precedent below:

Forward to the Bank evidence of the opening of a Treasury Account in Bank-al-

Maghrib (Central Bank of Morocco) acceptable to the Bank, which will receive the

loan resources (§ 5.1.3).

6.3 Compliance with Bank Group Policies

The core Bank Group directives and other guidelines applicable under this programme

are as follows: (i) Directives on Programme-Based Operations (2012); and (iii) Directives on

Financial Product Pricing Flexibility for MICs (2009). No waiver for any of these directives is

requested under this programme.

VII. RISK MANAGEMENT

7.1. The main risks to the attainment of the programme results could be linked to: (i)

an adverse international economic context; and (ii) a wavering of government’s determination

to implement the reforms.

7.2. To mitigate the risk stemming from an adverse international economic context, two

important structures have been set up: (i) the Budget Watch Committee, tasked with ensuring

efficient budget implementation; and (ii) the Committee to coordinate the supervisory bodies

of the financial sector, charged with preventing the overall systemic risks of the financial sector.

7.3. With respect to the risk of wavering of government’s determination to implement

the reforms, high-level authorities have reaffirmed their commitment to implement financial

sector structural reforms. This strong commitment and ownership by the government were

largely demonstrated during past programmes.

VIII. RECOMMENDATION

It is recommended that the Board of Directors approve an African Development Bank

loan not exceeding EUR 100 million in favour of the Government of the Kingdom of Morocco

for financing the Financial Sector Development Support Programme – Phase III (PADESFI-

III).

ANNEX I

Page 1/4

LETTER OF DEVELOPMENT POLICY

v

To

The President of the

African Development Bank

Subject: Letter of Development Policy on the Financial Sector Development Support Project

Mr President,

The Kingdom of Morocco has during the past two decades resolutely embarked on a

financial sector modernization process to support and sustain economic and social

development. The outcomes have been mainly the improvement of financial inclusion and

access to finance for Small- and Medium-Sized Enterprises (SMEs), reinforcement of the

capital market’s role in financing the economy and consolidation of the financial sector

control and supervision framework to ensure its solidity, durability and stability. These

reforms have helped to build a modern financial sector with the main financial instruments

and market institutions, and a strong institutional investor base.

The government will continue efforts to modernize and develop the financial sector and go

further in this process by leveraging achievements. We hope that the African Development

Bank will again support us in this new phase of reforms as was done successfully in the

previous financial sector development programmes.

The new government programme on the modernization of the financial sector has the

following main objectives:

1- Improving the population’s access to financial services for better financial

inclusion;

2- Strengthening financing solutions for small- and medium-sized enterprises,

which are an important source of sustainable socio-economic development

and wealth and employment creation;

3- Developing the supervision and risk monitoring framework to ensure balance

between expanding access to financing and financial stability objectives;

4- Further deepening the capital market by broadening the range of instruments

and investors such that the financial sector can play its full role in savings

mobilization and its optimal allocation to finance investment and the

economy.

KINGDOM OF MOROCCO

MINISTRY OF ECONOMY AND FINANCE

THE MINISTER

المملكة المغربية

الوزير

ANNEX I

Page 2/4

These objectives have been translated into the following four pillars of the proposed

development programme for support by the African Development Bank:

Pillar 1: Improve the Population’s Access to Financial Services

One of the priorities of public policy is to build an inclusive financial system that offers a

full range of financial services to a large population, in particular for individuals. The

measures planned under this framework are mainly of two types:

Improving the population’s access to financing and financial services: this

measure has several sub-components, chief among which are (i) reviewing

the format of the "Enseignement Plus" product to better meet the needs of

students of private higher education institutions and schools; (ii) optimizing

the financial viability and risk management of the "Damane Assakane" Fund;

and (iii) establishing the Employee Savings Plan for mobilizing long-term

savings.

Strengthening the microcredit sector by improving the institutional

microfinance environment.

