Contents include: basic data and social demographic indicators, 1971-95. Liberalizing the economy -- structural reform issues: reform of the fiscal system; public enterprise reform and increased scope for private sector activity; price liberalization and reform of consumer subsidies; environmental issues; financial sector; factor markets; and exchange system liberalization. Labor market developments; recent trends; structure of unemployment; reasons for unemployment; reforming labor markets. Determinants of nongovernment investment, 1972-95: nongovernment investment data; estimates of investment functions; explaining the performance of nongovernment investment. The associaiton agreement and the new fisheries agreement between Morocco and the EU. Statistical tables.


Contents include: basic data and social demographic indicators, 1971-95. Liberalizing the economy -- structural reform issues: reform of the fiscal system; public enterprise reform and increased scope for private sector activity; price liberalization and reform of consumer subsidies; environmental issues; financial sector; factor markets; and exchange system liberalization. Labor market developments; recent trends; structure of unemployment; reasons for unemployment; reforming labor markets. Determinants of nongovernment investment, 1972-95: nongovernment investment data; estimates of investment functions; explaining the performance of nongovernment investment. The associaiton agreement and the new fisheries agreement between Morocco and the EU. Statistical tables.

I. Morocco: Liberalizing the Economy--Structural Reform Issues1

Since Morocco “graduated” from use of Fund resources and external debt rescheduling in 1993,2 efforts have been pursued to liberalize the economy. Steps to rationalize further the tax system have been taken. Privatization has gained momentum; the development of private concessions for building and operating infrastructure has been initiated; and the restructuring of public enterprises has continued. Price controls have been somewhat relaxed, notably in the energy sector, and utility prices brought closer to cost prices. Financial sector reforms have accelerated, entailing a move toward market-based instruments for the conduct of monetary policy. The trade and exchange system has been substantially liberalized with the abolition of quantitative import restrictions (QRs), the locking-in of trade liberalization through commitments under the agreements concluding the Uruguay Round and the Association Agreement with the European Union (AAEU) (1995), the establishment of current account convertibility (1993), and the introduction of an interbank foreign exchange market (1996). Sectoral investment codes were replaced by generalized investment incentives (Charte de l’investissement) in December 1995. A new commerce code and a new corporate law have been adopted, and efforts are underway to address rigidities in the land and labor markets. Nonetheless, weaknesses in the regulatory framework remain, and partly explain why higher levels of private investment have not yet been achieved. There remains substantial scope for improvements in the tax system and the quality of the government’s overall public expenditure program.

1. Reform of the fiscal system3

Tax system

Since 1990, the VAT system has been strengthened further through a reduction of the rates, a broadening of the base, and a consolidation toward the “normal” VAT rate at 20 percent. With the elimination of the 12 and 30 percent rates in 1992 and 1993, respectively, the VAT rates were reduced to three rates (7 percent, 14 percent, and 20 percent). However, the 1996/97 budget reintroduced a new intermediate rate, at 10 percent, applicable exclusively to the tourism sector. Since 1993, a number of exemptions were abolished (such as for animal skins, pasta, and soap), while the rates for some products (tea, rice, animal drippings) were moved closer toward the normal rate; VAT on interest on financial instruments was reduced from 14 to 7 percent. The VAT base has been broadened further in the 1996/97 budget law, with the extension of the VAT to retailers with turnover exceeding DH 2 million per year.

While the normal VAT rate is relatively high and applies to more than 75 percent of the products subject to VAT, total VAT collection reached less than 6 percent of GDP in 1995, reflecting the large number of exonerations and exemptions as well as weaknesses of tax administration and collection. Small retailers and producers of goods and services (with turnover below DH 2 million and DH 180,000, respectively) remain exempt from VAT. For political and social reasons, a small number of basic consumption goods, such as milk, sugar and flour, as well as construction of social housing, are exempted. Through 1995, the sectoral investment codes granted various exemptions and exonerations from VAT for strategic sectors (such as exports, handicrafts, industry and mining, maritime transport and tourism). These exemptions and exonerations were generalized with the introduction of a unified investment charter in December 1995 (see below and Annex 1). As regards tax administration, the introduction of the VAT has been associated with an important program of computerization to facilitate the verification of the tax returns and enhance tax collection. However, certain restrictions relating to the system of deductions (règle du butoir) do not allow for an immediate VAT refund when the deduction provided by the tax paid at earlier stages is larger than the tax collected on the sales of the taxpayer, impeding the overall efficiency of the VAT system.

