Abstract

During the first half of the 1970s, Morocco pursued a relatively conservative fiscal policy. Following the boom in phosphate prices in 1974–75, this policy stance changed dramatically. Although revenue increased considerably, it was outpaced by expenditure, largely on account of a buildup in defense outlays and a surge in government investment. As a result, the fiscal deficit deteriorated rapidly, reaching 18 percent of GDP in 1976 when phosphate prices dropped sharply (Chart 1).1 When phosphate prices dropped further in 1977, the fiscal deficit was brought down primarily through cuts in investment outlays, albeit only to 11 percent of GDP by 1978. It then continued at around that level for the next two years, as further cuts in expenditure and adjustment measures under the Government’s three-year stabilization plan initiated in 1978 were not sustained, partly owing to unfavorable weather conditions and increases in oil prices. The large fiscal deficits in the second half of the 1970s were financed by net domestic bank credit, amounting to 3–4 percent of GDP annually, and increased external borrowing on commercial terms. These deficits were largely responsible for a worsening of inflationary pressures, a rapid buildup of external debt, and the ensuing pressures on the balance of payments.

During the first half of the 1970s, Morocco pursued a relatively conservative fiscal policy. Following the boom in phosphate prices in 1974–75, this policy stance changed dramatically. Although revenue increased considerably, it was outpaced by expenditure, largely on account of a buildup in defense outlays and a surge in government investment. As a result, the fiscal deficit deteriorated rapidly, reaching 18 percent of GDP in 1976 when phosphate prices dropped sharply (Chart 1).1 When phosphate prices dropped further in 1977, the fiscal deficit was brought down primarily through cuts in investment outlays, albeit only to 11 percent of GDP by 1978. It then continued at around that level for the next two years, as further cuts in expenditure and adjustment measures under the Government’s three-year stabilization plan initiated in 1978 were not sustained, partly owing to unfavorable weather conditions and increases in oil prices. The large fiscal deficits in the second half of the 1970s were financed by net domestic bank credit, amounting to 3–4 percent of GDP annually, and increased external borrowing on commercial terms. These deficits were largely responsible for a worsening of inflationary pressures, a rapid buildup of external debt, and the ensuing pressures on the balance of payments.

Chart 1.
Chart 1.

Fiscal Indicators

(In percent of GDP)

Sources: Moroccan authorities; and IMF staff estimates.

By the early 1980s, the authorities recognized that fiscal deficits averaging more than 10 percent of GDP could not be sustained. The adjustment programs adopted during 1980–93 therefore aimed at reducing significantly the fiscal imbalance to lower inflation, promote economic growth, and foster the viability of the balance of payments over the medium term.

The reduction in the fiscal deficit went through two phases (Table 4). In the first phase—which began weakly in 1981 but gained momentum in 1982 and lasted through 1985—the authorities emphasized reducing expenditure (primarily capital expenditure) as a percentage of GDP to bring about a rapid improvement in the fiscal balance. Mean-while, they were preparing an overhaul of the tax system. In the second phase, which lasted from 1986 until 1993, the focus shifted to cutting current expenditure and upgrading revenue performance, through the implementation of structural tax reforms aimed at improving the elasticity and efficiency of the tax system and broadening the tax base. In designing the fiscal adjustment measures, the authorities paid particular attention to protecting the most vulnerable segments of the population.

Table 4.

Financial Transactions of the Central Government

(In percent of GDP)

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Sources: Ministry of Finance; and IMF staff estimates.

During the adjustment period, fiscal performance was at times hampered by fluctuations in weather conditions, adverse movements in international interest rates or the terms of trade, delays in preparing and implementing tax reforms, and an overshooting in expenditure because of domestic political and social considerations. Nonetheless, after a decade of fiscal adjustment, the Government brought the budget deficit down to less than 3 percent of GDP, streamlined the tax system considerably, and ameliorated the structure of expenditure.

Expenditure Issues and Policies

At the beginning of the 1980s, the level of government expenditure, at about 35 percent of GDP, could no longer be sustained; the revenue base remained weak, mainly because of lower receipts from the phosphate sector and the relatively inelastic tax system. Expenditure thus had to be reduced substantially as a ratio to GDP.