Pillar 2: Improve Access to Financing for VSEs/SMEs

Although access by enterprises to financing, especially for SMEs, has been significantly

improved with successive financial sector reforms that have helped to diversify financing

sources, strengthen the national guarantee system and improve financial reporting, the

government intends to continue the reform process. As such, it is worthwhile to mention

the development of the "ILAYKI" guarantee product dedicated to women entrepreneurs. In

addition and in line with the government’s strategy, the Board of Directors of the Central

Guarantee Fund (CCG) adopted this institution’s 2013-2016 development plan, which can

be broken down into the following guidelines:

The introduction of new products specifically to support export-oriented

companies consistent with their life cycle needs, namely: (i) the "Mezzanine

Export" product to encourage investment in export promotion, through co-

financing between banks and the Central Guarantee Fund; (ii) the "Damane

Export" product to support the cash flow of export-oriented companies; and

(iii) export markets security to enhance access to international markets;

The consolidation of generic guarantee for VSMEs by integrating leasing and

transfer financing in its offer of products.

Pillar 3: Strengthen the Governance Mechanism and Financial Sector Stability

Strengthening of the financial sector governance mechanism is one of the objectives of the

sector’s modernization process. Achieving this goal requires reinforcing the independence

and powers of intervention of control authorities. Thus, at the level of the capital market,

the law on the Moroccan Capital Market Authority (AMMC) was enacted early 2013. This

law enshrines the independence of the authority responsible for supervising the capital

market and invests it with broad powers, in particular the control of all sections and

stakeholders of the capital market. These powers also extend to the empowerment of

persons with certain sensitive functions within organizations under the control of this

authority. The independence of the AMMC is a key element of the capital market reform

ANNEX I

Page 3/4

and the revision of its governance method and composition of its Board of Directors hinges

primarily on the promulgation of the Organic Law on the appointment to senior level

positions, and that includes AMMC and ACAPS among strategic institutions, pursuant to

which Chairpersons are appointed by the Council of Ministers. In this framework, the draft

organic law was adopted by the Cabinet on 5 February 2014.

Pillar 4: Deepen the Financial Markets

Recognizing the financial market’s role in financing the economy and promoting sector

policies geared towards the development of the key strategic economic sectors, the public

authorities have launched a new generation of reforms aimed at diversify financial

instruments in a more efficient and secure environment with modern market infrastructure.

The end objective is to position ourselves as a regional financial hub in the service of

Africa’s development.

This is the basis for the drafting of the bill on covered bonds that will enable operators to

invest in better guaranteed securities and mobilize long-term funds on concessional terms

for operations in favour of housing in particular, but also of the local administrations. This

product affords banks access to alternative resources to refinance their long-term lending

and optimize their asset/liability management, while providing institutional investors

access to sound, long-term placements.

In the same spirit, the draft law governing the real estate mutual investment agencies

(organismes de placement collectif en immobilier -OPCI) aims to mobilize savings,

especially on a long-term basis, to be channelled especially into financing professional real

estate.

The government has further prepared a bill on the OPCI offering solutions for equity

financing and quasi-equity financing operations of enterprises in general, and SMEs in

particular. This draft law is expected to result mainly in: expansion of the scope of

application of the law to cover all capital investment activities, enhanced security of the

system and increased investor protection, improvement of the financial techniques utilized

and promotion of foreign capital investment.

Another relevant reform relates to the bill laying the foundation for a regulated financial

instruments futures market that affords Moroccan enterprises more effective risk coverage.

This draft law provides for the establishment of a clearing mechanism with central

counterparty, to secure the transactions. Draft general regulations setting out the rules of

operation of the clearing house have been prepared and transmitted to the market

institutions and supervisors, for comment.

To improve financial market liquidity, the government has also devoted efforts to the

formulation of a legislative framework for securities lending. To enact this law, the

framework agreement that specifies the obligations of parties involved and sets out the

technical modalities for these operations has been drafted in consultation with the market

actors and approved by decree.

It is our conviction that these new products will stimulate the financial markets and give

new impetus to the financial sector. However, it is indispensable to modernize the

legislative framework pertaining to the stock markets so as to create new markets that

favour the emergence of new channels of growth, for example through the emergence of a

ANNEX I

Page 4/4

new alternative market dedicated to SMEs and compartments for the rating of the shares

issued by mutual investment funds. To that end, a bill to modify the existing stock markets

law has been prepared and is under discussion with the Secretary-General of the

government.

To enable the Casablanca Stock Exchange to serve as a relay channel for the international

financial supply as well as the national and regional demand, the possibility of rating

foreign securities has been introduced. Such rating should allow national and foreign

investors opportunities for investment in companies whose development will advance the

region’s development potential.

