Faced with an economic and financial crisis in the early 1980s, Morocco has made significant progress in macroeconomic adjustment and in structural reforms over the last decade. The success of these efforts can be seen in the resilience of the economy during two consecutive years of drought—1992 and 1993—as well as in Morocco’s ability in 1993 to establish current account convertibility and “graduate” from the prolonged use of IMF resources and debt rescheduling. Nonetheless, the Moroccan economy still faces significant challenges that need to be tackled before it can move onto the path of higher, sustainable growth that would enable Morocco to reduce chronic unemployment and improve living standards. Accordingly, Morocco’s medium-term strategy will have to focus on further improving the allocation of resources, increasing productivity, and strengthening the budgetary position to release additional resources for private sector investment. To these ends, the Moroccan authorities are giving priority to a number of policy actions.

The authorities plan to further improve the legal and regulatory environment for private sector investment by revising the investment codes with a view to harmonizing incentives across sectors, reducing distortions, and narrowing the scope of tax exemptions. They also intend to liberalize access to a number of activities that are essential for private sector development and to phase out the remaining price controls. Furthermore, the recent discussions sponsored by the Government between the employers’ association and the labor unions have aimed, among other things, at improving labor relations and the working of the labor market.

The further liberalization of the trade and payments system so as to increase competition and improve productivity is also high on the authorities’ agenda. The new GATT agreement constitutes an important step forward, and, within that framework, the authorities are continuing to reduce protection, in particular, by removing the remaining quantitative restrictions on imports. Concurrently, they plan to establish the full convertibility of the dirham to integrate Morocco’s goods and financial markets more fully with those of the rest of the world, improve the incentive structure within the country, and attract foreign direct investment. Such investment is particularly important, as it adds to the resources available to finance growth without increasing the country’s debt burden. The authorities realize that integrating the Moroccan economy into the world economy will require the deepening of the domestic financial markets and sustained financial discipline to strengthen the underlying macroeconomic framework. From a procedural point of view, the move to full convertibility entails mainly eliminating the restrictions on capital transactions by Moroccan residents. To effect a smooth transition, preparatory work is under way to determine the required steps for establishing an interbank foreign exchange market, including through a widening of the scope for commercial banks to hold foreign exchange and allowing a network of foreign exchange dealers to operate.

The authorities are also accelerating the reform of the financial system to better mobilize domestic savings and channel them increasingly into productive investment. The ongoing implementation of the prudential regulations envisaged under the recently adopted banking law will help to strengthen the soundness of the banking system, while the new securities law should be instrumental in further developing the stock market and a secondary market in government paper. Consistent with the prospective move to full convertibility and to foster competition in the banking system and improve the overall allocation of financial resources, the authorities are considering eliminating the remaining controls on interest rates.

With a view to widening the scope for private sector economic activity as well as improving resource allocation and attracting foreign investment, the authorities plan to forge ahead with the reform of the public enterprise sector. They are taking steps to speed up the privatization of the 102 enterprises remaining on the list established under the 1989 Privatization Law and plan, in due course, to privatize a number of additional major enterprises. Moreover, to improve the operations of those enterprises remaining in the public sector, the authorities are reinforcing the system of performance contracts by strengthening requirements, ensuring a better monitoring of the existing contracts, and increasing the number of enterprises operating under such contracts. The important efforts made in recent years to identify and reduce cross-payments arrears of public enterprises and the Government, as well as to prevent a re-emergence of arrears, are expected to continue.

The authorities plan to continue strengthening the fiscal position, so as to achieve a progressive reduction in the absorption of resources by the Government, increase domestic savings, and release resources for private sector investment. Given the considerable gains already made on the revenue side in recent years, as well as the expected continued improvement in tax administration and compliance, greater emphasis needs to be placed on restricting the growth in expenditure. Expenditure can be concurrently redirected to provide increased resources for health and basic education. The strengthening in the fiscal position will allow the monetary authorities to conduct monetary policy more flexibly, enabling them to balance the need to reduce inflation further with providing for an adequate expansion in credit to support the growth of the private sector. To avoid distortions, the central bank intends to rely increasingly on the use of indirect market-based policy instruments to manage monetary policy, in particular by developing open market operations.

Morocco’s experience provides a number of insights that may be useful for other countries launching or implementing adjustment programs. The following key lessons seem particularly relevant:

First, a comprehensive “critical mass” of policies is needed to address large financial imbalances and deep-rooted structural bottlenecks effectively. The adjustment efforts Morocco undertook in the late 1970s and early 1980s failed primarily because they were piecemeal. It was only toward the mid-1980s that more wide-ranging structural reforms were put in place; these not only had a direct impact on incentives and efficiency, but also helped redress the fiscal position and enhanced the conduct of monetary policy. In particular, the tax reforms shifted part of the burden of fiscal adjustment from the expenditure to the revenue side to bring about a more durable and sustainable improvement in the fiscal position. At the same time, the reform of the financial system and the move to indirect instruments of monetary control enabled the monetary authorities to mobilize financial savings more effectively while fostering a more efficient utilization of credit.