The initial focus was on cutting capital expenditure, the largest item in the budget, which accounted for 36 percent of total expenditure at the start of the 1980s. While such levels were unsustainable, the productivity of capital outlays suffered from the lack of adequate project preparation. The budgeting and expenditure control procedures for implementing and monitoring projects were also inadequate. The payment authorizations approved by Parliament exceeded by far the amount available for payments, and, since unspent authorizations could be carried over from one year to the next, the gap grew ever wider. As a result, the public investment program was marred by low rates of return, rising budgetary allocations for investment, and the emergence of payments arrears. To cut back capital expenditure, the authorities canceled or delayed new projects, transferred a portion of capital outlays to public enterprises or to other levels of the public sector, and took several measures to improve budgetary procedures. In particular, they established limits for expenditure authorization, commitment, payment orders, and payments to bring investment outlays in line with budgetary allocations. Starting with the 1986 budget law, uncommitted authorizations in a given year were canceled, and the carryover was limited to commitments for which payment orders had not been issued. In addition, a new nomenclature was introduced in 1989, together with an improved computerization of the accounts, to facilitate implementation of the investment program.

Morocco’s adjustment strategy also involved a restrained wage policy and limits on hiring, as the wage bill constituted the second largest share of expenditure, with 33 percent of the total in 1980. Wage freezes were implemented in 1981–85, resulting in a reduction of some 20 percent in civil servants’ real wages. To support the control of the wage bill, the authorities initiated a reform of the civil service remuneration system in 1982. It aimed at increasing the productivity of the civil service by rationalizing the wage structure and providing appropriate wage incentives to qualified staff. As the budgetary position improved, wage increases were granted during 1986–91 to retain and attract qualified personnel, and the average real wage of civil servants gradually returned to its 1980 level by 1990 and slightly exceeded it by 1991. However, it declined again during 1992–93, in the absence of any nominal wage increase during these years. Concurrently, the expansion of the civil service was slowed down. Hiring declined from an annual average of 6.5 percent in 1981–83 to 2.5 percent in 1984–86 and continued at about the same average pace thereafter. Thus, the number of civil servants increased from about 500,000 in 1980 to over 700,000 in 1993.

The Government also launched a broad effort to streamline three other categories of expenditure: goods and services, subsidies, and transfers. Expenditure on goods and services (other than wages) was slashed during 1981–86. In particular, maintenance programs were cut, with a possible adverse impact on the productivity of the capital stock and infrastructure. At the same time, the underbudgeting of expenditure, particularly on utilities, contributed to the accumulation of a stock of government arrears equal to some 10 percent of GDP by the end of 1985. These arrears were gradually reduced in subsequent years; to prevent their re-emergence and to reduce waste, the authorities took measures in 1986 to provide for a more adequate budgeting for utilities and maintenance programs while keeping them constant in real terms during 1986–91. However, allocations for office equipment and computers were increased in the following years to reinforce the efficiency of administration.

Consumer subsidies, which represented 7.5 percent of total expenditure in 1981, covered certain vital consumer goods—mainly several categories of flour, edible oil, butter, milk, and sugar—and production inputs, such as cement, fertilizers, and certain petroleum products. The adjustment policy aimed at reducing the ratio of subsidies to GDP while minimizing the impact on the most vulnerable segments of the population. Thus, while increasing the prices of subsidized goods, the Government improved the targeting of subsidies to the lower-income groups. Price increases started with categories of lesser necessity, which constituted the lowest proportion in the consumption basket of the poor. The authorities also lowered the costs of subsidies by limiting the scope of goods that benefited from subsidization while safeguarding goods consumed most by the lower-income groups. The reduction in subsidies was also helped by declining import prices of the subsidized products.

Transfers to public enterprises were reduced in the context of the reform of public enterprises, including cost recovery and privatization. However, the comprehensive measures took time to formulate and implement, which precluded a significant reduction in these transfers. The transfers to local governments had been set every year in the annual budget laws until 1988; in that year, a law was passed earmarking 30 percent of the value-added tax (VAT) revenue to the local governments to provide a more regular revenue flow to their budgets.

Revenue Issues and Policies

While the main focus in the first half of the 1980s was to reduce the fiscal deficit rapidly through expenditure cuts, this approach was complemented in the second half of the decade by efforts to reform the tax system and reverse the ongoing slow erosion of the tax base, which was mainly due to declining phosphate-related revenues. These efforts succeeded in raising tax revenue as a share of GDP by nearly 5 percentage points between 1986 and 1993.

