The monetary policy of Morocco’s central bank, Bank Al-Maghrib, has generally aimed at maintaining price stability and safeguarding Morocco’s external position while keeping interest rates at moderate levels and providing enough credit to the private sector to support growth objectives.8 However, during the late 1970s and early 1980s, monetary policy was heavily constrained by the domestic financing requirements of the treasury. In response to the worsening fiscal deficits, domestic credit to the treasury grew, on average, by 25.5 percent a year during 1974–80; with credit to the private sector also expanding rapidly, total credit and broad money increased at average annual rates of about 21.5 percent and 19 percent, respectively, outstripping by a wide margin average real output growth of about 6.2 percent a year. The ensuing brisk growth in excess liquidity, in turn, led to an inflation rate of about 10.5 percent a year and put pressure on the balance of payments. In addition, credit control through direct instruments, combined with ceilings on interest rates, stifled the development of the financial sector, thus weakening Morocco’s ability to mobilize domestic savings and channel them into productive investment. Most interest rates during this period were negative in real terms, contributing to the misallocation of resources (Chart 2).
Interest Rates
(In percent a year)
Source: Moroccan authorities.1Treasury bill rate deflated by CPI.Interest Rates
(In percent a year)
Source: Moroccan authorities.1Treasury bill rate deflated by CPI.Interest Rates
(In percent a year)
Source: Moroccan authorities.1Treasury bill rate deflated by CPI.The adjustment program initiated in the early 1980s called for an improvement in the fiscal position that would be consistent with a monetary policy designed to reduce inflation and re-establish a sustainable balance of payments position while redirecting financial resources increasingly to support the growth of the private sector. The program also emphasized the development of a modern financial sector, with a view to mobilizing domestic savings, enhancing financial intermediation, and fostering better management and allocation of resources. Moreover, in order to improve the efficiency and effectiveness of monetary policy, the program envisaged the development of indirect and market-based monetary policy instruments.
Role of Credit Policy
Although Morocco opted to peg the dirham to a basket of currencies, as it maintained controls on capital outflows and trade, the evolution of broad money and prices tended to be intimately linked to the credit policy stance of Bank Al-Maghrib, at least in the short run. With some lag, however, domestic credit policy, through its impact on excess liquidity and demand, also affected Morocco’s net foreign assets position.
Under the adjustment program, the authorities’ efforts regarding credit policy can be divided into two phases. In the first half of the 1980s, the fiscal position did not improve enough to allow a substantial slowdown in the expansion of domestic credit without unduly squeezing the private sector. In the second half, the marked reduction in the budget deficit gave the monetary authorities greater flexibility in conducting monetary policy. During 1986–89, it enabled them to lower the rate of domestic credit expansion with a view to reducing excess demand pressures and rebuilding net foreign assets; nonetheless, the authorities had to limit rather tightly the growth of credit to the private sector. Starting in 1990, the further improvement in the fiscal position allowed credit to the private sector to pick up without rekindling excessive liquidity growth and inflationary pressures.
Thus, between 1980 and 1985, credit policy continued to be expansionary, reflecting mostly the treasury’s high domestic bank financing requirements, which averaged 3.8 percent of GDP a year, as well as the monetary authorities’ concerns not to unduly restrict private sector credit. In the event, the monetary authorities allowed credit to the private sector to grow broadly in line with nominal GDP, although the private sector’s share in domestic credit, which had reached about 38 percent in 1980, still dropped to about 35 percent in 1985 (Table 6). Overall domestic credit grew, on average, by nearly 17 percent a year. Reflecting the central bank’s credit policy, broad money expanded at an average rate of 14 percent a year, well in excess of real output growth, thereby further exacerbating excess demand pressures. Thus, the inflation rate remained high, averaging about 9.8 percent, and Morocco’s external position worsened significantly, with gross official reserves falling to just over a week of imports of goods and nonfactor services in 1985.
