Abstract

The economic and financial imbalances in the Moroccan economy at the beginning of the 980s had resulted from an excessive expansion in domestic demand—driven in large part by the ambitious public investment programs—and from an inadequate growth in supply, primarily reflecting price and market distortions as well as inefficient public sector investment. The adjustment strategy adopted by the authorities at the beginning of the 1980s aimed at achieving a sustainable growth rate and a viable balance of payments position over the medium term, with policy measures envisaged in two broad areas. First, fiscal and monetary policies were to be strengthened to bring the level and growth of demand in line with the level and growth of productive capacity. Second, distortions in the incentive structure were to be corrected to improve savings, encourage productive investment, induce a shift of resources toward the export sector, and strengthen the productive base of the economy. This entailed not only a realignment of relative prices, but also a shift away from direct controls and intervention toward greater reliance on market forces.

The economic and financial imbalances in the Moroccan economy at the beginning of the 980s had resulted from an excessive expansion in domestic demand—driven in large part by the ambitious public investment programs—and from an inadequate growth in supply, primarily reflecting price and market distortions as well as inefficient public sector investment. The adjustment strategy adopted by the authorities at the beginning of the 1980s aimed at achieving a sustainable growth rate and a viable balance of payments position over the medium term, with policy measures envisaged in two broad areas. First, fiscal and monetary policies were to be strengthened to bring the level and growth of demand in line with the level and growth of productive capacity. Second, distortions in the incentive structure were to be corrected to improve savings, encourage productive investment, induce a shift of resources toward the export sector, and strengthen the productive base of the economy. This entailed not only a realignment of relative prices, but also a shift away from direct controls and intervention toward greater reliance on market forces.

In terms of policy packages, the authorities’ adjustment strategy during the 1980s had two broad phases. In the first phase, which lasted through 1985, the emphasis was on fiscal adjustment through large cuts in capital expenditure and wage restraint, supported by a tight monetary policy through credit controls and a flexible exchange rate to improve competitiveness. These policies were designed to achieve the stabilization goals, in particular, to improve the external current account within a relatively short period. During this first phase, although several structural reforms were envisaged in the context of the extended arrangement, progress on this front was slow and, ultimately, was mostly limited to preparatory studies. In part, this reflected a severe setback that occurred in 1981, as the combined effect of rising defense outlays, a drought, and delays in tax and subsidy reform—prompted by riots—contributed to a massive deterioration of the fiscal position. Concurrently, the envisaged actions to improve the financial performance of public enterprises were not fully implemented. This setback prompted the authorities to replace the program supported by the extended arrangement with programs supported by a succession of stand-by arrangements, while a thorough preparation of structural reforms was launched and a consensus on the need for such reforms was sought. In the second phase, which began in 1986, the policy packages gave greater emphasis to structural reforms to ensure the sustainability of the adjustment effort but continued to attach importance to strengthening the budgetary position. Major structural reforms were initiated to overhaul the fiscal system and the trade regime. Fiscal reforms sought to enhance the elasticity of the tax system, improve the distribution of the tax burden, and reduce distortions while concurrently limiting the growth and improving the structure of expenditure. Trade and exchange liberalization aimed at ameliorating resource allocation and fostering external adjustment. Reforms were also introduced in the areas of public enterprises, the financial system, pricing policies, and investment codes. In this phase, the nominal exchange rate was anchored to a currency basket of Morocco’s main trading partners, apart from a step devaluation in May 1990 and a concurrent change in the composition and the weights of the basket.

Morocco’s adjustment efforts since 1980 have been supported by nine IMF arrangements, with an arrangement in effect at least part of every year during 1980–93 (Table 2). During this period, the IMF committed SDR 3.040 million to Morocco under stand-by and extended arrangements, and Morocco used resources amounting to a cumulative total of SDR 1,733 million by the end of March 1993, when the last stand-by arrangement expired, including SDR 351 million under the compensatory financing facility. In addition to financial support, the IMF also provided extensive technical assistance, notably in the areas of expenditure control and monitoring, tax system reform, and exchange rate policy.

Table 2.

Stand-By and Extended Arrangements Approved During 1980–92, and Related Purchases Under the Compensatory Financing Facility

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Source: Treasurer’s Department.

Arrangement was canceled in March 1981 and replaced by another extended arrangement.

Arrangement was canceled in April 1982.

Combined export and cereal purchase.

Arrangement was canceled in December 1986.

Arrangement was extended to April 30, 1988.

