Morocco: Request for an Arrangement Under the Resilience and Sustainability Facility-World Bank Assessment Letter for the Resiliency and Sustainability Facility
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International Monetary Fund. Middle East and Central Asia Dept.
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MOROCCO

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MOROCCO

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MOROCCO

REQUEST FOR AN ARRANGEMENT UNDER THE RESILIENCE AND SUSTAINABILITY FACILITY-WORLD BANK ASSESSMENT LETTER FOR THE RESILIENCY AND SUSTAINABILITY FACILITY

September 15, 2023

WORLD BANK ASSESSMENT LETTER FOR THE RESILIENCY AND SUSTAINABILITY FACILITY

A. Country Vulnerability to Climate Change Including Human, Social and Economic Costs

Morocco is considered as a “climate hotspot.” Average temperatures have increased by almost 1.4°C between the 1970s and the 2010s (0.34°C per decade), exceeding global trends. Nine of the ten warmest years recorded in the country’s history have taken place in the 21st Century. Precipitation patterns have followed an overall downward trend with more erratic patterns, increasing the frequency and severity of both droughts and flooding events. Over the past 60 years, overall water inflows have declined by about 30 percent, placing Morocco in a situation of structural water stress, a trend that is expected to intensify in coming decades. This has resulted in the overexploitation of underground water sources, which exceeds sustainable levels by about 30 percent. In addition, given that more than 65 percent of the population and 90 percent of industry are concentrated on the country’s coastline, sea-level rise constitutes another long-term stressor, especially for low-lying areas, which will contribute to exacerbate the risk of floods.

Climate shocks already constitute a major source of macroeconomic volatility in Morocco. As a result of the extreme variability of agricultural production depending on precipitation levels, rainfall shocks explain close to 37 percent of the variance of Morocco’s output over the medium-term.1 This has become increasingly apparent in recent years, amplifying the large growth fluctuations that have surrounded the multiple shocks undergone by the Moroccan economy since the COVID-19 pandemic. Droughts can also have fiscal and balance of payment impacts, forcing the government to adopt costly emergency measures to support farmers and increasing food imports to compensate for a shortfall in domestic production. In 2022, this coincided with a global surge in food prices following Russia’s invasion of Ukraine, exacerbating the balance of payment impact of that year’s drought. In turn, floods cause average direct losses estimated at around USD450 million per year.

Climate change could result in major GDP losses over coming decades. According to the World Bank’s Morocco Country Climate and Development Report (CCDR),2 if unaddressed, a reduction in water availability to all sectors of the economy consistent with the trends observed in recent decades could reduce GDP by up to 6.5 percent (compared with a baseline scenario). Under all the scenarios considered in the CCDR, the agricultural sector is projected to suffer the most, thus reducing its participation in GDP. However, nonagricultural sectors would also be significantly affected, and most of the overall GDP losses would be explained by the negative impacts in these sectors, given their greater weight in the economy. In addition, the CCDR projects the median impact of floods on output to gradually increase over time, from 0.2 percent of GDP in 2025 to surpass 0.5 percent of GDP by the 2030s and to reach almost 1 percent in 2050.

Vulnerable groups are disproportionally impacted by climate change. About 79 percent of Morocco’s poor live in rural areas and tend to rely on mostly rainfed agriculture as their main source of income and nutrition. This implies that they are disproportionately exposed to the risks posed by droughts, as clearly illustrated by the recent performance of labor markets in urban vs. rural environments: while net job creation amounted to 150 thousand in urban areas, year 2022 witnessed the loss of 170 thousand jobs in rural environments due to the drought. According to the CCDR, the continuation of ongoing trends in water supply could reduce the demand for unskilled agricultural labor by up to 10 percent, forcing up to 1.9 million Moroccans to migrate to cities. In urban areas, the hazard maps produced for various cities evidence that disadvantaged neighborhoods (where climate migrants will be more likely to relocate) tend to also be more prone to floods and are more exposed to the risks posed by sea level rise.

B. Government Policies and Commitments in Terms of Climate Change Adaptation and Priority Areas to Strengthen Resilience

The Moroccan authorities have reinforced their policies and commitments to cope with climate change over the past decade. Morocco submitted its first Nationally Defined Contribution (NDC) in 2015, and an updated version in 2021. On the adaptation front, the revised NDC strengthens the interventions in the four sectors already covered by the 2015 NDC (agriculture, water, fisheries and aquaculture, and forestry) with enhanced objectives, and includes several additional sectors: meteorology, sensitive environments (coastline, mountains, and oases), urban and rural planning, and health. The adaptation objectives defined in the NDC are further developed in the National Strategic Adaptation Plan (NSAP), which was adopted in January 2022. The NSAP sets a roadmap for 2020-2030, with a concerted and inclusive framework to support adaptation planning and priority actions to strengthen the resilience of the population and the territories to climate change.