Monetary Indicators
Monetary Indicators
| 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Annual change in percent of beginning broad money stock) | |||||||||||||||
| Net foreign assets | –3.6 | –4.2 | –5.6 | –6.6 | –3.6 | –2.1 | 5.4 | 3.0 | 3.1 | 1.0 | 14.8 | 7.1 | 4.6 | 3.9 | |
| Domestic credit | 14.8 | 20.3 | 15.7 | 24.4 | 11.9 | 18.8 | 10.6 | 6.9 | 11.8 | 10.1 | 2.1 | 14.7 | 7.6 | 6.0 | |
| Private sector | –1.9 | –2.2 | 1.4 | –2.3 | 0.2 | 0.8 | 1.1 | 1.8 | 1.7 | –0.4 | 13.0 | 6.8 | 5.0 | 3.7 | |
| Government | 9.6 | 12.9 | 7.0 | 20.0 | 6.2 | 14.3 | 11.9 | 4.5 | 8.1 | 6.7 | –2.3 | 0.2 | 2.8 | 3.2 | |
| Broad money | 10.9 | 15.5 | 10.3 | 18.0 | 9.0 | 17.7 | 15.9 | 9.7 | 14.7 | 11.8 | 18.5 | 16.8 | 9.3 | 8.2 | |
| Quasi money | 3.9 | 3.5 | 2.9 | 6.5 | 2.4 | 5.9 | 2.3 | 1.0 | 2.8 | 2.7 | 3.4 | 5.4 | 4.5 | 4.3 | |
| Quasi money share in broad money (in percent) | 17.9 | 18.5 | 19.4 | 22.0 | 22.4 | 24.0 | 22.7 | 21.6 | 21.3 | 21.5 | 21.0 | 22.7 | 24.9 | 26.9 | |
| Share in total domestic credit (in percent) | |||||||||||||||
| Central government | 61.8 | 62.1 | 59.9 | 63.9 | 62.8 | 64.7 | 68.7 | 68.5 | 68.6 | 68.4 | 64.8 | 55.5 | 54.0 | 53.9 | |
| Private sector | 38.2 | 37.9 | 40.1 | 36.1 | 37.2 | 35.3 | 31.3 | 31.5 | 31.4 | 31.6 | 35.2 | 44.5 | 46.0 | 46.1 | |
| (In percent of GDP) | |||||||||||||||
| Change in central government credit | 3.6 | 5.0 | 2.7 | 7.9 | 2.5 | 5.6 | 4.6 | 2.0 | 3.4 | 3.0 | –1.0 | 0.1 | 1.5 | 1.8 | |
| Change in private sector credit | 2.0 | 2.9 | 3.3 | 1.7 | 2.4 | 1.7 | –0.5 | 1.1 | 1.5 | 1.5 | 2.0 | 6.9 | 2.7 | 1.6 | |
| Government bonds held by deposit banks | 8.5 | 9.3 | 8.8 | 11.6 | 11.0 | 13.0 | 15.2 | 17.0 | 16.5 | 17.7 | 14.9 | 13.8 | 16.3 | 17.6 | |
| Velocity (nominal GDP divided by money stock) | |||||||||||||||
| Broad money | 2.4 | 2.2 | 2.4 | 2.1 | 2.2 | 2.2 | 2.2 | 2.1 | 2.1 | 2.0 | 1.9 | 1.8 | 1.7 | 1.6 | |
| Narrow money | 2.9 | 2.7 | 2.9 | 2.7 | 2.9 | 2.9 | 2.9 | 2.6 | 2.7 | 2.6 | 2.4 | 2.3 | 2.2 | 2.2 | |
| Memorandum items: | |||||||||||||||
| Real GDP growth (in percent) | 3.4 | –2.8 | 9.6 | –0.6 | 4.3 | 6.3 | 8.4 | –2.7 | 10.4 | 2.5 | 3.5 | 6.2 | –4.1 | 0.2 | |
| Annual change of average CPI (in percent) | 9.5 | 12.5 | 10.5 | 6.3 | 12.4 | 7.7 | 8.7 | 2.7 | 2.4 | 3.1 | 7.0 | 8.0 | 5.7 | 5.2 | |
Monetary Indicators
| 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Annual change in percent of beginning broad money stock) | |||||||||||||||
| Net foreign assets | –3.6 | –4.2 | –5.6 | –6.6 | –3.6 | –2.1 | 5.4 | 3.0 | 3.1 | 1.0 | 14.8 | 7.1 | 4.6 | 3.9 | |
| Domestic credit | 14.8 | 20.3 | 15.7 | 24.4 | 11.9 | 18.8 | 10.6 | 6.9 | 11.8 | 10.1 | 2.1 | 14.7 | 7.6 | 6.0 | |
| Private sector | –1.9 | –2.2 | 1.4 | –2.3 | 0.2 | 0.8 | 1.1 | 1.8 | 1.7 | –0.4 | 13.0 | 6.8 | 5.0 | 3.7 | |
| Government | 9.6 | 12.9 | 7.0 | 20.0 | 6.2 | 14.3 | 11.9 | 4.5 | 8.1 | 6.7 | –2.3 | 0.2 | 2.8 | 3.2 | |
| Broad money | 10.9 | 15.5 | 10.3 | 18.0 | 9.0 | 17.7 | 15.9 | 9.7 | 14.7 | 11.8 | 18.5 | 16.8 | 9.3 | 8.2 | |
| Quasi money | 3.9 | 3.5 | 2.9 | 6.5 | 2.4 | 5.9 | 2.3 | 1.0 | 2.8 | 2.7 | 3.4 | 5.4 | 4.5 | 4.3 | |
| Quasi money share in broad money (in percent) | 17.9 | 18.5 | 19.4 | 22.0 | 22.4 | 24.0 | 22.7 | 21.6 | 21.3 | 21.5 | 21.0 | 22.7 | 24.9 | 26.9 | |
