Abstract

By the beginning of the 1980s, Morocco’s macroeconomic performance was steadily deteriorating: fiscal and external current account deficits were mounting, external indebtedness was growing, and foreign exchange reserves were dwindling. The government budget deficit (on a payment-order basis and excluding official grants) stood at 14 percent of GDP in 1981, compared with about 3 percent of GDP at the beginning of the 1970s (Table 1). With growing fiscal imbalances, the external current account deficit, excluding official grants, deteriorated sharply from an average of about 2 percent of GDP during 1970–72 to 12 percent in 1981. As a result, external debt swelled from about 20 percent of GDP to 70 percent, and debt-service payments rose from the equivalent of 11 percent of exports of goods and nonfactor services and private transfers to 36 percent. Foreign exchange reserves were virtually exhausted by 1982, while domestic and external payments arrears had started to accumulate.

By the beginning of the 1980s, Morocco’s macroeconomic performance was steadily deteriorating: fiscal and external current account deficits were mounting, external indebtedness was growing, and foreign exchange reserves were dwindling. The government budget deficit (on a payment-order basis and excluding official grants) stood at 14 percent of GDP in 1981, compared with about 3 percent of GDP at the beginning of the 1970s (Table 1). With growing fiscal imbalances, the external current account deficit, excluding official grants, deteriorated sharply from an average of about 2 percent of GDP during 1970–72 to 12 percent in 1981. As a result, external debt swelled from about 20 percent of GDP to 70 percent, and debt-service payments rose from the equivalent of 11 percent of exports of goods and nonfactor services and private transfers to 36 percent. Foreign exchange reserves were virtually exhausted by 1982, while domestic and external payments arrears had started to accumulate.

Table 1.

Selected Economic and Financial Indicators

article image
Table 1 (concluded)
article image
Sources: Ministry of Finance; Bank Al-Maghrib; World Bank Debt Tables; IMF, International Financial Statistics; and IMF staff estimates.

From 1990, based on new consumer price index.

Information Notice System of the International Monetary Fund.

Government credit includes direct credit from Bank Al-Maghrib and special credit.

End of period for M2.

Excluding official grants.

Includes debt that is not publicly guaranteed.

As these imbalances began to emerge in the late 1970s, the authorities attempted to contain the external deficits by tightening restrictions on trade and payments. With inflationary pressures building up—fueled also by rising food import prices—price increases were curtailed through comprehensive controls and subsidies on the retail prices of some basic products. Financial imbalances were thereby accompanied by widespread distortions in the price structure, which hindered the efficient allocation of resources. Meanwhile, output growth was uneven—apart from intermittent booms in the phosphate sector, growth in the agricultural, mining, and manufacturing sectors was lagging behind that in the construction and public services sectors. Moreover, the persistence of the imbalances in the economy threatened the sustainability of economic growth.

The problems that plagued the Moroccan economy at the beginning of the 1980s reflected natural and policy-induced weaknesses, which had been aggravated by the exogenous shocks of the 1970s. An important structural weakness in the economy was the vulnerability of output and exports to such shocks, because of the dominant role of agriculture and mining. The agricultural sector during the 1970s accounted for more than 20 percent of GDP, 45 percent of employment, and 50 percent of Morocco’s merchandise exports and was oriented toward food production and livestock. The cultivated land was predominantly rain-fed. Irrigated agriculture accounted for only about 10 percent of total arable land but contributed about one-half of the sector’s value added. The diversification of agricultural output was hampered by a weak infrastructure, in particular, inadequate transportation and storage facilities. Agricultural output and exports were therefore highly vulnerable to weather conditions.

Although Morocco produced and exported a variety of minerals, phosphates were by far the most important. Most of the phosphate production was exported in rock form, and only a small amount was processed domestically into phosphoric acid and fertilizers for export. Exports of phosphate rock and its derivatives accounted for about one-fourth of merchandise exports. Thus, export receipts and—because of the importance of revenues from the phosphate sector—budgetary revenues were substantially affected by the wide swings in the world demand for, and the prices of, phosphates.

The policy-induced weaknesses resulted from the development strategy Morocco had pursued since independence in 1956. This strategy was primarily based on import-substituting industrialization and agricultural self-sufficiency, together with national control over natural resources and, beginning in 1973, over industry. Since in most sectors the aim of Morocco’s industrial policy was to substitute for imports, inefficient plants with high production costs were protected, resulting in high tariff or nontariff barriers to imports. Financing for the inward-oriented industrialization strategy was to come from earnings from the export of phosphates and agricultural crops.