Tax System

In the early 1980s, the tax system was highly complex, with numerous taxes subject to multiple rates, deductions, exemptions, and preferential treatments. These characteristics contributed not only to the distortionary and inequitable features of the tax system but also to its inelasticity and significantly complicated tax administration.

The budget depended heavily on international trade taxes, the most important source of revenue, accounting for about 25 percent of total revenue in 1980. Of this amount, import duties and taxes accounted for 80 percent and contributions from phosphate exports for the remainder. Import duties were characterized by high rates, with a wide dispersion from zero to 400 percent. A special import tax of 15 percent and stamp duties were superimposed on import duties.

Sales taxes were the second largest source of budgetary revenue in 1980, accounting for some 22 percent of the total. While the sales tax on goods was a VAT applied to manufacturing and import levels, the tax on services was a cascade tax. This shortcoming, combined with extensive exemptions and multiple rates, contributed to distortions and made administration of these taxes more complicated. Excise duties, accounting for some 11 percent of total revenue, were inelastic in that most of the rates were specific, except those on tobacco products, and did not change commensurately with the considerable price changes that took place during 1975–85.

The schedular taxes on income and profits—the third largest source of budgetary revenue in 1980, contributing 20 percent of total revenue—were rather complex, as different sources of income were taxed according to different schedules, with high marginal rates and elaborate rules on deductions and exemptions. The superimposition of a national solidarity surtax on each source of income and a complementary tax on the total of almost all sources of income further added to the complexity and non-transparency of the system.

To encourage investment in high-priority sectors and underdeveloped regions, nine investment codes granted generous long-term tax exemptions, which varied across sectors. These codes contributed to a revenue loss, estimated at 1 percent of GDP, and tended to introduce distortions by differentiating investment incentives between sectors and regions.

Tax Reforms

The objectives of the tax reforms—as outlined in the Loi Cadre of April 1984, which governed the later introduction of the corporate profit tax, the VAT, and the global income tax—were to reduce distortions, improve equity, increase simplicity and transparency, and facilitate tax administration. The attainment of these objectives was expected to increase the elasticity of the tax system, reduce the dependence of the budget on import taxes, and provide an economic environment more favorable to investment, employment, and growth. The tax reforms were also accompanied by measures to rationalize the operations of local governments.

A primary objective of the reform was to simplify and rationalize income taxation by eliminating the complexity of the schedular income taxes. In December 1986, a separate corporate profit tax replaced the tax on professional profits. The two rates on the latter tax were merged into a single rate of 45 percent. This was subsequently reduced to 40 percent in 1989 and to 38 percent in 1993. The national solidarity tax surcharge on profits continued to apply, but at the rate of 10 percent. A minimum corporate tax was also introduced to ensure tax payment from all corporations regardless of their profits. At the same time, the tax base was enlarged by reducing exemptions. In November 1989, a global personal income tax was introduced to replace the schedular taxes and the complementary income tax. The new single schedule had a top marginal rate of 52 percent and a minimum personal exemption of DH 12,000. In 1993, the top marginal rate was reduced to 48 percent and the minimum personal exemption was raised to DH 15,000. The global income tax has improved transparency, simplicity, and equity.

The most important reform of the indirect taxes was the introduction of the VAT in April 1986 to replace the sales taxes on goods and services. The VAT initially had five rates, ranging from 7 percent to 30 percent with the basic rate fixed at 19 percent, but the number of rates was reduced to three in 1993.2 For social reasons, basic consumption goods such as flour, milk, and sugar were exempted. The VAT has, to a large extent, achieved simplification and neutrality by unifying the two sales taxes, extending the tax base to the distribution sector, reducing the number of rates, and generalizing the tax credit mechanism to eliminate the cascading effects and 19 percent, of the tax on services. Administration was facilitated by exempting small businesses and professionals from the VAT, which would have yielded only minor revenue for the budget.

The reform of taxes on goods and services was accompanied by the introduction of a levy on petroleum products in 1986 to capture the windfall profits derived from the differential between the international prices and the fixed domestic prices of petroleum products. As international oil prices declined sharply in subsequent years, especially in 1988, revenue from the petroleum levy increased substantially, to 2–3 percent of GDP.