Since 1990, the authorities have pursued a policy aimed at reducing the corporate profit tax (IS) rate, with a view to encouraging more transparent and spontaneous profit declarations and stimulating investment. The corporate tax rate was gradually reduced from 44 percent in 1988 to 38 percent in 1993, 36 percent in 1994, and 35 percent in 1996. The possibility to opt for an accelerated depreciation with respect to the amortization of equipment and other investments was introduced in 1994. At the same time, the tax was extended to profits from the sale of securities, participations, and other financial assets.

In 1989, the individual general income tax (IGR) introduced the concept of a global income and eliminated the separate tax treatments of income originating from different sources.4 The IGR rate structure has five brackets. The maximum marginal rate on individual income tax had been gradually reduced from 52 percent in 1990 to 44 percent in the 1996 transitory budget law, and the minimum personal exemption raised from DH 12,000 to DH 18,000 over the period. However, income tax rates differ for certain categories; these include in particular incomes of certain foreign companies involved in public works in Morocco, temporary workers, and fixed-term teachers, who are taxed at flat rates of 10 percent, 30 percent, and 17 percent, respectively.

The control of tax fraud and evasion remains an important issue and a priority for the authorities. Although a minimum corporate tax was introduced to palliate the fraud problem and secure some tax payments from the “informal” corporate sector, there is ample scope for further reinforcement of tax control in this area. The need for enhanced controls is compounded by the heavy reliance of the tax system on self-assessment without sufficient adequate auditing. However, following the campaign against fraud and evasion in early 1996 (campagne de normalisation), the collection of corporate profit and individual general income taxes increased substantially during the first semester of 1996, as tax liabilities were regularized. Tax administration has been further reinforced by the elimination of certain privileges regarding payment of import duties by the government and public enterprises and also by legislation passed together with the 1996/97 budget, introducing specific legal provisions penalizing tax fraud and evasion.

Trade taxes, notably import duties (droits d’importation) and an import levy surcharge5 (prélèvement fiscal à l’importation (PFI)) have been reduced in recent years. In particular, in late 1994, tariffs on 400 consumer items not locally produced were reduced to 5 percent; and in the context of the 1996 transitory budget, this category was extended and duties consolidated at 10 percent while exonerating such items from the PFI; in addition the number of tariff categories was reduced from 13 to 6, with rates ranging from 2.5 percent to 45 percent. However, the 1996/97 budget law added two new tariff rates at 24 percent and 43.5 percent. Higher rates (up to around 300 percent) apply to certain agricultural, subsidized products such as edible oils, sugar, and cereals and derivatives, following the replacement of QRs on such products by tariffs. Total import taxes on industrial products are bound under the WTO at 55 percent, including the import surcharge.

Tariffs are widely dispersed, with higher rates on locally produced goods and lower rates on inputs, equipment goods, and nonlocally produced goods. About one third of imports are subject to a zero tariff rate. As a result, effective protection rates vary widely; according to a recent WTO report,6 the average weighted tariff was 11.4 percent in 1994. Import reference prices7 apply mostly to textiles and cars, raising the effective rate of taxation on imports of such items. Morocco is committed under the GATT/WTO (Tokyo Customs Valuation Code), as well as under the AAEU, to abolishing reference prices by 1998.8

The agenda for tax reform in the coming years will be largely set by the need to replace tax losses resulting from the gradual dismantling of import duties on goods imported from the EU, the tax relief already granted under the Charte de l’investissement, and the intended further reduction in income tax rates. This will require notably: (i) a further broadening of the taxable base through the reduction of tariff and tax exemptions; (ii) a modernization of the VAT to enhance its effectiveness and neutrality; and (iii) the restructuring, reorganization, and modernization of the tax administration, with a view to improving efficiency and productivity.