Coping with water scarcity has long constituted a national priority for Morocco. Infrastructure investment (mostly in dams and in water basin interconnections) has traditionally been the cornerstone of the government’s strategy to cope with water scarcity.3 This is still the case today, and both the National Program for Potable Water Supply and Irrigation (2020-2027) and the National Water Plan (2020-50) continue to prioritize supply-side solutions, with a growing emphasis on non-conventional water resources, such as desalination and wastewater reuse. Since the adoption of the Plan Maroc Vert in 2008, the government has also supported the adoption of modern irrigation techniques to increase water productivity. However, weak water demand management policies and low tariffs for certain services (in particular for irrigation) have fueled over-consumption, and tariff-setting policies do not yet fully take relative water scarcity into consideration. The country’s New Development Model acknowledges this problem, emphasizing the importance of reinforcing water demand management, also through the adoption of tariffs that “reflect the true value of the water resource.” The authorities are currently undertaking a water costing analysis which would inform a new water tariff-setting framework in Morocco. In addition, Morocco’s water sector needs to set the right governance model to adequately manage competing demands from different sectors, through a strong national entity capable but also reinforced decentralized entities (river basin agencies) capable of incorporating local specificities in the decision-making process. Morocco is already engaged in a reform to strengthen the sector’s governance, and the water law approved in 2016 points towards a decentralized, integrated, and participatory management and planning of water resources, and mandates the establishment of water information systems at national and river basin levels.

Morocco has developed a comparatively strong disaster risk management and financing architecture (DRM and DRF). Since the early 2000s, the government has focused on gaining a better understanding of critical risks and on defining the roles and responsibilities of the various institutions that are involved in disaster risk reduction, response, and recovery. A central element of the country’s strategy has been the transition from a post-disaster emergency approach to a preparedness approach that prioritizes investment in both structural and nonstructural disaster risk reduction. The National Flood Protection Plan was updated in 2016, with a programmed investment of US$ 1.5 billion for the period 2016-36. In addition, the Natural Disaster Resilience Fund (FLCN), initially created to finance post-disaster reconstruction, has been turned into an innovative mechanism for co-financing investment in disaster risk reduction and preparedness at the local level. Morocco has also put in place a sophisticated dual catastrophic risk insurance system that: (i) guarantees coverage for privately insured households through additional premiums that covered at least 8.9 million people in 2021; and (ii) provides basic compensation for the uninsured poor and vulnerable population through the Solidarity Fund against Catastrophic Events (FSEC).

C. Government Policies and Commitments in Terms of Climate Change Mitigation and Priority Areas to Reduce Greenhouse Gas Emissions.

Despite having increased substantially in recent decades, Morocco’s GHG emissions remain comparatively small. The country’s total annual GHG emissions doubled between 2000 and 2019 (from 44.6 to 91.2 million tons CO2 eq). However, they still represent just 0.2 percent of global emissions, and the carbon intensity of the Moroccan economy is 9 percent lower than that of the world, and 30 percent below the MENA region. Moreover, since the early 2010s, Morocco has entered a relative decoupling trend in which real GDP is growing faster than GHG emissions, implying that the carbon intensity of GDP has begun to decline.

The power sector is the largest contributor to Morocco’s emissions, justifying a decarbonization agenda that has understandably been centered on the development of renewable energy (RE). The energy sector accounted for 65.1 percent of total gross GHG emissions in 2018, followed by agriculture (22.1 percent), industrial processes (6 percent), and waste management (5.4 percent). In terms of energy-related emissions, the power sector dominates with 36.1 percent, followed by the transportation (29 percent). In this context, as in many other countries, Morocco’s mitigation policies have so far prioritized the decarbonization of power generation. Indeed, various flagship solar and wind projects have been developed to tap the country’s plentiful RE potential.

However, Morocco’s efforts to decarbonize through RE have been offset by the growing use of coal for power generation. Despite recent progress, wind, solar, and hydropower represent only 20 percent of the country’s electricity generation and 9.8 percent of its total energy use (if we include bio-fuels and waste) in 2019, against 56.5 percent for oil, 29.8 percent for coal and 3.9 percent for natural gas. Along with efforts to tap into the country’s vast RE potential, three new coal power plants were commissioned in the 2010s, bringing the total coal-fired power generating capacity above 4GW (39 percent of total power generation in 2021). As a result, the carbon intensity of the power sector has continued to increase, with around 600 tons of CO2 emitted by GWh in 2020, among the highest in the world.