In the context of the trade liberalization initiated in 1983, international trade taxation changed considerably. First, quantitative restrictions on imports were gradually replaced by tariffs. Second, the rates were gradually reduced. The maximum tariff rate was cut from 400 percent in 1980 to 35 percent in 1993,3 and the rate of the special import tax from 15 percent in 1983 to 5 percent in 1987. Third, import taxes other than tariffs were simplified in 1988 by replacing the special import taxes and stamp duties on imports with a single flat import levy4 of 12.5 percent applied to virtually all imports. As a result, the dispersion of tariffs and effective protection were substantially narrowed. On exports, the statistical tax was eliminated in 1986. The main measure regarding other taxes was a simplification of stamp taxes and registration fees in 1989 to promote compliance.

Regarding the investment codes, a major reform was introduced in 1988 to reduce the scope and duration of tax benefits. Under the new regime, most exemptions were limited to 50 percent of income taxes, while the maximum period of exemption was reduced in most cases from 5–15 years to 5 years and in a few cases to 10 years. The administrative procedures were substantially simplified in 1989. Even with these reforms, the current multiple codes still tend to distort the allocation of resources among sectors because of their differential tax preferences. Therefore, to reduce distortions across sectors, the authorities have been working to replace the existing investment codes with a unified code.

The reforms were accompanied by measures to improve tax administration, in particular during the second part of the 1980s. Procedures for tax assessment, collection, and auditing were strengthened. Computerization was increased, especially with the introduction of the VAT. Procedures were introduced to ensure self-assessment for, and automatic payment of, the VAT, the corporate profit tax, and the global income tax. Tax amnesties were granted in 1984 and 1990, with a view to bringing more taxpayers into the tax net and reducing evasion. From mid–1991, tax administration was further strengthened by the extension of tax withholding to some sources of income other than wages and salaries; the increased coordination of different tax collection services; and enhanced computerization to permit more exchanges of tax information and the cross-checking of tax liabilities. Furthermore, in 1993, quarterly installment payments on a current-year basis were established, eliminating the previous delay of one year between the accrual of corporate profits and their tax payment.

Outcome

Despite occasional setbacks, the fiscal balance improved steadily during the adjustment period. Through 1986, adjustment occurred through cutbacks in expenditure. In subsequent years it was based on improving revenue performance, as tax reforms implemented earlier started to bear fruit.

Expenditure

Total expenditure was reduced by 7.4 percentage points of GDP between 1981 and 1993, to reach 29.2 percent of GDP in 1993. The cuts were implemented essentially during 1981–86 and affected mainly capital expenditure and, to a lesser extent, current expenditure.

Capital expenditure initially bore the brunt of the adjustment. It was sharply cut by 5 percentage points of GDP in 1981–85 and by another 3.6 percentage points of GDP in 1986. The cut in 1986 was effected in response to the VAT revenue shortfall following the introduction of the VAT, but it also reflected the reform in capital expenditure control procedures implemented at the beginning of 1986. Capital expenditure in 1986—3.6 percent of GDP—was considered too low to sustain medium-term economic growth and was raised in subsequent years, with a surge in 1989–90 following an improvement in the rate of execution of investment projects.

During 1981–93, the wage bill was reduced by 1.3 percent of GDP, to 10.5 percent in 1993. This reflected a reduction of 2 percent of GDP in 1981–85—achieved by the above-mentioned wage freeze and hiring limits—which was then partially offset by an increase of 0.7 percent of GDP during 1986–93, owing to a resumption of wage increases and hiring. Notwithstanding the decline in the wage bill relative to GDP, its share in total expenditure increased from 33 percent in 1980 to 36 percent in 1993.

Other outlays on goods and services were cut by 0.8 percent of GDP during 1981–93. Between 1984 and 1991, such outlays were kept at about 3 percent of GDP but rose in 1992–93 to 4 percent of GDP, largely because of purchases of office equipment to make public administration more efficient. The arrears that had accumulated during 1980–85, in part because of an underbudgeting for these outlays, were gradually reduced during 1986–93.

The accumulation of domestic and foreign debts to finance the large deficits led to an increasing burden of interest payments on the budget. These more than doubled, from 2.4 percent of GDP in 1980 to 5.8 percent in 1993, to become the third largest item in the budget. After a rapid increase in the early 1980s, interest payments peaked at 6.2 percent of GDP in 1985, remained virtually stable until 1990, and started dropping thereafter, reflecting mainly a more restrained borrowing policy and lower international interest rates. The relative deceleration in interest payments on foreign debt was partially offset by higher interest payments on domestic debt on account of higher domestic financing by treasury bonds and by higher domestic interest rates after 1986, in part due to the liberalization of interest rates. Although domestic interest payments increased from less than 1 percent of GDP in 1981 to 2.5 percent in 1993, foreign interest payments remained predominant at 3.3 percent of GDP in 1993.