This principle of having foreign securities rated by the Stock Exchange is actualized in the

stock market bill. Moreover, and in order to give this project the required visibility and

guarantee the sound implementation of the actions and measures required for its

concretization, a draft market convention consolidating the commitments of all

stakeholders (State, market authorities and enterprises) has been prepared for signature.

Lastly, I wish to inform you that the process of reforms undertaken in our country in 1993

was crowned by the adoption, in 2010, of the text relating to Casablanca Finance City

(CFC), which seeks to create a financial space to position the city of Casablanca as a

regional finance center.

These, Mr. President, are the broad outlines of this new phase of the ongoing process of

financial sector reform and modernization.

I thank you for your invaluable support for the implementation of this ambitious

programme, and I ask you to accept, Mr. President, the assurances of my highest

consideration.

Mr. Donald KABERUKA President of the African Development Bank Angle des trois rues: Avenue du Ghana, Rue Pierre de Coubertin, Rue Hedi Nouira – BP 323 – 1002 Tunis Belvédère - Tunisia –

ANNEX II

Page 1/7

MOROCCO - Financial Sector Development Support Programme III – PADESFI-III

MEASUREMENT MATRIX

(MEASURING PADESFI I & II FOR INFORMATION PURPOSES)

Data Sources: DS; Institutions Responsible: IR

(**) Measures precedent to presentation of PADESFI III to the Board of Directors

Sub-

Component

PADESFI I

(2009-2010)

PADESFI II

(December 2011 -

2012)

PADESFI III

Single Tranche

Targeted Output

Indicators

Targeted Impact

Indicators

Data Sources and

Institutions Responsible

Component 1 - IMPROVING ACCESS TO FINANCIAL SERVICES FOR THE POPULATION

1. A –

IMPROVE THE

POPULATION’S

ACCESS TO

BANKING

SERVICES

Granting of postal

bank status by Bank-

Al-Maghrib

Commencement of

operations by the

Postal Bank

Launch of "mortgage

loan" by Al-Barid Bank

(Postal Bank)

Bank use by scholarship students through the

launching of "MINHATY Card" by Al-Barid

Bank (ABB)

Launch of "MINHATY

Card" by ABB by end-

2014.

The number of

" MINHATY" bank

cards distributed by

ABB will reach

300,000 at end-2014

DS: Letter from the

Ministry of Economy and

Finance forwarding a copy

of the ABB

correspondence attesting

to the launch of the

product

IR: MEF / ABB

Improve access to credit for students to finance

their education by reviewing the configuration "

Enseignement Plus” product

Signing of the rider

amending the State / CCG

Agreement on

management of the

"Enseignement Plus"

Guarantee Fund

The number of

students who

receive the

"Enseignement

Plus" loan increases

by 25% between

2013 and 2015

DS: Letter from the

Ministry of Economy and

Finance forwarding a copy

of the rider amending the

State / CCG agreement on

management of the

"Enseignement Plus"

Guarantee Fund

IR: MEF / CCG

Amendment of the

agreement linking the

State to the "Central

Guarantee Fund"

(Caisse Centrale de

Garantie) and the

“Damane Assakane"

fund establishing a

product specific to the

targeted population

through the “Cities

without Slums”

programme.

Optimize financial viability and risk

management of the "Damane Assakane" Fund.

Signing of the rider

amending the State / CCG

Agreement on "Damane

Assakane" Fund by end-

June 2014.

The number of

mortgage loans

guaranteed by the

"Damane Assakane"

Fund increases from

97,600 in 2012 to

134,000 in 2014

DS: Letter from the

Ministry of Economy and

Finance forwarding a copy

of the rider amending the

State / CCG Agreement on

the management of the

"Damane Assakane"

Guarantee Fund.

IR: MEF/CCG

ANNEX II

Page 2/7

Sub-

Component

PADESFI I

(2009-2010)

PADESFI II

(December 2011 -

2012)

PADESFI III

Single Tranche

Targeted Output

Indicators

Targeted Impact

Indicators

Data Sources and

Institutions Responsible

Adoption of the Decrees

of the Minister of

Economy and Finance

on the:

- Housing Savings Plan

- Education Savings

Plan

- Equity Savings Plan

(PEA),

Establish an Employee Savings Plan to mobilize

long-term savings through the adoption of the

Decree of the Minister of Economy and Finance

on the Employee Savings Plan

Signing by the Minister of

Economy and Finance of

the Decree defining the

features and parameters

of the Employee Savings

Plan by end-2014.