| Share in total domestic credit (in percent) | |||||||||||||||
| Central government | 61.8 | 62.1 | 59.9 | 63.9 | 62.8 | 64.7 | 68.7 | 68.5 | 68.6 | 68.4 | 64.8 | 55.5 | 54.0 | 53.9 | |
| Private sector | 38.2 | 37.9 | 40.1 | 36.1 | 37.2 | 35.3 | 31.3 | 31.5 | 31.4 | 31.6 | 35.2 | 44.5 | 46.0 | 46.1 | |
| (In percent of GDP) | |||||||||||||||
| Change in central government credit | 3.6 | 5.0 | 2.7 | 7.9 | 2.5 | 5.6 | 4.6 | 2.0 | 3.4 | 3.0 | –1.0 | 0.1 | 1.5 | 1.8 | |
| Change in private sector credit | 2.0 | 2.9 | 3.3 | 1.7 | 2.4 | 1.7 | –0.5 | 1.1 | 1.5 | 1.5 | 2.0 | 6.9 | 2.7 | 1.6 | |
| Government bonds held by deposit banks | 8.5 | 9.3 | 8.8 | 11.6 | 11.0 | 13.0 | 15.2 | 17.0 | 16.5 | 17.7 | 14.9 | 13.8 | 16.3 | 17.6 | |
| Velocity (nominal GDP divided by money stock) | |||||||||||||||
| Broad money | 2.4 | 2.2 | 2.4 | 2.1 | 2.2 | 2.2 | 2.2 | 2.1 | 2.1 | 2.0 | 1.9 | 1.8 | 1.7 | 1.6 | |
| Narrow money | 2.9 | 2.7 | 2.9 | 2.7 | 2.9 | 2.9 | 2.9 | 2.6 | 2.7 | 2.6 | 2.4 | 2.3 | 2.2 | 2.2 | |
| Memorandum items: | |||||||||||||||
| Real GDP growth (in percent) | 3.4 | –2.8 | 9.6 | –0.6 | 4.3 | 6.3 | 8.4 | –2.7 | 10.4 | 2.5 | 3.5 | 6.2 | –4.1 | 0.2 | |
| Annual change of average CPI (in percent) | 9.5 | 12.5 | 10.5 | 6.3 | 12.4 | 7.7 | 8.7 | 2.7 | 2.4 | 3.1 | 7.0 | 8.0 | 5.7 | 5.2 | |
A turnaround in monetary management was finally made possible by the sizable improvement in the fiscal position in the second half of the 1980s. The decline in the treasury’s domestic bank financing requirements—averaging about 1 percent of GDP during 1986–92 allowed the growth rate of credit to the Government to drop from an average of about 19 percent a year during 1980–85 to 6.6 percent during 1986–92. Between 1986 and 1989, the monetary authorities, in an effort to reduce excess demand pressures and rebuild net foreign assets, also curtailed private sector credit growth to an average of about 6.4 percent. As a result, in 1986 the private sector’s share in total domestic credit dropped further to 31 percent, but net foreign assets started expanding considerably. In 1990, the share of credit allocated to the private sector started to rise, though not smoothly. For example, in 1991 credit to the private sector surged by 48 percent when Bank Al-Maghrib abolished direct credit ceilings and moved to indirect monetary policy instruments, and expanded by another 12.6 percent in 1992. By then, the share of private sector credit in total credit had reached 46 percent—returning to the peak of the early 1970s—and remained virtually unchanged in 1993.
Reflecting the substantial decline in domestic credit growth to an annual average rate of 9.3 percent during 1986–92. as well as the rapid accumulation of net foreign assets, broad money grew at an annual average rate of 14 percent, far exceeding average real GDP growth. Concurrently, however, the demand for broad money and, notably, for term deposits expanded noticeably in response to the Moroccan authorities’ financial sector reforms, in particular, the liberalization of term deposit rates. Accordingly, the velocity of broad money fell from 2.2 in 1986 to 1.7 in 1992 (Chart 3), contributing, together with a number of other factors, to a decline in inflation to an average annual rate of 5.4 percent during 1986–92.