Expenditures on subsidies fell from 2.7 percent of GDP in 1981 to 0.8 percent in 1993, with the main cut effected in 1986. Apart from the direct actions taken to reduce subsidies, large drops in the import prices of the subsidized products and the limiting of subsidies to specific varieties of products contributed to the decline. Transfers declined from a peak of 2.1 percent of GDP in 1982 to 0.5 percent in 1993, largely as a result of efforts to reform public enterprises.

The fiscal adjustment resulted in a decline of all functional categories of expenditure as a share of GDP, except interest payments and local governments. The latter expanded from 0.8 percent of GDP in 1980 to 2.4 percent in 1992, reflecting the transfer of the earmarked VAT revenue starting in 1988. At the same time, outlays for the social sectors increased as a percentage of total expenditure; in particular, education and health spending grew from 20.9 percent to 22 percent of total outlays. In contrast, the share of other functions in total expenditure, including defense and public order, fell during the same period.

Revenue

Revenue as a percentage of GDP declined until the mid-1980s and increased afterward. The drop in revenue of some 2 percentage points of GDP in 1981–85 was mainly due to the initial negative impact of trade reform on import tax revenue and the decline in phosphate prices, which affected dividends from public enterprises. During 1986–93, revenue increased by 5.7 percent of GDP to reach 26.4 percent in 1993. The reversal can be attributed to the increase in the elasticity of the tax system, resulting from the tax reforms and the improvement in tax administration, especially during 1991; the replacement of quotas by tariffs under the trade liberalization; the reduction in exemptions; and the establishment of the petroleum levy in 1986. The reforms contributed to a substantial improvement in revenue, even after excluding revenue from the petroleum levy (some 2.4 percent of GDP in 1986) and other exceptional measures, such as the acceleration of corporate tax payments and a tax amnesty in 1990 (about 0.8 percent of GDP in that year).

The reforms changed the tax structure. In the early 1980s, taxes on international trade were the most important source of revenue (25 percent of total), followed by sales taxes (22 percent), income taxes (20 percent), and nontax revenue (15 percent). In 1990–93, the VAT and income taxes became the two most important sources of revenue (23 percent each), while taxes on international trade ranked third (19 percent), followed by the petroleum levy (7 percent). Although the share of international trade taxes in total revenue has declined, the tax system still depends heavily on international trade.

During 1981–93, revenue from taxes on income and profits increased by about 1 percent of GDP to 5.7 percent in 1993. This gain, albeit modest, can be attributed to the impact of the far-reaching reforms introduced during 1986–89, which enhanced the buoyancy of the tax system in spite of the reduction in the rates on corporate and individual income taxes and the increased personal exemption for individual income tax. A comparison with the countries of the Organization for Economic Cooperation and Development (OECD) shows that, while corporate income tax revenue in Morocco was very close to the average of 2.2 percent of GDP observed in OECD countries, personal income tax revenue, at about 2.7 percent of GDP in 1993, was substantially lower than the average of some 11 percent of GDP for those countries in the late 1980s.5 This suggests that there is considerable potential for expanding the share of personal income tax in total revenue.

Between 1981 and 1993, revenue from taxes on goods and services increased by 3.4 percentage points of GDP, to 11 percent in 1993, or 42 percent of total revenue. The revenue growth in 1981–85 was mainly due to rate increases,6 while in the subsequent period it was due to the introduction of the petroleum levy in 1986 and to the gradual increase in the buoyancy of the VAT, despite an initial shortfall of 1 percent of GDP following its introduction. The VAT shortfall was caused mainly by the generalization of tax credits, which was not fully offset by a reduction in exemptions; a broadening of the tax base; a rise in tax rates; or a reduction of the legal lag to claim tax credits. Notwithstanding these initial difficulties, the gradual improvement in tax administration and the shift of certain products to higher rates in 1988 enhanced the buoyancy of the VAT in subsequent years. Revenue from other taxes on goods and services, primarily on tobacco and petroleum products, remained at a stable ratio to GDP, at about 2.5 percent, owing mainly to increases in the ad valorem tax rate on tobacco products.