Ahead of COP-26 in Glasgow in November 2021, Morocco submitted a revised Nationally Determined Contribution (NDC) with an enhanced mitigation target. The revised NDC aims to achieve a 45.5 percent reduction of its greenhouse gas emissions by 2030 compared to a business-as-usual scenario. This represents an increase of 3.5 percentage points in the mitigation objective from the 2016 NDC. Most notably, Morocco’s updated NDC includes for the first time the cement and phosphates sectors. The inclusion of the latter sector is particularly relevant, given that Morocco is estimated to hold approximately 75 percent of the world’s phosphate reserves and has become, globally, the fifth largest exporter of fertilizers. According to the Climate Action Tracker (CAT), Morocco’s climate targets and policies are “almost sufficient,” and the targets set under its unconditional commitment meet their fair-share contribution to the Paris Agreement.

D. Other Challenges and Opportunities

Decarbonization could constitute a major development opportunity for Morocco. Given its large endowment in RE sources, the country is particularly well placed to reap the economic benefits that could emanate from the global decarbonization push. Its economy is closely integrated with the EU, which is among the regional blocks that have embraced ambitious climate targets. In this regard, decarbonization represents an opportunity for the Moroccan industry to not only maintain but even expand its market share in Europe. It would also increase the country’s attractiveness for Foreign Direct Investment (FDI), and position Morocco as a hub for green investment and export, with positive spillovers in terms of economic growth and jobs. Moreover, by reducing Morocco’s reliance on imported fuels, the decarbonization agenda would reduce the economy’s vulnerability to international price shocks, and the successful development of green hydrogen could turn the country into an energy exporter.

But the transition towards a low carbon and resilient (RLC) Morocco would require the mobilization of a large volume of investments. The CCDR estimates total investment needs at USD77.7 billion in net present value terms between 2022 and 2050, the equivalent of 3.5 percent of discounted GDP over such time period. According to the CCDR’s RLC scenario, this effort should initially be concentrated on the adaptation agenda, primarily to mitigate the looming risks that increasing water scarcity poses to the Moroccan economy and society. In turn, mitigation investment would have to increase substantially in the 2030s and 2040s if Morocco is to successfully converge towards net zero emissions.

The bulk of this investment effort could be shouldered by the private sector if key reforms are implemented. According to the CCDR, up to 85 percent of the decarbonization investment needed for the RLC to materialize could be undertaken by the private sector, minimizing pressure on Morocco’s already stretched public finances. However, for this scenario to materialize, the country would need to fundamentally transform its electricity market and institutional arrangements. Among the most urgent reforms are allowing for third-party access to the transmission and distribution networks at regulated tariffs so that private investors in RE can sell directly to eligible customers without discrimination. The public sector is more likely to retain a leading role in adaptation investment. However, there is room to increase the participation of the private sector in the water mobilization effort, for instance through well-designed PPPs in desalination and wastewater reuse, as already envisaged by the authorities. Again, encouraging private sector participation in adaptation will require sound regulatory frameworks.

Greening the financial sector will be instrumental to channel resources toward climate-friendly activities. Morocco has taken decisive steps to establish a broad framework for greening the financial system, but a fully-fledged climate finance strategy has yet to be developed. Morocco is moving towards the preparation of “green taxonomy” to stimulate the flows of private financing towards the green transition.

E. WB Engagement in the Area of Climate Change

The World Bank’s Country Partnership Framework (CPF) prioritizes climate action among its key objectives. The Performance and Learning Review of the CPF, presented to the World Bank’s Board of Executive Directors on August 23, 2023, strengthened the CPF’s original focus on climate change and introduced a new strategic pillar ’Supporting the Climate Transition’ into the strategic framework with objective #8 ’Improving Access to Sustainable Water Resources’, objective #9 ’Strengthen Resilience to Climate Shocks/Change and Mitigation’ and objective #10 ’Promote a whole-of-Government approach to climate change’.. Currently, the Bank has a strong portfolio of lending and technical assistance operations with a focus on climate. On the analytical front, Morocco’s was among the first CCDRs produced by the World Bank, published in November 2022.