Second, reforms must be thoroughly prepared to achieve their objectives. In 1981, some of the reforms envisaged for the public enterprise sector, for example, were introduced without adequate preparation and were therefore ineffective. In 1991, when the Moroccan authorities moved to indirect instruments of monetary control, they did not introduce the full range of available instruments and were unable to prevent the initial explosion of credit. In those circumstances, the authorities were compelled to raise legal reserve requirements rapidly, creating an atmosphere of uncertainty in the banking sector. By contrast, the introduction of the value-added tax and the income and profits tax was well prepared and yielded the expected results.

Third, the proper sequencing of reforms helps achieve the desired objectives in an orderly manner. In the case of Morocco, domestic financial policies and exchange rate adjustments sought to strengthen the external sector position as a prerequisite to liberalizing the trade regime, so as to avoid undue pressures on the external sector position. Decontrolling prices, liberalizing the marketing system, and reforming investment incentives concurrently made the domestic market more competitive. Together with the buildup of international reserves, these steps allowed for the smooth establishment of current account convertibility and the liberalization of capital transactions for nonresidents. On a more general level, Morocco’s emphasis on stabilization through the mid-1980s enabled the authorities to successfully implement structural reforms between 1986 and 1993.

Fourth, the prompt adaptation of policies to adverse exogenous developments is essential. Morocco’s problems stemmed in part from the rapid expansion of government expenditure in response to the boom in phosphate prices in 1974–75 and the failure to adjust policies in a timely manner when those prices dropped in the second half of the 1970s. This pattern was repeated in 1981–82, as adjustment efforts were relaxed in the face of, among other things, adverse exogenous developments. By contrast, faced with the Middle East crisis in 1990–91 and the severe droughts of 1992–93, the authorities adapted their policies to avoid a major erosion of the progress achieved in previous years.

Fifth, sustained and continuous adjustment and reform are key to limiting the costs and maximizing the benefits of policies. In Morocco, the process has indeed been a sustained and continuous one since 1983, with progress being made from one year to the next even if the original targets have not always been achieved. This has avoided the costs that other countries faced in following an “on again, off again” approach, which entailed not only an erosion of earlier progress during the “off” periods, but also a high start-up cost of regaining the lost momentum. Furthermore, apart from the direct benefits of the steady policies pursued. Morocco has benefited from the confidence that the continuity instilled in both domestic and foreign investors. This is reflected in the substantial increase in domestic private investment and the surge in foreign private investment in recent years.

Sixth, an outward-oriented, market-based strategy helps promote financial stability and growth. Morocco’s experience demonstrates that the liberalization of the economy, combined with an appropriate exchange rate policy and underpinned by appropriate financial policies, contributed to a sizable growth in the tradable goods sector and a substantial expansion of nontraditional exports, which contributed to the overall growth of the economy and to the strengthening of the balance of payments position. The growth of the economy, by expanding the tax base, also facilitated the improvement in the budgetary position, which, in turn, enabled the monetary authorities to shift credit resources to increasingly support the private sector while reducing inflation. The openness of the economy, by fostering domestic competition and efficiency, also helped to enhance price stability.

Seventh, the pace of adjustment has to be tailored to the specific circumstances of the country. Although the pace of reform and adjustment in Morocco can be characterized as “gradual,” it was determined by the country’s circumstances. The initial imbalances and structural problems were large. While deflationary policies alone could have rapidly attenuated the imbalances, such an approach could have led to significant output losses because of the rigidities in the economy. Because Morocco was able to benefit from substantial and prolonged external financial assistance, it could prepare and sequence the reforms carefully. In particular, the performance since 1986 shows how, as the adjustment and reform process gained momentum, the financial policies and structural reforms complemented each other effectively. In determining the pace of reforms, the authorities had to strike a careful balance with public acceptability; occasional civil disturbances erupted when they pushed the limits. This suggests that a faster pace could have generated considerable social tension, which could have disrupted the adjustment process.

Eighth, and consistent with the analysis above, the sustainability of reforms and adjustment requires public support. The disruption of the efforts deployed in 1978–82 reflected in part public resistance to the reforms. It was only as progress was made in 1983–86 and the benefits started to be felt that the reforms gained widespread support. The Government’s efforts to explain its policies more widely and to provide more information on economic developments aided this process and partly explain why the Government was able to accelerate the pace of reforms in the second half of the 1980s. There was also an effort to ensure that the programs contained elements to protect the more vulnerable segments of the population and to ameliorate social conditions. In particular, the targeting of subsidies was improved, while greater allocations were provided for the social sectors, notably health and education.

Ninth, an effective administration is essential for the preparation and implementation of a comprehensive adjustment program. Morocco has a highly competent civil service that was able to prepare and implement the requisite reforms. This was particularly apparent in the mobilization of domestic revenue—which, apart from the changes in the tax system, required significant improvements in tax and customs administration—as well as in progress made in improving the monitoring and control of government expenditure. The reform of the financial system also involved intensive preparation to revise the legal framework and considerable efforts, which are ongoing, to implement such revisions. The same applies to the other reforms, including those of the investment codes, the trade and exchange systems, and the restructuring of the public enterprise sector.