Monetary Aggregates
Source: International Monetary Fund.1The private sector is defined to include all economic agents other than the central Government.2Narrow money includes demand deposits and currency in circulation outside the banking system. Broad money includes narrow money as well as term deposits. Because of a reclassification of passbook deposits from quasi money to broad money in 1980, data before 1980 are not strictly comparable with date after 1980.Monetary Aggregates
Source: International Monetary Fund.1The private sector is defined to include all economic agents other than the central Government.2Narrow money includes demand deposits and currency in circulation outside the banking system. Broad money includes narrow money as well as term deposits. Because of a reclassification of passbook deposits from quasi money to broad money in 1980, data before 1980 are not strictly comparable with date after 1980.Monetary Aggregates
Source: International Monetary Fund.1The private sector is defined to include all economic agents other than the central Government.2Narrow money includes demand deposits and currency in circulation outside the banking system. Broad money includes narrow money as well as term deposits. Because of a reclassification of passbook deposits from quasi money to broad money in 1980, data before 1980 are not strictly comparable with date after 1980.In 1993, broad money expanded by 8.2 percent, compared with 9.3 percent in 1992, while nominal GDP increased by 4.7 percent, up from 0.3 percent in 1992. Credit to the Government expanded by 6.9 percent in 1993, up from 5.8 percent in 1992. Reflecting a weakening of firms’ credit demand, private sector credit growth slowed from 12.6 percent in 1992 to 7.2 percent in 1993, resulting in the virtual stagnation of the private sector’s share in domestic credit. Given the already low level of investment in 1993, owing to the depressed state of the agricultural sector and the sluggish world economy, the authorities refrained from reducing private sector credit growth more sharply. With net foreign assets growing by 19.5 percent in 1993, the cumulative expansion of broad money during 1992–93 exceeded 18 percent, compared with a cumulative nominal GDP growth of only 5 percent.
Appendix III formally investigates the evolution of the demand for money as well as the relationship between money and prices. The estimated equations indicate that, over the last twenty years, money demand increased more rapidly than domestic expenditure, suggesting an increased monetization of the Moroccan economy. They also point to a significant shift in the demand for money in 1991, which allowed broad money to grow faster without a corresponding increase in excess liquidity and inflation. In addition, the results are consistent with the hypothesis that the monetization process was reinforced by the declining inflation rate in the second half of the 1980s. The regressions, furthermore, point to a significant and positive relation between excess domestic liquidity and prices in the Moroccan economy during the last twenty years. For example, they indicate the presence of excess liquidity in the economy in 1992 and 1993, consistent with the observed, though moderate, pickup in inflation in the second half of 1993, even though the average rate of inflation in 1993 declined.
Reform of Monetary Policy Instruments and the Financial System
From 1976 to 1990, credit policy relied primarily on quantitative controls, under which credit was allocated according to a system of quantitative ceilings (encadrement du crédit). At the beginning of each year, Bank Al-Maghrib established overall and bank-specific quantitative maximum limits on total lending. Within the annual target, semiannual targets were set: generally, lower increases were permitted in the first half of the year than in the second half on account of the seasonality of crop credit and budgetary financing needs. While the encadrement system aimed at curtailing excessive growth of domestic credit, partly by imposing severe penalties on banks that failed to stay within the limits, it actually covered only part of the credit to the economy. Excluded from encadrement, for example, were all credits provided by development banks,9 as well as commercial bank credits related to exports and the financing of investments of small and medium-size enterprises.
The composition of the volume of credit provided by commercial banks10 was influenced through placement ratios, which regulated the asset composition of banks’ balance sheets throughout the 1970s and early 1980s. Commercial banks had to lend to the central Government and to development banks at below-market rates. For example, in 1980, the minimum treasury paper holding requirement (plancher d’effets publics) stipulated that banks hold 30 percent of demand deposits (sight and time deposits) in treasury bills carrying a comparatively low interest rate of 4.25 percent. In addition, commercial banks were required to hold specified percentages of demand deposits in bonds issued by the development banks: (1) 3.5 percent for bonds by the CNCA, which finances projects in the agricultural sector and agro-industries: (2) 5.5 percent for bonds by the BNDE, which lends to industrial sectors: and (3) 6 percent for bonds by the CIH, which finances housing and hotel projects.