Under the trade liberalization program, the average rate of import tariffs and taxes declined from 18.9 percent of imports of goods and nonfactor services in 1981 to 13 percent in 1985. It then rose to 20 percent in 1993. This increase, particularly after 1988, was due to the acceleration of the replacement of quotas by tariffs, the application of the single import levy to virtually all imports, and a decline in tax evasion, resulting from the reduction in both the levels and the dispersion of the tax rates. Representing less than 1 percent of total revenue or GDP, revenue from export taxes was minimal. Other tax revenue increased after 1989, in particular that from registration fees and stamp duties, as a result of the reforms.

Finally, nontax revenue remained near 2 percent of GDP throughout the 1980s. The decline in revenue from the phosphate sector has been offset in recent years by improved revenue from other public enterprises, receipts from the fishing agreement with the European Union (EU) (formerly the European Community), and higher net earnings of the central bank.

Fiscal Balance

As a result of the revenue-enhancing and expenditure-reducing measures described above, the fiscal deficit, on a payment-order basis and excluding grants, was cut from 14 percent of GDP in 1981 to 2.8 percent of GDP in 1993. The adjustment was relatively stronger during 1986–93 than during 1981–85, owing to a reduction of 4.2 percentage points in 1986. In that year, sharp cuts in expenditure of some 6 percentage points of GDP more than offset a drop in revenue of some 2 percentage points related to the introduction of the VAT. Also in 1986, the primary fiscal balance turned positive.7 The stronger adjustment during 1986–93 was also attributable to the positive impact of the tax reforms, which started to materialize toward the end of the period. In 1993, the deficit increased to 2.8 percent of GDP owing mainly to a worse-than-expected drought and economic conditions in Morocco’s major export markets.

Payments arrears emerged in 1980 as expenditure was cut insufficiently in the face of declining revenue. Apart from a partial reduction in 1981, arrears continued to accumulate until 1985, principally on materials and supplies, subsidies, debt service, and capital expenditure. The accumulation of payments arrears by the Government was accompanied by arrears of public enterprises toward the Government and cross-debts among public enterprises and between these and the private sector. At the end of 1985, the stock of gross domestic arrears owed by the Government was estimated at DH 12.9 billion (10 percent of GDP). In 1987, after having completed a cross-cancellation of identified debts between the Government and public enterprises, the authorities reduced the Government’s remaining gross obligations to DH 5 billion by issuing treasury bonds and canceling tax liabilities. The reduction of arrears was pursued during 1988–93, except in 1989, when a sharp increase in capital appropriations led to an accumulation of arrears of about 1 percent of GDP. Thus, the stock of gross domestic arrears owed by the Government was brought down to DH 3.3 billion (1.3 percent of GDP) by the end of 1993. When changes in arrears are taken into account, the fiscal deficit on a cash basis and excluding grants broadly followed the reduction pattern of the fiscal deficit on a payment-order basis.

The financing of the fiscal deficit changed both in its level and in its structure during 1980–93. Domestic and foreign financing and grants were reduced in terms of GDP while the share of domestic financing in total financing grew, reflecting in part increased financing through treasury bonds during 1985–93. Net foreign financing and grants, which accounted for a major share in the 1980s, declined through 1993, as amortization increasingly exceeded foreign borrowing after 1982. In 1983, debt rescheduling started and, with an annual average of 4 percent of GDP, it became the major form of foreign financing until the end of 1992, the last year for external debt rescheduling. Grants, mostly from other Arab countries, varied from insignificant amounts in 1986, 1987, 1989, and 1992 to about 2.5 percent of GDP in 1990–91 and 1 percent in 1993. Foreign financing and grants dropped to 0.1 percent of GDP in 1993.

Social Issues and Protection

A major concern of the authorities has been to reduce poverty and improve the welfare of the population as pan of their efforts to develop the economy. Over the last two decades, much progress has been achieved. GDP per capita has risen substantially, and a recent World Bank report indicates that the number of poor was halved, to 3.3 million or 13 percent of the population in 1990–91. Other social indicators have also improved (Table 5). For example, the number of pupils per teacher and of inhabitants per physician, as well as infant mortality, declined between 1980 and 1990. The most important element of poverty reduction, especially during 1987–91, was a relatively high rate of economic growth in conjunction with the reduction of inflation and the implementation of structural reforms, which, together, provided substantial employment for a growing population. Furthermore, the reduction in the fiscal deficit was achieved through measures that were likely to improve equity. For example, the replacement of the schedular income taxes by the global income tax enhanced equity, as all sources of income were subject to the same tax scale. Moreover, tax liabilities became more closely related to the ability to pay, while the exemption of basic products consumed by the most vulnerable groups tempered any regressivity of the VAT. At the same time, to the extent that the initial freeze on public sector wages served as a signal for private sector wage setting, it prevented layoffs during the most difficult phase of adjustment, while the reduction of consumer subsidies was achieved, in part, through improved targeting.