Tax incentives for investment: Charte de l’investissement

A system of investment incentives consisting of eight separate sectoral investment codes covering industry, handicrafts, tourism, the maritime sector, real estate, mining, young entrepreneurs, and the export sector prevailed through 1995. All codes provided ad-hoc fiscal incentives through preferential tax treatment and exemptions, without follow up controls, and used different criteria for approval. Benefits varied according to regions where the projects were located, the scale of the investment, and the activity concerned.9

After various attempts to rationalize investment incentives within the framework of the existing codes, in December 1995 a new legal framework (Loi cadre formant Charte de l’investissement), valid for 10 years, replaced the various sectoral investment codes. The new charter seeks to promote investment in Morocco across all nonagricultural sectors through the provision of homogenous fiscal incentives and a streamlining of administrative procedures, and aims at: (i) encouraging exports; (ii) promoting employment; (iii) reducing the cost of investment and production; (iv) rationalizing water and energy consumption; and (v) protecting further the environment. Agriculture remains outside this new framework.

To these ends, the new charter includes essentially a number of fiscal incentives, including exemptions for VAT, PFI, and registration fees, as well as tax breaks on the corporate profit and income taxes, which generalize across sectors the tax incentives that were previously granted under the sectoral investment codes. The new fiscal incentives were mostly implemented with the 1996 transitory budget law (as detailed in Annex 1). However, the new charter also includes a number of initiatives to encourage investment, notably: (i) promotion of financial offshore places, free zones for exports, and customs free industrial warehouses; (ii) enhanced administrative assistance and guidance to potential investors; and elimination of the administrative approval for investment compliance (Certificat de conformité); (iii) establishment of a special fund in the central government budget to promote investments; (iv) government’s participation in the development of industrial zones, particularly in the less developed areas; and (v) more generally, government’s commitment to participate in expenditure on infrastructure; education (including vocational training); land acquisition for certain large investment projects, particularly those favoring job creation and regional development; diffusion of high technology and know-how; and protection of the environment.

2. Public enterprise reform and increased scope for private sector activity

Morocco’s public enterprise sector includes about 800 entities and accounts for a significant share of total value added and employment.10 The government has a majority holding in an estimated 450 firms, of which 35 are classified as public service monopolies. Sixteen “Régies” are responsible for the distribution of electricity and water on a regional basis, and the Regional Agencies for Agricultural Development (ORMVAs) manage agricultural irrigation.


The Privatization Law, promulgated in 1990, authorizes the government to privatize a portfolio of 112 state-owned enterprises, composed of 37 hotels and 75 companies over a period of six years.11 In early 1995, the privatization law was amended to incorporate two oil refineries and to extend the privatization period until end-1998. The list was based on a number of specified criteria. Eligible firms had to: (i) have the legal status of corporations (Sociétés anonymes); (ii) operate in a competitive environment; (iii) be profitable or potentially profitable; (iv) have no overstaffing problems; (v) have no public service (or utility) role; (vi) have a significant share of state ownership; and (vii) contribute to regional development.

The privatization process is carried out by three institutions: the Ministry of Privatization manages the evaluation and sale of companies; the Evaluation Commission--seven “wise men” nominated by the King--sets a minimum price for the sale of a company; and the Transfer Commission-an interministerial committee of five members--advises the Minister of Privatization, and approves the actual transfer in the case of direct negotiations. While ensuring transparency, this arrangement at times has also slowed the process. A number of companies, for example, have elicited no interest at the minimum price set by the Evaluation Commission. The government is currently considering proposals to streamline the privatization procedures, notably through greater flexibility in setting the minimum price.

Actual privatization started in earnest in late 1993. As of mid-1996, a total of 39 public entities had been sold (22 companies and 17 hotels for proceeds totaling 3.2 percent of 1995 GDP), while some others were closed. The major firms privatized to date include a large financial holding company (SNI) in 1994 and Morocco’s second largest bank (BMCE) in 1995; in each of these two cases, the initial public offering was substantially oversubscribed, and the shares of the companies performed well on the Casablanca stock exchange market after privatization. In early 1996, BMCE was the first Moroccan company to issue equity abroad through global depositary receipts (GDR) in the London market. Other major transfers included the largest intercity bus company (CTM-LN); the biggest cement manufacturer (CIOR), the first tranche (30 percent) of Morocco’s largest oil refinery (SAMIR), and a large chemical producer (SNPE). For large enterprises, majority of control has typically been sold to a core of “strategic” shareholders having the required financial capabilities and technical know-how, and the remaining capital through public offerings. The program has led to an increase in the number of individual Moroccan shareholders to 288,000 individuals. Total foreign participation (mainly from Switzerland, the United Kingdom, the United States, and France) accounted for almost 30 percent of the privatization proceeds. The program has also been instrumental in activating the stock exchange, whose market capitalization rose tenfold during 1989-95.