In 1974, all interest rates were reviewed and fixed according to the length of maturity of loans and deposits in an effort to shield domestic rates from developments abroad and provide the productive sector with adequate conditions for investment and growth. In spite of periodic adjustments, most interest rates remained negative in real terms throughout the 1970s and the early 1980s, reaching about minus 10 percent in 1974 and minus 6 percent in 1977 (Chart 2). The setting of rates also led to a distortion of their term structure by compressing the difference between short-and long-term interest rates. By the end of 1989, for example, the interest rates on 10-and 15-year bills and bonds were 1.5 percentage points lower than rates on bonds with 2-and 5-year maturities.
Case for Reforms
Over time, credit controls became less efficient in limiting the expansion of domestic credit. First, the special credit facilities not subject to encadrement expanded considerably: while in 1976 the share of domestic bank credit subject to encadrement amounted to 65 percent, by 1989 it had fallen to 40 percent. Second, as banks enjoyed relatively high profits and were usually quite liquid, they occasionally exceeded their credit ceilings, despite the penalties, in order to satisfy the credit demand of their traditional customers. Third, not only were the credit ceilings ineffective in controlling the expansion of total domestic credit, they were also costly in terms of efficiency. Because each bank’s share in total credit had been more or less frozen at the 1976 level, competition between banks played a limited role in credit allocation, which did not help the modernization of the financial system, where the status quo guaranteed banks relatively high oligopolistic profits. Moreover, the administrative control of credit ceilings and interest rates weakened incentives for financial savings. For some time during 1986, for example, banks refused to accept time deposits of more than six months, because the tight limits on credit expansion and the reduction in the money market rate prevented a profitable use of such resources. In addition, the administrative setting of lending rates and the distorted yield curve discouraged long-term lending. Last, the deepening of the money market was repressed, particularly by the imposition of asset-composition ratios, while resource mobilization and allocation were further hampered by the limited array of financial instruments and the shallowness of the stock market.
Improving Credit Policy Instruments
As quantitative ceilings became less effective in the second half of the 1980s, Bank Al-Maghrib relied increasingly on indirect instruments to control credit expansion and concomitantly stepped up its intervention in money markets via refinancing. Finally, in January 1991, Bank Al-Maghrib ceased relying on direct credit control and abolished the credit ceilings, even though it kept controls on lending rates in place.
Accordingly, the monetary authorities adopted a more active policy on reserve requirements. The bank reserve ratio on sight deposits was progressively raised from 4 percent in 1986 to 7 percent in 1988, 15 percent in 1990, and 20 percent in 1991.11 Over the same period, Bank Al-Maghrib’s monitoring of obligatory reserves was improved and shifted from a monthly to a weekly basis. Moreover, in January 1991, the month in which credit ceilings were abolished, the coverage of the reserve ratio was broadened to include passbook deposits (comptes sur carnet), and the monetary authorities were given the right to increase the reserve ratio on sight deposits to a maximum of 25 percent, as well as to introduce a reserve ratio on time deposits of up to a maximum of 10 percent. These measures, however, did not prevent a drastic surge in domestic credit, which between the end of 1990 and the end of 1991 rose by more than 17 percent, mainly on account of a 48 percent expansion in private sector credit. To contain credit expansion, Bank Al-Maghrib increased the bank reserve ratio on sight deposits to the legal maximum of 25 percent in October 1992. In the same month, however, to regain the use of the reserve ratio instrument, the bank lowered the ratio again to 10 percent, where it remained at the end of 1993. Banks were requested to hold the freed reserves, which amounted to DH 9.4 billion, in seven-year treasury bonds carrying an annual interest rate of 10.5 percent.
In tandem with the shift toward an active reserves policy to control credit expansion, Bank Al-Maghrib enhanced its refinancing policy and fostered the development of the interbank money market. This market was originally established in 1983 along with the new system of placing treasury paper through bids and tenders in a move to rely increasingly on indirect market-based instruments. The money market expanded considerably, and, with the liberalization of deposit interest rates in successive steps from 1985 onward, the money market interest rate took on a growing significance for refinancing facilities. As a result, total subscriptions and advances in this market, notably of treasury paper tenders, rose from DH 4.8 billion in 1984 to more than DH 15 billion in 1986 and DH 21 billion in 1989. In 1993, given their liquid position, commercial banks’ demand for advances from Bank Al-Maghrib dropped sharply, causing the total stock of outstanding subscriptions and advances again to decline to DH 11.5 billion.