Table 5.

Social Indicators

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Sources: Moroccan authorities; World Bank; and IMF staff estimates.

Using the official exchange rate.

Minimum wage in the industrial sector.

Notwithstanding the progress achieved thus far in reducing poverty, major challenges remain to be addressed. First, the number of poor people, most of them living in the rural areas, is still high. Second, considerable disparities in living conditions and welfare indicators still prevail between urban and rural areas and between the different income groups in those areas. Third, social indicators such as infant mortality and primary school enrollment are still well below those observed in similar countries.

The authorities are aware that to reduce poverty further they must achieve higher growth through increased investment and higher productivity. In addition, targeting public investment to areas where the poorer segments of the population live and improving the flexibility of the labor market will be important. Finally, the authorities need to reallocate current government expenditure to improve the availability of basic social and infrastructure services to the poor.

Local Government Finance Issues

The local governments in Morocco consist of 47 provinces; 13 prefectures, which are divided into 250 urban communes also called municipalities; and 1,300 rural communes. Each province or prefecture is administered by an elected assembly and a governor, who reports to the Minister of Interior and is appointed by the King. Each commune is administered by an elected council and a president. The council formulates the budget, decides on local taxes and fees, and selects investments. The president is responsible for executing the budget, except a major part of local investment, which is directly managed by the central Government. The communal budgets must be approved by the Ministry of Interior and the Ministry of Finance. Both ministries also approve borrowing requests submitted by local governments to lending agencies. The treasury receives all local government resources and pays suppliers on behalf of the communes.

Local governments derive their revenue from more than fifty taxes and fees—four of which are administered by the central Government on behalf of local governments and the remainder by local governments—and from transfers from the central Government. These transfers are used to finance local government current deficits and investment projects managed directly by the central Government, local governments, or jointly by both levels of government. As part of the process of decentralization initiated in 1976, aimed at entrusting local governments with more responsibility for managing local economic and social affairs, the modalities of these transfers were changed in 1988 with the implementation of the 1986 VAT law, allocating 30 percent of VAT revenue to local governments. This allocation replaced all previous transfers, which had to be approved annually by the central Government. In 1990, a reform of local taxes was implemented to provide more revenue to local governments through local taxation.

Most local government expenditure goes toward providing waste disposal and constructing and maintaining roads, slaughterhouses, and markets. Since 1990, additional responsibilities in education and health areas have gradually been transferred to local levels from the central Government to promote further decentralization and reduce the fiscal imbalance at the central level. Services such as water and power distribution and local transportation are provided through entities called régies owned by the local governments. The financial performance of the régies is generally poor. Since both the communes and the régies have limited autonomy and do not have access to bank loans, they borrow from the Fonds d’équipement communal (FEC) to finance their investment projects. The FEC is a government fund charged with appraising communal investment projects, which it finances through domestic bond issues and foreign borrowing. Because of problems with its lending performance, the FEC was restructured in 1992 as an autonomous, government-owned, specialized financial institution.

On the basis of information available since 1988, local governments in the aggregate are estimated to have incurred annual average deficits of some 0.2 percent of GDP during 1988–93, which they financed by borrowing from the FEC. Estimated data for 1993 provide some perspective on the structure of revenue and expenditure. Revenue was estimated at 3.2 percent of GDP in 1993. Of this total, VAT revenue represented the largest share (50 percent); of the remainder, roughly half came from revenue collected by the central Government, and the other half was collected by local governments. Expenditure was estimated at 3.8 percent of GDP in 1993, of which capital expenditure accounted for 47 percent, the wage bill for 31 percent, and goods and services and interest payments for the remainder. About 22 percent of capital expenditure was spent on projects selected and managed by local governments. The remainder was spent on national programs managed by the central Government, or jointly managed by both levels of government. The national programs covered rural development, water, electricity, education, and health.