A “Moroccanization” drive was launched in 1973 through the promulgation of laws that tended to restrain foreign ownership; at the same time, new sectoral investment codes and an export code replaced the previous unified investment code, granting different incentives to different sectors. “Moroccanization” contributed mainly to an increase in the number of public enterprises involved in production, beyond those created initially in the mining sector to secure Moroccan control of the country’s natural resources before independence.

Thus, public sector involvement in large capital-intensive industries—such as fertilizer, heavy engineering, basic chemicals, and petrochemicals—increased throughout the 1970s. Public enterprises were largely immune from competitive pressures and market prices because they were granted monopolies or were protected from external competition by high tariffs and other import restrictions. At the same time, they suffered from organizational and managerial shortcomings, administrative controls, inappropriate pricing policies, and overemployment. Consequently, the sector was inherently weak and prone to inefficiencies, the cost of which was transferred to taxpayers through government subsidies.

Government finances also suffered from a number of structural problems, which made them less responsive to economic developments. On the revenue side, the tax system was relatively inelastic, reflecting a narrow tax base and low tax yields. Tax revenue was highly dependent on import duties and on developments in phosphate markets. Furthermore, tax administration needed strengthening. On the expenditure side, the share of the wage bill in total expenditure was high, owing mainly to the large size of the civil service. Moreover, public investment programming, implementation, and monitoring were weak, resulting in low rates of return on public investment projects.

Morocco’s financial sector consisted essentially of a heavily regulated, oligopolistic banking system. The capital market was undeveloped. Credit policy was primarily used to finance government needs and to achieve industrial policy goals, with preferential credit being provided at relatively low interest rates. The absorption of total financial resources by the treasury was high, accounting for more than two-thirds of total bank lending during 1977–80. The ceilings imposed on interest rates kept key interest rates negative in real terms, thus restricting the capacity of the banking system to mobilize deposits and impeding the development of financial intermediation. Consequently, the high degree of concentration, the tight regulation of interest rates and credit ceilings, and the high level of obligatory lending requirements imposed on banks resulted in limited competition in the financial sector and led to distortions, inefficiencies, and resource misallocations. Meanwhile, the limited range of financial instruments, notably the lack of a market for bonds and the narrowness of the stock market, also constrained resource mobilization in the economy and kept savings relatively low.

At the beginning of the 1970s, domestic savings amounted to only about 13 percent of GDP. However, with the conservative fiscal and monetary policies followed at the time, the share of resources allocated to investment was also low. The economy’s resource deficit was thus kept at a low level, averaging less than 2 percent of GDP in 1970–72. It was the exogenous shocks of the 1970s and the policy responses of the authorities, combined with the structural weaknesses in the economy, that led to growing financial imbalances.

In 1974, the oil price increase coincided with an even sharper rise in the price of phosphate, and Morocco enjoyed a substantial improvement in the terms of trade, equivalent to some 5 percent of GDP. The ensuing rapid increase in budgetary and export receipts prompted the Government to raise current expenditure and public investment sharply. During 1974–75, substantial wage increases were granted, and the Government decided to subsidize the retail prices of sugar, petroleum, and other commodities whose international prices had surged. Furthermore, defense outlays began to escalate in 1975. Public expenditure on consumption and investment rose sharply, and, although the average annual growth rate of real GDP remained high for the remainder of the 1970s despite recurrent droughts, the savings rate in the economy declined substantially after 1974.

The world economic recession that constricted overseas markets and the fall in phosphate prices starting in mid-1975 caused a precipitous decline in Morocco’s export receipts and related budgetary revenue. Nevertheless, the Government continued to spend at relatively high levels. The overall budget deficit, which amounted to 3.9 percent of GDP in 1974, reached 18.1 percent of GDP in 1976, and the external current account balance switched from a surplus of 2.5 percent of GDP to a deficit of 14.9 percent of GDP over the same period. The Government financed these deficits in large part by borrowing heavily from abroad, partly on commercial terms. However, reflecting inefficient resource allocation caused by a distorted incentive structure, returns on investment were too low to allow continued recourse to foreign borrowing at the required levels. The external public debt and the debt-service burden started building up toward levels that quickly proved unsustainable.