An important aspect of Bank Al-Maghrib’s emphasis on the development of the money market in the mid-1980s was that the treasury’s short-term borrowing requirements were increasingly financed via the money market through the issuance of one-month treasury bonds at fixed rates, rather than through advances by Bank Al-Maghrib. This enhanced the central bank’s control over the expansion of total domestic credit. In 1989, the treasury shifted to a system under which bills with various maturities were placed through auctions.12 Initially only banks and specialized financial institutions could participate in the auction market of government bills with maturities of 1–12 months, while for larger maturities insurance companies could also participate.
Although the range of participants in the money market was expanded in 1991—with insurance companies and other enterprises being allowed to subscribe to bills—a mechanism to allow Bank Al-Maghrib to undertake open market operations has not yet been developed. Treasury bills, for the most part, remain nonnegotiable—except for certain bills that can be traded on the Casablanca stock exchange. The monetary authorities consider the development of an appropriate institutional framework to support the development of a secondary market in treasury bills a primary challenge in the coming years. The presence of such a market would greatly enhance Bank Al-Maghrib’s ability to influence lending rates in the economy through indirect and market-based methods, rather than through limits on bank spreads.
Reforming the Financial System
In the 1970s, the development of Morocco’s financial sector was hindered by administrative regulations. The reform strategy, the implementation of which gained momentum in the mid-1980s, involved a bold break with the past in that it recognized that controlled deposit and lending rates, asset-composition ratios, and credit ceilings distorted market signals, prevented the deepening of money and bond markets, impeded the accumulation of domestic financial savings, and reduced incentives to grant long-term credit for investment projects. Although the reform of the financial markets is still far from complete, real interest rates have been allowed to rise to significantly positive levels, asset-composition ratios were lowered and the base to which they apply was narrowed, and credit ceilings were abolished. Meanwhile, as the Moroccan banking system was opened further to foreign banks—through the voiding of the decree implementing the “Moroccanization” law—the scope for competition in the financial system increased, and bank supervision and prudential regulations were strengthened. These measures, particularly the liberalization of deposit rates and the lifting of credit ceilings, had a dramatic effect on financial intermediation. Time deposits rose from DH 21 billion in 1989 to DH 30 billion in 1991, and further to DH 42 billion in 1993, while commercial banks’ loans to the private sector increased from DH 28 billion in 1989 to DH 48 billion in 1991 and DH 61 billion in 1993.
In October 1980, the authorities took steps to make interest rates more reflective of market forces: they simplified the structure of administered interest rates and increased the average level of deposit and lending rates by roughly 20 percent. However, deposit rates still remained negative in real terms. In April 1982, interest rates were raised by another 1.5 percentage points, after which longer-term deposits started to yield positive real rates of return. Interest rates were liberalized on deposits above 12 months in 1985, above 6 months in 1989, and above 3 months in 1990. On deposits with interest rates that were still regulated between 1986 and 1991, the authorities replaced the fixed rates with a minimum interest rate. These minimum rates aimed at encouraging long-term savings by establishing an upward-sloping yield curve: 8.5 percent for 3-month deposits, 10.5 percent for 6-month deposits, and 11 percent for 12-month deposits. In January 1992, interest rates on all time deposits were fully freed. As a result of these changes and falling inflation, most interest rates became positive in real terms in 1987 and remained so through 1993.
While lending rates were also progressively freed during the 1980s (except for export credits and re-discountable medium-term credits), the liberalization of interest rates was still not fully completed by the end of 1993. In 1985, the authorities eliminated all controlled fixed rates and introduced instead a ceiling on lending rates; the modalities of determining the ceiling were altered on several occasions. Beginning in October 1990, the ceiling was applied to all credits of an initial duration of more than two years and was set at one-third above the average interest rate on treasury bills in the auction market. Beginning in July 1991, the ceiling was adjusted monthly and applied to all fixed-rate loans: it was set at one-third above the weighted average of interest rates on six-month and one-year deposits during the preceding month. Because this approach implied a rising markup with rising deposit interest rates, the authorities began in July 1993 to limit the markup to 2.5 percentage points. This limitation of the markup was aimed at reducing lending rates to encourage private sector demand for credit and to raise investment and economic activity, which remained flat in 1993 on account of the drought. However, even though the expansion in private sector credit exceeded that of nominal GDP, lending rates stayed close to the ceilings throughout the year and investment failed to pick up. Accordingly, Bank Al-Maghrib again altered the setting of the lending rate ceiling in March 1994. Under the new regulations, a reference rate was set based on the cost of all financing resources of banks, including operating costs. The ceilings were set by marking up the reference rate by 3 percentage points for short-and medium-term loans and 4 percentage points for long-term loans. As a result, the ceilings declined by 1–2 percentage points. Although the resulting differentiation between short-, medium-, and long-term interest rates increases the incentive to provide more long-term credit, it may lead to increased rationing of credit for smaller high-risk projects, particularly during boom years when credit demand is high. Moreover, given that the new ceiling is adjusted only semiannually rather than monthly, it is less sensitive to short-term credit market developments.