The number of

savers signing up to

the new savings plan

reaches 1,000 by

end-2015.

DS: Letter from the

Ministry of Economy and

Finance forwarding a copy

of the Decree of the

Minister of Economy and

Finance on the Employee

Savings Plan.

IR: MEF

Launch of "Mobile Banking" by Al Barid

Bank (ABB) to improve access to financial

services throughout the country for the

population

(**)

Launch of "Mobile

Banking" by ABB by end-

2014.

The number of

Mobile Banking

subscribers reaches

150 000 at end-

2015.

SD: Letter from the

Ministry of Economy and

Finance with a copy of the

Al Barid Bank letter

confirming the launch of

"Mobile Banking".

IR: MEF/ ABB

Promote financial literacy through the creation

of the Moroccan Financial Literacy Foundation.

Creation of the Moroccan

Financial Literacy

Foundation by end-2014.

The number of

beneficiaries of

financial literacy

programmes reaches

100 000 at end-

2015.

DS: Letter from the

Ministry of Economy and

Finance forwarding a copy

of the minutes of the first

meeting of the Board of

Directors of the

foundation attesting to the

creation of the foundation.

IR: BAM / MEF

Adopt the Financial Literacy Action Plan.

(**)

Adoption of the Financial

Literacy Action Plan by

the Board of Directors of

the Foundation by end-

2014.

SD: Letter from the

Ministry of Economy and

Finance, forwarding a

copy of the minutes of the

meeting of the Board of

Directors of the

Foundation adopting the

Action Plan.

IR: BAM/ MEF

1 B -

STRENGTHEN

THE MICRO-

Adoption by monetary

authorities of

regulations on the

Transmission of the

draft law amending the

Launch of a study to upgrade the micro-finance

institutional environment

Launch of the call for

expressions of interest for

the study on upgrading the

DS: Letter from the

Ministry of Economy and

Finance forwarding the

ANNEX II

Page 3/7

Sub-

Component

PADESFI I

(2009-2010)

PADESFI II

(December 2011 -

2012)

PADESFI III

Single Tranche

Targeted Output

Indicators

Targeted Impact

Indicators

Data Sources and

Institutions Responsible

CREDIT

SECTOR

classification and

provisioning of non-

performing loans of

micro-credit

associations.

Introduction of

regulations governing

risk management and

internal control of

micro-credit

associations by the

monetary authorities

Law 18-97 on Micro-

credit to Parliament

Completion of the study

on the development

strategy for the micro-

credit sector

Signing of membership

contracts at the micro-

credit associations

Credit Bureau

representing 90% of the

sector's outstanding

credit

micro-finance

institutional environment

in Morocco by the

Ministry of Economy and

Finance by end-2014.

attestation of the launch of

the Call for Expression of

Interest in the study.

IR: MEF/DAAG

Component 2 - IMPROVE ACCESS TO FINANCE FOR VSES/ SMES

2. A - IMPROVE

ACCESS TO

CREDIT FOR

VSES/ SMES

Appointment of a new

Board of Directors of

the Central Guarantee

Fund which includes

private sector

representatives and an

Audit Committee.

Adoption of a

guarantee products

offering in line with

business life-cycle

needs and opening of

two Central

Guarantee Fund

regional offices

Launch of a new

guarantee product for

VSMEs

Promote women’s entrepreneurship through

the creation of a guarantee product called

"ILAYKI" dedicated to women

entrepreneurs.

(**)

Creation of "ILAYKI" by

end-2014.

The number of start-

ups promoted by

women since the

creation of ILAYKI

reaches 175 at end-

2015.

DS: Letter from the

Ministry of Economy and

Finance forwarding the

brief outlining the

features of ILYAKI.

IR: MEF/CCG

Adopt a guarantee products offering for export-

oriented companies in line with their life cycle

needs through the launch of the following

products:

i) "Mezzanine Export" to encourage export-

oriented investment through co-financing

between banks and the Central Guarantee Fund;

(ii) "Damane Export" to support the cash flow of

export-oriented companies;

(iii) Bonding of export markets to increase

access to international markets.

Creation of guarantee

products for export-

oriented companies by

end-2014.

The cumulative

volume of loans

financed under

"Mezanine Export"

reaches MAD 110

million at end-2015.