To give a new impetus to the privatization program, the authorities started issuing privatization bonds in January 1996. These bonds give priority to buy shares of future privatization through public offerings on the stock exchange. The zero-coupon bonds pay annual interest rates of 8 percent at conversion to shares or 8.5 percent at redemption on December 31, 1998; this compares with a 9.5 percent interest for traditional treasury bonds of comparable maturity. The first privatization bond issue of DH 1.5 billion was oversubscribed by more than 25 percent, and in the event the issue was raised to DH 1.76 billion. A second issue of DH 1 billion, which was launched in May 1996 and targeted to institutional investors, was also oversubscribed, although to a lesser extent. Both issues were mainly sold to Moroccan residents and nonresidents.

The privatization program for fiscal year 1996/97 (July-June) provides for the completion of the sale of SAMIR to a core group of investors and the sales of the smaller oil refinery (SCP), the leading laminator (SONASBD) and distributor of fertilizers (FERTIMA), three sugar producers, a gaz storage company (SONAS), two financial institutions (the largest deposit bank (BCP) and the development bank (BNDE)). SONAS has been transferred to the private sector in May 1996, and the government successfully floated 35 percent and 30 percent of its stake in SONASID and FERTIMA on the stock exchange in June and October 1996, respectively. The privatization of the sugar companies faced difficulties, owing to uncertainties in the regulatory regime following the liberalization of imports and the move to a new unitary subsidy scheme; a main concern of potential buyers is uncertainty pertaining to the future evolution of trade protection and domestic price control regulations.

The government is currently preparing a second list of companies for future privatization, possibly including firms in the telecommunications and transport sectors. The government is also encouraging private sector concessions (“concessions”) in the public utilities sector, and is preparing new legislation to set up a proper regulatory framework for privatized companies and monitoring concession obligations, including through the establishment of a regulatory agency. Other purposes of this new regulatory framework would be to secure a credible and coherent investment environment, provide arbitration between operators and users and among different operators, and define the general principles (such as cost-based pricing, nondiscriminatory access, protection against unfair competitive practices) to guide regulation in a competitive environment. As of November 1996, the government has been negotiating build-operate-own (BOO) and build-operate-transfer (BOT) contracts (concessions) with private firms in the water and the electricity sectors and the motorway system. In particular, the electricity enterprise, ONE, has concluded contracts with private firms for the construction and operation of two new thermal generating plants (the Jorf Lafsar power plants); and the water distribution and sewerage systems in Casablanca is to be operated by a French private firm, under a 50-year BOT contract.

While the process of privatization and the granting of private concessions has gained momentum and seems based on a broad consensus, a number of remaining difficulties and impediments will need to be addressed to ensure continued progress. These and related policy issues include: (i) the privatization process is likely to be more difficult in the period ahead, as some of the remaining firms on the initial list may be less attractive; (ii) labor redundancies will become a more serious problem with the privatization of the larger and less profitable firms, given the rigidities of the current labor regulation and practices, including legal obstacles to reassign workers from one public enterprise to another; and (iii) administrative procedures will need to be effectively streamlined as soon as possible.

Restructuring of public enterprises

Major reforms were undertaken during 1985-93 to improve public enterprises’ financial performance and develop their administrative autonomy and accountability, with a view to shifting the government’s role from one of controlling public enterprises’ functions to one of holding management responsible for achieving the performance objective.12 Since 1994, the government has strengthened the role of the executive boards, negotiated a number of new performance contracts, and established a list of public enterprises to be liquidated or restructured during 1996-2000. A new company law adopted in 1996 imposes on all firms, including public enterprises, regular auditing and company disclosure requirements.