Morocco’s adjustment strategy was supported by considerable external financing from official bilateral and other multilateral sources, as well as by debt reschedulings. The cumulative Paris Club debt relief under six reschedulings (1983–92) totaled $6.9 billion. In addition, commercial bank creditors agreed to restructure, under three reschedulings (1986–92), a total of $6.7 billion of medium-term debt. During 1980–93, resources committed to Morocco by the World Bank (including those from the International Development Agency) totaled $5.4 billion, and cumulative gross disbursements amounted to $4.2 billion.

Morocco’s approach to adjustment can be characterized as gradual, as the authorities considered it politically more acceptable and hence more sustainable. Given the size of the imbalances at the beginning of the 1980s, this approach required a relatively long IMF involvement and, in the event, necessitated significant amounts of external financing.

In terms of strength and policy mix, the implementation of policies diverged somewhat from the programs. First, the pace of adjustment was significantly slowed down by adverse exogenous factors, of both external and domestic origins. Second, the progress made in fiscal adjustment—the key policy element—proved more difficult to achieve than expected, reflecting both revenue shortfalls and expenditure overruns, with the budgetary outcome being on track in only three annual programs. However, the strong implementation of some other policies, particularly credit policies and exchange rate policies, served to offset in part the impact of the weaknesses in the fiscal stance. Finally, the pace of structural reforms was also slower than initially envisaged because of the time needed to forge the necessary political consensus and, subsequently, to formulate and implement the reforms.

The results of the annual programs compared with the original program targets were mixed (Table 3). All macroeconomic objectives of the adjustment program were broadly achieved only in 1988, when exogenous conditions, notably weather conditions and the evolution of the terms of trade, were favorable: the implementation of demand-management policies improved, partly reflecting these exogenous developments, and structural reforms started to have an impact. In terms of specific objectives, the growth performance, which was very much influenced by such exogenous factors, exceeded the target in five of the program years. Inflation, reflecting the strong implementation of monetary and credit policies, was lower than envisaged in eight of the program years. However, the external current account objectives were met in only three of the program years. There was a strong correlation between the meeting of the fiscal target under the program and the achievement of the external current account objective. The external current account objective was met despite a substantially higher than programmed budget deficit only in 1983, when exchange restrictions were imposed and developments in the terms of trade were substantially better than envisaged at the time the program was formulated. Similarly, the only year in which the external current account objective was not met despite a better-than-programmed budgetary outturn was in 1986, when the improvement in the terms of trade was much smaller than forecast at the time the program was formulated.

Table 3:

Performance Under Adjustment Programs

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Sources: Various staff reports on use of IMF resources; Moroccan authorities; and IMF staff estimates.

Annual percent change.

Excluding official grants, in percent of GDP.

Payment-order basis, excluding grants, in percent of GDP.

Program objectives are those that were specified at the time the request for the use of IMF resources was submitted for Executive Board approval. Some of the objectives were revised at the time of the reviews.

No program targets for 1993 were set under the last stand-by arrangement, which expired in March 1993 and which was in support of a program for 1992.

Overall, although economic performance under the annual adjustment programs often fell short of expectations owing notably to policy slippages, poor harvests, and unfavorable terms of trade developments, the adjustment process nonetheless moved more or less steadily in the right direction and brought tangible, albeit gradual, progress. Over the adjustment period, inflation was kept relatively low; the average annual growth rate resulted in an increase in per capita income; and the savings performance of the economy improved so that only a modest reduction in the ratio of investment to GDP was required to restore external viability by the end of 1992.

The external debt situation also improved significantly. External debt declined from a peak of over 128 percent of GDP in 1985 to 75 percent at the end of 1992. Over the same period, debt service, before debt relief, fell from 58 percent of exports of goods and nonfactor services and private transfers to 37 percent, while gross official reserves increased from the equivalent of 0.3 month to 5.1 months of imports of goods and nonfactor services. The success of Morocco’s adjustment strategy was demonstrated by the resilience of the Moroccan economy in 1993, the first year the country did not have recourse to the use of IMF resources, debt relief, or other exceptional financing. Although a severe drought continued for the second consecutive year, the fiscal and current account deficits were held close to the 1992 levels and the annual average inflation rate was reduced even further. In addition, Morocco was able to establish the convertibility of the dirham for current account transactions, relax a number of restrictions on capital transactions by residents, and establish virtually full convertibility for nonresidents. Increased confidence in the Moroccan economy was evidenced by a steep rise in secondary market prices for Morocco’s debt and a further step-up in direct foreign investment, permitting an additional accumulation of gross official reserves to the equivalent of some six months of imports.

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