The cumulative

volume of "Damane

Export" credit and

bonding reaches

MAD 400 million at

end-2015

DS: Letter from the

Ministry of Economy and

Finance forwarding the

briefs outlining the

features of each product.

IR: MEF /CCG

Include "lease financing" in the guarantee

products offerings dedicated to investment

(Damane Express, Damane Crea and Damane

Dév).

Inclusion of lease

financing in guarantee

products offerings

dedicated to investment

by end-April 2015.

DS: Letter from the

Ministry of Economy and

Finance ’s letter

approving the cooperation

agreement between the

ANNEX II

Page 4/7

Sub-

Component

PADESFI I

(2009-2010)

PADESFI II

(December 2011 -

2012)

PADESFI III

Single Tranche

Targeted Output

Indicators

Targeted Impact

Indicators

Data Sources and

Institutions Responsible

CCG and financing

companies offering lease

financing

IR/ MEF/CCG

Facilitate the transfer of business by creating

"Damane Transmission".

Inclusion of "Damane

Transmission" in the SME

Guarantee Fund product

offering by end-June 2015.

Total of potential

credits granted by

banks to finance the

"Damane

Transmission"

reaches MAD 55

million at end-2015.

DS: Letter from the

Ministry of Economy and

Finance forwarding a copy

of the rider amending the

State / CCG agreement on

the management of the

SME Guarantee Fund.

IR: MEF/CCG

B 2 - DEVELOP

GUARANTEE

ACTIVITIES AT

THE REGIONAL

LEVEL

Expand guarantees at the regional level through

the opening of new CCG business centres in

other cities of the Kingdom

Total number of

operational business

centre reaches at least six

at end-2015.

DS: MEF’s letter attesting

to the opening of CCG

business centres

RI : MEF / CCG

Component 3 - STRENGTHEN THE FINANCIAL SECTOR GOVERNANCE MECHANISM

3 A -

STRENGTHEN

THE CAPITAL

MARKET

SUPERVISION

MECHANISM

Submission of a draft

law on the Capital

Market Authority to

the General

Secretariat of the

government

Transmission of the

draft law on the

Moroccan Capital

Market Authority

(AMMC) to Parliament

Designate the composition of the AMMC Board

of Directors

Text (s) on the

composition of the AMMC

Board of Directors signed

by end-2015

DS: Letter from the

Ministry of Economy and

Finance forwarding a copy

of the signed text (s) on the

composition of the

AMMC Board of

Directors.

IR: MEF

Expand the powers of the AMMC with regard to

the authorization of certain functions within

organizations subject to control.

The decree establishing

the list of duties requiring

authorization is signed by

the Minister of Economy

and Finance by end-2015.

DS: Letter from the

Ministry of Economy and

Finance forwarding a copy

of the decree establishing

the list of duties requiring

authorization

IR: MEF

ANNEX II

Page 5/7

Sub-

Component

PADESFI I

(2009-2010)

PADESFI II

(December 2011 -

2012)

PADESFI III

Single Tranche

Targeted Output

Indicators

Targeted Impact

Indicators

Data Sources and

Institutions Responsible

3 B - ENHANCE

THE BANKING

SECTOR'S

STABILITY

Submission of the draft

law amending BAM

statute to the General

Secretariat of the

government

Transmission of the

draft banking law to the

General Secretariat of

the government

Launch of monetary and

financial codification

Strengthen the soundness and stability of the

banking sector through a new banking law

providing for the creation of a macro-

prudential supervision and systemic crises

management framework, strengthen

prudential regulation and supervise financial

conglomerates (**)

The banking bill is

adopted by the Cabinet by

end-2014.

The rate of non-

performing loans

held by banks is

limited to a

maximum of 5.5%

at end-2015

DS: Letter from the

Ministry of Economy and

Finance forwarding the

report from the Cabinet

that adopted the bill on

credit institutions and

similar bodies.

IR: MEF

Credit Bureau

conducting at least

one reporting test with

respondents

Commencement of

Credit Bureau

operations

Launch of a second credit bureau to increase the

services provided by credit rating agencies while

promoting competition to reduce costs and

improve service quality.

The Central Bank (BAM)

announces the selection of

the operator that will be

authorized to manage the

second credit bureau by

end-2014.

DS: Letter from the

Ministry of Economy and

Finance forwarding

BAM's confirmation of

the choice of the operator.