Recognizing the need for strong measures to reduce the financial imbalances in the economy and to forestall a debt crisis, the authorities adopted a three-year stabilization plan in 1978. Taxes were increased, government investment outlays were cut by more than one-third, and the rate of growth of current expenditure was reduced. The treasury sharply curtailed its recourse to net foreign borrowing but resorted increasingly to net domestic bank financing. In these circumstances, the rate of credit expansion to the private sector slowed down. To mobilize financial savings, the authorities raised interest rates on deposits and treasury bonds, although the rates remained below the rate of inflation. In addition, import restrictions were increased, including through the introduction of an advance import deposit scheme. These measures initially succeeded in reducing the overall budget deficit as well as the trade and current account deficits but, at the same time, curbed real economic growth.

The problems facing the Moroccan economy were aggravated in 1979, in part because of circumstances beyond the country’s control. First, the agricultural harvest was adversely affected by unfavorable weather conditions, necessitating increased imports of foodstuffs. Second, labor strikes and social unrest compelled the Government to increase wages after a two-year freeze. Third, the marked increase in oil prices led to a deterioration in the terms of trade, putting additional pressure on the balance of payments. On the policy side, the authorities increased the prices of subsidized commodities but by less than the increase in their import costs. While defense outlays were stepped up, new taxes were introduced, including a temporary tax on income and profits and an increase in the special import tax to 15 percent. In the circumstances, the overall budget and the external current account deficits in 1979 were contained at slightly below the previous year’s levels; as in earlier years, they were largely financed by external borrowing on commercial terms. The increased recourse to external borrowing moderated the expansion of domestic credit and allowed for a higher import level than would otherwise have been possible, with the rate of inflation continuing its declining trend in 1979.

The policies adopted during 1978–79 were financial in nature, designed primarily to improve the budgetary and balance of payments situations. Although these policies led to modest improvements in the financial situation, growth was sluggish and threatened by imbalances that still remained large. Furthermore, the adjustment policies pursued during this period failed to address the structural weaknesses in the economy. The incentive structure continued to encourage consumption rather than savings, production for import substitution rather than for export, and capital-intensive rather than labor-intensive activities, where Morocco enjoyed a comparative advantage. Government control and intervention, affecting a large share of the economy, continued to hinder the efficient functioning of the economy. In the budget, the share of unproductive expenditure in total expenditure remained high, and reforms were not undertaken to improve the elasticity of the tax system. Public enterprises continued to incur losses and rely on transfers from the government budget. In these circumstances, the stabilization policies of 1978–79 did not bring about a lasting and satisfactory improvement.

  • Dooley, Michael, David Folkerts-Landau, Richard D. Haas, Steven A. Symansky, and Ralph W. Tryon, Debt Reduction and Economic Activity, IMF Occasional Paper, No. 68 (Washington: International Monetary Fund, March 1990).

    • Search Google Scholar
    • Export Citation
  • Finaish, Mohamed, and Eric Bell, “The Arab Maghreb Union,” IMF Working Paper No. 94/55 (Washington: International Monetary Fund, May 1994).

    • Search Google Scholar
    • Export Citation
  • Gold, Joseph, The Fund’s Concepts of Convertibility, IMF Pamphlet Series, No. 14 (Washington: International Monetary Fund, 1971).

  • International Monetary Fund, Exchange Arrangements and Exchange Restrictions Annual Report (Washington, various issues).

  • International Monetary Fund, International Financial Statistics (Washington, various issues).

  • International Monetary Fund, Direction of Trade Statistics (Washington, various issues).

  • Morocco, Bank Al-Maghrib, Annual Report (Rabat, various issues).

  • Morocco, Ministry of Commerce, Industry, and Privatization, Text of Law and Decrees Authorizing the Transfer of Public Enterprises to the Private Sector (Rabat, 1994).

    • Search Google Scholar
    • Export Citation
  • Morocco, Ministry of Finance, Statistiques du Trésor (Rabat, various issues).

  • Morocco, Ministry of Finance, Loi de Finances (Rabat, various issues).

  • Morocco, Premier Ministre, Ministère Charge de l’Incitation de l’Economie, Direction de la Statistique, Annuaire Statistique du Maroc 1993 (Rabat, 1993).

    • Search Google Scholar
    • Export Citation
  • Nsouli, Saleh M., Current Account Convertibility: Anachronism or Transition (paper presented at the Seminar on Currency Convertibility, Marrakech, December 1993).

    • Search Google Scholar
    • Export Citation
  • Nsouli, Saleh M., Peter Cornelius, and Andreas Georgiou, “Striving for Currency Convertibility in North Africa,” Finance and Development, Vol. 29 (December 1992), pp. 4447.

    • Search Google Scholar
    • Export Citation
  • Organization for Economic Cooperation and Development, Revenue Statistics of OECD Member Countries, 1965–92 (Paris, 1993).