Regarding asset-composition ratios, the minimum treasury paper holding requirement was eliminated for term deposits of more than one year in 1984, and for all term deposits and future increases in passbook deposits in 1985 and 1986, respectively. The effect of these measures on the financing of the treasury, however, was mitigated by a rise in the ratio from 30 percent to 35 percent on deposits of less than one year. As part of the authorities’ program of financial sector reforms, that ratio was lowered again to 32 percent in June 1991 and to 25 percent in June 1993, thereby increasing banks’ loanable funds as well as their incentives to attract deposits. The bonds continued to be remunerated at 4.25 percent, however, considerably below market rates, with the implicit tax estimated at about 0.5 percent of GDP.
Similarly, other asset-composition ratios—which require commercial banks to lend to particular sectors of the economy, notably by purchasing bonds of the development banks—have been reduced or eliminated in recent years, with a view to moving toward a more efficient, market-based allocation of credit in the Moroccan economy. Between 1991 and 1993, Bank Al-Maghrib reduced in several steps the mandatory holdings by commercial banks of bonds issued: (1) by CIH, from 6 percent to 2.5 percent of sight deposits: (2) by the CNCA, from 3.5 percent to 2 percent: and (3) by the BNDE, from 5.5 percent to 2.5 percent. In March 1994, Bank Al-Maghrib abolished the ratios applying to BNDE and CIH bonds and eliminated the retention coefficient applicable to export credits (créances nées à l’étranger), which last stood at 3 percent of total current liabilities of banks (exigibilités bancaires).
In addition to eliminating or softening a number of restrictions governing the financial system, the monetary authorities actively fostered the development of new financial markets. For instance, in 1986, the authorities created a market for commercial paper (billets de trésorerie) to permit direct borrowing by large and financially sound enterprises. Transactions in this market increased sharply, from about DH 0.8 billion at the end of 1986 to about DH 5.5 billion at the end of 1989. Moreover, the authorities promoted the expansion of the money market, notably by relaxing the mandatory asset-composition ratios. While diversifying financial instruments, these developments were also seen as a first step toward developing a secondary market for treasury bills large enough to support an active open market policy by Bank Al-Maghrib.
In addition to revising the statutes of Bank Al-Maghrib with a view to increasing its independence and better defining its relations with the treasury, the authorities took steps to modernize the institutional framework of Morocco’s financial sector. The regulatory structure of the banking system and banking supervision were improved to enhance competition and efficiency in the financial sector while at the same time guarding its soundness. In particular, the new banking law implemented in July 1993 allows foreign banks to open branches in Morocco and aims to reinforce the solidity of the banking system through the implementation of strengthened prudential ratios in accordance with the agreement of the Basle Committee on Banking Supervision. In this context, the authorities have already introduced a minimum ratio of 8 percent of capital to risk-weighted assets, a risk-concentration ratio of 7 percent of a bank’s net equity to a single borrower or group of related borrowers, a new loan classification, new loss-provisioning regulations, and a requirement that financial institutions undergo independent audits. Because substantial preparatory work will be required to implement these new rules, banks will have until the end of 1994 to classify their assets and until the end of 1996 to provide for loan losses.
A new securities market law was implemented in September 1993 to encourage the development of the stock market and thereby improve the management and allocation of risks in the Moroccan economy. This law provides for (1) the management and ownership of the stock exchange by the private sector; (2) the establishment of a Stock Exchange Commission to ensure transparency of dealings in the stock market as well as compliance with the new regulations; (3) the separation of brokerage and commercial banking; and (4) the establishment of the legal basis for the development of new financial instruments, notably mutual funds. Regarding debt financing of investment projects, changes in regulation have recently been effected to allow private enterprises to increasingly raise funds in domestic bond markets; in addition, in June 1993 foreign borrowing by private enterprises was largely liberalized.