IR: MEF/BAM

Component 4 - DEEPEN CAPITAL MARKETS

4. A -

DIVERSIFY

FINANCIAL

INSTRUMENTS

Preparation and

transmission of the bill

on covered bonds to

stakeholders.

Transmission of the bill

on covered bonds to the

General Secretariat of

the government

Promote the mobilization of long-term and low

cost resources by creating a legislative and

regulatory framework for covered bonds

The bill on covered bonds

is adopted by the Cabinet

by end-2015.

DS: Letter from the

Ministry of Economy and

Finance forwarding the

report of the Cabinet that

adopted the bill on

covered bonds.

IR: MEF

Adoption of a bill on

the financial

instruments futures

market by the Cabinet

Preparation and

transmission of the draft

General Regulation of

the futures market

Ensure the efficient commencement of the

futures market by setting missions and modes of

operation of the clearing house

The proposed general

regulation of the futures

market clearing house is

prepared and forwarded

to stakeholders (Stock

DS: Letter from the

Ministry of Economy and

Finance’s attesting to the

forwarding of the draft

ANNEX II

Page 6/7

Sub-

Component

PADESFI I

(2009-2010)

PADESFI II

(December 2011 -

2012)

PADESFI III

Single Tranche

Targeted Output

Indicators

Targeted Impact

Indicators

Data Sources and

Institutions Responsible

management company

to stakeholders

Exchange, Maroclear,

AMMC and BAM) by end-

2014.

general regulation to

stakeholders.

IR: MEF

Preparation and

submission of a

proposed legislative

framework for property

investment mutual

funds (OPCI) to the

stakeholders

Promote the mobilization of long-term resources

for financing real estate by setting up the OPCI

legislative and regulatory framework

The bill on OPCIs adopted

by the Cabinet by end-

2015.

DS: Letter from the

Ministry of Economy and

Finance forwarding the

report of the Cabinet that

adopted the bill on OPCIs

IR: MEF

4. B - BOOST

THE CAPITAL

MARKET

Adoption of the decree

enforcing Law No. 44-

10 on the Status of

Casablanca Finance

City (CFC) by the

Cabinet

List of foreign securities on the Casablanca

Stock Exchange

Market convention on the

listing of foreign securities

on the Casablanca Stock

Exchange is signed by

end-2014.

DS: Letter from the

Ministry of Economy and

Finance forwarding the a

copy of the market

convention.

IR: MEF

Submission of a bill

amending and

supplementing the

Dahir on the Stock

Exchange to the

General Secretariat of

the government

Adoption of the bill

amending the Law on

the Stock Exchange

by Cabinet

Preparation and

transmission of the draft

statute on the Stock

Exchange to

stakeholders

Create compartments specifically dedicated to

mutual funds and SMEs on the Casablanca Stock

Exchange

The bill amending the Law

on the Stock Exchange is

adopted by the Cabinet by

end-April 2015.

At least a

stabilization of

market

capitalization in

2014 to its 2013

level of MAD 450

billion

DS: Letter from the

Ministry of Economy and

Finance forwarding the

report of the Cabinet that

adopted the bill on the

Stock Exchange.

IR: MEF

Transmission of Bill

No. 54-08 on the Initial

Public Offering (IPO) to

the General Secretariat

of the government

Presentation of the IPO

bill to the Cabinet

Enhance transparency in financial transactions

and protect depositors and investors by adopting

the decree enforcing the law on IPOs

The decree to implement

the law on IPO which

defines the powers of the

Minister of Economy and

Finance is adopted by the

Cabinet by end-2014.

DS: Letter from the

Ministry of Economy and

Finance forwarding the

report of the Cabinet

adopting the decree.

IR: MEF

ANNEX II

Page 7/7

Sub-

Component

PADESFI I

(2009-2010)

PADESFI II

(December 2011 -

2012)

PADESFI III

Single Tranche

Targeted Output

Indicators

Targeted Impact

Indicators

Data Sources and

Institutions Responsible

Strengthen prudential regulations, controls and

conditions under which the FPCT conducts

securitization transactions.

The decree enforcing Law

No. 33-06 on debt

securitization is adopted

by the Cabinet by end-

2014.

DS: Letter from the

Ministry of Economy and

Finance forwarding the

report of the Cabinet

adopting the decree

enforcing Law No. 33-06

on debt securitization.