Local government finances have been difficult to monitor owing to a lack of data, caused in part by the lack of an adequate and uniform nomenclature of expenditure. Without such a nomenclature, consolidation of local budgets and their consolidation with the central government budget to obtain a more comprehensive picture of the financial operations of the Government as a whole have not been possible. These difficulties have been mitigated, to some extent, by the joint efforts of the Ministry of Finance and the Ministry of Interior in 1990 to consolidate all actual local government expenditures and revenue from 1988 onward. At the same time, a new nomenclature has been designed to facilitate control of expenditure and to improve harmonization with the nomenclature of the central Government. An accounting plan has been finalized and will be tested in selected communes in 1994 before being applied to all local governments in 1995.

The authorities have formulated the main elements of a reform package for distributing the VAT revenue among different local governments using criteria more relevant than the current population-based one. These would include (1) the size of the population as a proxy for needs; (2) fiscal endowment, as measured by local revenue collected by the central Government to provide an equity adjustment factor to the population criterion; and (3) fiscal effort, as measured by local revenue collected by local governments, to encourage self-reliance. Under the new system, the current deficit coverage by VAT revenue would be eliminated. Local governments would have complete autonomy in using the VAT revenue allocated to them, while the financing of their deficits would be limited by a maximum allowable debt-service ratio imposed by the FEC. The new system is expected to be put in place in 1995.

Outstanding Issues

Morocco has made significant progress on the fiscal front over the past decade: the budget deficit has been brought under control, the elasticity of revenue increased, the reliance on international trade taxes reduced, subsidies lowered, and expenditure control strengthened. Nonetheless, the authorities are planning further steps to make the economic environment more favorable to investment, employment, and growth.

First, improvements in the elasticity and the efficiency of the tax system are expected to continue. The elasticity can be strengthened by broadening the tax base through the reduction of exemptions in income taxes and the extension of the coverage of the VAT, in particular to other retailers in the distribution sector and to agriculture, Currently, the VAT is estimated to cover only 40 percent of GDP. The efficiency of the tax system can also be enhanced by eliminating the differential deductions for different sources of income from the global income tax, completing the phasing out of the VAT on interest, and, more generally, reducing the number of VAT rates and limiting and harmonizing tax incentives under a unified investment code.

Second, tax and customs administration are expected to be further strengthened, mainly through establishment of a system of taxpayer identification and reinforcement of the procedures for assessing, collecting, and auditing. These measures would help particularly to enlarge the income tax base. The improvement in customs administration would be brought about by a further reduction in the number of tariffs, a streamlining of customs procedures, and additional training in customs classification and valuation.

Third, the reliance on import taxes needs to be reduced further to lessen the dependence of the tax system on international trade and reduce the anti-export bias imparted by current trade taxes. This would be achieved principally through a continued reduction of import tariffs.

Fourth, the authorities plan to continue improving the structure of expenditure. In particular, the large share of the wage bill can be tackled through a comprehensive reform of the civil service, while the high interest payments can be reduced through an improvement in the budgetary position, which will help to ease domestic interest rate pressures and the Government’s overall debt burden.

Fifth, the authorities plan to reinforce budget execution and expenditure control. In this respect, they will further rationalize the preparation, programming, execution, and monitoring of investment; introduce an accounting plan to cover all central government operations: and apply the current expenditure nomenclature to the Annexed Budgets and Special Accounts, to provide timely and reliable information to improve financial and cash management.

Finally, the operations of local government finance would be improved to increase the efficiency of the general government. In this regard, it is critical to upgrade the availability and reliability of data so that the local government and the central government budgets can be consolidated: harmonize local taxation to avoid disparities among local governments and an increased total tax burden: and improve the budgetary and expenditure control procedures to allow for a better execution of local budgets.

1

Unless otherwise indicated, the fiscal deficit is measured on a payment-order basis and excludes grants.

2

The three rates are 7 percent, 14 percent, and 19 percent.

3

It was reduced from 400 percent in 1980 to 60 percent in 1984, 45 percent in 1986, 40 percent in 1992, and 35 percent in 1993.

4

Prélèvement fiscal sur I’importation.

6

The basic tax rate on goods increased from 15 percent to 17 percent in 1982 and to 19 percent in 1984.

7

The primary deficit is defined as total revenue less noninterest expenditure.

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