Two major operations that operationalize the recommendations of the CCDR have already been approved:

  • The Climate Operation / Support to NDC Program for Results (USD350 million) focuses on operationalizing some of the key recommendation of the CCDR, notably the “whole of government” approach aiming at strengthening coordination mechanisms to address urgent climate and development nexus topics both at national and territorial level. In particular, the Climate operation will mainstream climate considerations into financial sector policies and public finance practices, by using fiscal planning, budgeting, public investment management and procurement practices as instruments to accelerate the climate transition.4 It also establishes institutional mechanisms to foster an integrated approach to climate and development at the territorial level, with a focus on enhancing the resilience of vulnerable groups and ecosystems.

  • The Water Security and Resilience Program for Results (USD350 million) supports interventions to strengthen the governance of the water sector, with a focus on water planning, strengthening of groundwater management, basin-level capacity to manage water resources, data, and information management systems. It also aims at improving the valuation and financial sustainability of the water sector, and promotes non-conventional water, from the regulatory perspectives and by supporting investment to scale-up wastewater reuse. It includes measures to strengthen incentives to reduce potable water losses in the distribution system.

Other active lending operations have significant climate co-benefits. These include: (i) the Strengthening Human Capital for a Resilient Morocco Development Policy Financing series (first operation approved in 2022 for an amount of USD500 million), which includes among its objectives the adaptation of health and social protection services to the risks associated with climate change, and the improvement of climate risk management and resilience against catastrophic events; (ii) the Resilient and Sustainable Water in Agriculture Investment Project Financing (USD180 million), which aims at enhancing the governance of water in Agriculture, improving the quality of irrigation services, and increasing access to advisory services and modern on-farm irrigation technologies; (iii) the Blue Economy Program for Results (USD350 million), which aim at developing institutional frameworks, improving integrated management of natural resources, and strengthening selected sectors for a climate-resilient Blue Economy in targeted areas; (iv) the Morocco Noor Solar Project (USD463 million IBRD and USD144 million from Clean Technology Fund), with the objective to increase innovative solar power generation in Morocco; (v) the Morocco Clean and Efficient Energy Project (USD125 million IBRD and USD24 million CTF), which supports clean power generation and to improve operational efficiency of Morocco’s national power utility; (vi) the Disaster risk management and resilience program (USD300 million) aiming to improve the institutional framework to finance disaster risk reduction activities and strengthen financial resilience to natural disasters for targeted populations in the Program Area, (vii) the Green Generation program (USD250 million) that aims at promoting the environmental sustainability of the agri-food value chains and (viii) the Urban Transport program (USD350 million) supporting climate-smart transport solutions.

In addition, the World Bank supports the Moroccan authorities with various analytical and advisory activities. These include: the development of complementary macroeconomic and microeconomic models for the ex ante evaluation of the potential impacts that an environmental tax reform (including the introduction of a carbon tax) could have on the Moroccan economy and on households; a Public Finance Review which has included the water sector among its key areas of focus and which aims to inform government policies to ensure the sector’s financial sustainability; preparation of a diagnosis and of recommendations to implement green public procurement; support to the adoption of climate budget-tagging; and technical support on water management, agriculture resilience, disaster risk management and financing, bluet economy, among others.

The proposed RSF for Morocco contribute to the operationalization of the CCDR recommendations, along with other WB engagement. The reform measures envisaged under the RSF program have been identified in close coordination with WB staff. They have been identified in the CCDR as critical reforms to pursue a Resilient and Low Carbon development. They build on and complement the extensive WB engagement as described above. WB-led TA on carbon tax, greening the financial sector, reforming the electricity and water sectors, will inform the implementation of the RSF program.

1

Diaz Cassou, Javier; Iraqi,Amina; Megevand,Carole; Marzo,Federica. 2022. “Morocco Economic Update: The Recovery is Running Dry”. Washington, D.C.: World Bank Group

2

World Bank. 2022. “Morocco: Country Climate and Development Report.” Washington, DC: World Bank. https://www.worldbank.org/en/country/morocco/publication/morocco-country-climate-and-development-report.

3

Since then and up to 2020, the number of large dams increased from 20 to 146, and the total design storage capacity increased from 2 to 19.1 billion m3.

4

The Kingdom joined the International Platform on Sustainable Finance in 2019 and the Coalition of Finance Ministers for Climate Change in 2022. The Climate operation will support the Government of Morocco implement its commitments to the “Helsinki Principles”.

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Morocco: Request for an Arrangement Under the Resilience and Sustainability Facility-Press Release; Staff Report; Supplement; Staff Statement; and Statement by the Executive Director for Morocco
Author:
International Monetary Fund. Middle East and Central Asia Dept.