IR: MEF

Adoption of the Bill

on security lending

transactions by the

Cabinet

Developing a standard

securities lending

agreement template

Accelerate the operationalization of the law on

securities lending aimed at diversifying financial

instruments and strengthening financial market

liquidity.

The decree on the

approval of the securities

lending agreement

template is signed by the

Minister of Economy and

Finance by end-2014.

DS: Letter from the

Ministry of Economy and

Finance forwarding a copy

of the Decree signed by

the Minister of Economy

and Finance.

RI: MEF

Government

commitment to the

establishment of an

Public-Private

Investment Fund

Effective contribution

of the State to the

Public-Private

Investment Fund

Transmission of the bill

amending Law No. 41-

05 on venture capital

institutions to the

General Secretariat of

the government

Promote and enhance transparency in

venture capital operations by adopting the

bill amending Law No. 41-05 on venture

capital institutions (**)

The bill amending Law

No. 41-05 on venture

capital institutions is

adopted by the Cabinet by

end-2014.

DS: Letter from the

Ministry of Economy and

Finance forwarding the

report of the Cabinet

adopting the bill.

IR: MEF

ANNEXE III

Page 1/1

NOTE ON RELATIONS WITH THE IMF

Press Release No. 14/368 (28 July 2014) – International Monetary Fund

IMF Executive Board Approves US$5-Billion Arrangement for Morocco Under the

Precautionary and Liquidity Line

The Executive Board of the International Monetary Fund (IMF) today approved a new 24-month arrangement

for Morocco under the Precautionary and Liquidity Line (PLL) in an amount equivalent to SDR 3.2351 billion

(about US$5 billion, or 550 percent of Morocco’s quota at the IMF). The access under the arrangement in the

first year will be equivalent to SDR 2.941 billion (about US$4.5 billion, 500 percent of quota), rising in the

second year to a cumulative US$5.0 billion. Morocco’s first 2-year PLL arrangement was approved on August

2, 2012.

The Moroccan authorities have stated that they intend to treat the arrangement as precautionary, as they have

done with the 2012 PLL, and do not intend to draw under the arrangement unless Morocco experiences actual

balance of payments needs from a significant deterioration of external conditions.

The PLL arrangement will allow the authorities to pursue their homegrown reform agenda aimed at achieving

rapid and more inclusive economic growth while providing them with useful insurance against external shocks.

The PLL was introduced in 2011 to meet more flexibly the liquidity needs of member countries with sound

economic fundamentals and strong records of policy implementation but with some remaining vulnerabilities.

Following the Executive Board discussion on Morocco, Mr. Noayuki Shinohara, IMF Deputy Managing

Director and Acting Chairman of the Board, made the following statement:

“Morocco’s sound economic fundamentals and overall strong record of policy implementation have contributed

to a solid macroeconomic performance in recent years. Despite a difficult external environment, the authorities

made important strides in reducing vulnerabilities, rebuilding policy space and addressing medium-term

challenges over the course of the first arrangement supported by a PLL. They have been consolidating

Morocco’s fiscal position while pursuing an agenda of structural reforms to address vulnerabilities, strengthen

competitiveness, and promote higher and more inclusive growth. The significant progress made in reforming

the subsidy system is particularly commendable.

“The external environment remains subject to significant downside risks. In particular, protracted and slower–

than-expected growth in Europe than currently projected, heightened financial market volatility, or a surge in

oil prices resulting from geopolitical tensions could significantly affect the Moroccan economy. In this context,

the successor PLL arrangement will continue to provide insurance to support the authorities’ economic policies.

“The authorities are committed to further reducing fiscal and external vulnerabilities while laying the

foundations for higher and more inclusive growth. To achieve these goals, it will be important to control

expenditure as well as advance major reforms, including those of subsidies, pension and the tax system. The

timely adoption of a new organic budget law will be essential in order to strengthen and modernize the budget

framework. Moving toward a more flexible exchange rate regime, in coordination with other macroeconomic

policies would also help support competitiveness and enhance the economy’s capacity to absorb shocks.

Advancing structural reforms to improve the business climate, the judicial system, access to finance, and the

labor market will be crucial to achieving higher growth and employment,” Mr. Shinohara said.

Morocco has been a member of the IMF since 1958 and has a quota of SDR588.2 million (about US$903.4

million).