Finally, on January 1, 1994, a number of changes in taxation were effected to promote financial intermediation. The value-added tax on all financial operations was reduced from 14 percent to 7 percent to enhance incentives to provide financial services, and the tax on dividends of stocks quoted on the stock exchange was lowered from 15 percent to 7.5 percent to further mobilize savings and channel them into productive investment. In addition, steps were taken toward harmonizing the tax treatment of financial instruments. All income on treasury bills maturing in 1994 and on government-guaranteed debt will be taxed at 10 percent, whereas in 1995 it will be taxed at the same rate as income from all other fixed-revenue placements.
Increasing Financial Savings
An important goal of the reforms was to deepen financial markets so as to improve intermediation and thereby boost the mobilization of domestic savings. Indeed, the evolution of the share of quasi money in broad money13 indicates greater financial deepening (Chart 3). Following the liberalization of interest rates in successive steps and the softening of the obligatory holding requirements, financial deepening increased. The ratio of quasi money to GDP grew from 10 percent in the early 1980s to 17 percent in 1993, while the ratio of demand deposits to GDP grew from 21 percent to 31 percent.
Despite the mobilization of financial savings, however, the commercial banking system’s loan portfolio has not yet been restructured, as the share of medium-and long-term bank credit in total bank credit has hovered around 35 percent during the 1980s and early 1990s. Although a part of the shorter-term bank credits finances investment outlays, the private sector continues to rely primarily on financial intermediaries other than commercial banks—particularly the development banks—to obtain longer-term finance. Throughout the past decade, the development banks satisfied roughly 60 percent of the private sector’s need for medium-and long-term credit. As part of the strategy to allocate credit more efficiently in the Moroccan economy, the authorities are now planning to privatize two of these development banks, the BNDE and the CIH.
Outstanding Issues
Although the financial system has already undergone profound changes since the mid-1980s, the authorities have further plans for reforming and restructuring it. For example, they will continue shifting the central bank’s credit policy from direct controls to indirect and more market-based instruments. The authorities’ plans also call for deepening and diversifying financial markets so as to enhance financial intermediation in the economy and for stepping up competition in the banking sector while preserving and reinforcing the soundness of the financial system.
First, the elimination of all remaining interest ceilings and placement ratios should provide another major impetus for the deepening of financial markets by freeing up additional resources for a market-based allocation of credit while reducing the distortions in price signals.
Second, the further development of the money market will facilitate the conduct of monetary policy. Although in regulating domestic credit the monetary authorities have begun to intervene more frequently in money markets, notably by making advances available at variable market-determined interest rates, they still rely to a considerable extent on reserve requirements to control liquidity. One of the major challenges facing the authorities, therefore, is to develop a secondary market in treasury bills to enable the central bank to steer liquidity more flexibly through open market operations. This would also enable the authorities to dampen the effects of temporary capital inflows or outflows on the Moroccan economy with an appropriate sterilization policy. Key steps that need to be taken include (1) abolishing all restrictions on the resale of treasury bills; (2) setting up an effective book-entry system to register changes in ownership of treasury bills; and (3) reducing further the mandatory placement ratio applicable to treasury bills.
Third, further deregulating the banking system will increase competition among banks and improve the overall efficiency of the financial system, and implementing prudential regulations will enhance the solidity and efficiency of the financial sector. In that context, four banks with government participation, including the BNDE and the CIH as well as two commercial banks, are slated to be privatized, which would lower the Government’s ownership of total bank equity from almost 60 percent to about 20 percent. The authorities have set up the legal framework for the establishment of offshore banks with a view to mobilizing additional savings from Moroccans abroad, and in early 1994 two offshore banks were operating in Morocco, dealing exclusively with nonresidents.
The private sector as defined here includes all economic agents other than the central Government. Credit to the “private sector” is also referred to as credit to the “economy” in Moroccan banking statistics.
The development banks, also referred to as specialized credit institutions, included the National Development Bank (BNDE). the Housing and Tourism Bank (CIH), and the Agricultural Development Bank (CNCA). They were all state-owned. Their accounts are not integrated into the consolidated monetary survey.
In 1993, in addition to the development banks, the banking system in Morocco comprised 15 deposit banks, generally with significant foreign participation.
The share of reserve and placement requirements as a percentage of banks’ sight and time deposits exceeded 50 percent in 1989, a ratio that was much higher than those in most EU countries or the United States.
Treasury bills with maturities of 1 week, 3 weeks, 5 weeks, 3 months, 6 months, 12 months, 2 years, 3 years, and 5 years are auctioned.
An increase in the ratio of quasi money to broad money means that the banking system obtains more resources in longer-term form, thus enlarging the scope for financial intermediation.