Despite these actions, the financial burden imposed by public enterprises on the budget has not significantly declined since 1990. Total current and capital transfers from the government to public enterprises increased from 1.1 percent of GDP in 1990 to 1.7 percent of GDP in 1993 but declined thereafter, to 1.2 percent of GDP in the first semester of 1996. Also, large amounts of cross-arrears persist. On the one hand, the government has accumulated substantial arrears to the public enterprises, mostly related to payments for utilities, including electricity, water, transport services, and fuel. On the other, public enterprises have also accumulated arrears vis-à-vis the government, largely related to tax payment and to the service of treasury-guaranteed external debt. The implementation of an arrears clearance program beginning in 1993 has helped reduce the stock of arrears several times but has failed to prevent its periodic reemergence. Total government outstanding arrears rose to DH 12.7 billion (4.6 percent of GDP) by end-1995, well above the “normal” payment float of around DH 4-5 billion. As a result of the improvement in the fiscal accounts during the first semester of 1996, they were reduced to DH 9.7 billion (3 percent of GDP) by end-June 1996.

Policy issues in this area relate primarily to: (i) full autonomy to adjust prices to reflect true production costs; (ii) promulgation of a new code of public enterprise management and governance, which would emphasize profit maximization as an important objective of public enterprises; and (iii) annual assessment of public enterprises’ management performance on the basis of fulfillment of readily measurable objectives. The government is currently preparing, in collaboration with the World Bank, a new public enterprise reform operation, which will focus on systemic issues, such as pensions, arrears, and financial autonomy.

3. Price liberalization and reform of consumer subsidies

Pricing policies

The 1971 basic framework law governing domestic pricing, which gives broad powers to both the central and local governments in controlling prices and/or profit margins, remains in force. However, following the major reforms initiated in the mid-1980s, the government continued to reduce price controls and subsidies during 1990-94. The remaining price controls at the national level relate mainly to foodstuffs and pharmaceuticals, as well as utilities (see below). Other price controls are mostly applied at the local level by the municipalities, and affect retail selling prices and margins. At the provincial level, the wholesale prices of fresh food and vegetables and meat are generally fixed by regional authorities.

The authorities are currently working on a draft price and competition law (Projet de loi sur la concurrence et les prix) that would establish the principles of free and market determined prices as well as the framework for addressing monopolistic practices. To address the deficiencies in the existing legal framework, the new law would also need to: (i) ensure that the more serious types of anti-competitive behavior, including business practices that are also potentially anti-competitive (like franchising and exclusive sales) are adequately taken into account; (ii) introduce executory powers for the proposed anti-cartel commission; and (iii) introduce effective provision for civil suits by consumers or producers for damages incurred by anti-competitive behavior.

Petroleum prices

In early 1995, direct controls on domestic petroleum prices were replaced by a mechanism to fully pass through the fluctuations in international petroleum prices to domestic prices whenever changes in international prices exceed 2.5 percent; retail margins remain, however, fixed.


Water tariff rates at both the production and distribution levels are set by government decree and vary widely across regions and according to the final user (households or enterprises). In 1994, the World Bank estimated13 that the marginal cost associated with investment in conveyance and distribution to sustain and extend water supply to households and businesses in the Casablanca area over the period 1994-2000 averaged some DH 6.1 per cubic meter as compared to the average tariff of DH 4.3 per cubic meter prevailing in 1993; to keep tariffs in line with long-run marginal costs, the average tariff over the period would thus have to increase by about 30 percent in real terms from its 1993 levels. Price distortions as regards irrigation water are even higher. As a first step, in early 1996, tariffs in the first bracket (“tranche sociale”) were raised by 30 percent, and tariffs in the higher brackets by 36 percent. The additional charge for the rehabilitation of the Casablanca network was also raised.

With half of the population dependent on agriculture and production largely relying on erratic rainfall, Morocco has since independence pursued an ambitious program of extension of irrigated areas. Morocco has a relatively strong legal framework for recovering operating and maintenance (O & M) costs and a share of investment costs for irrigation water. Cost recovery has improved in the past decade and is estimated to broadly cover O & M costs, but only a fraction of investment costs.

The growing scarcity of water is a major constraint for Morocco, and is already reflected in indicators such as the decline in per capita supplies and exhaustion of available resources in a number of key basins, the degradation of water quality, and limited access of the rural population (14 percent) to potable supplies, compounded by the deterioration of existing infrastructure and the silting of dams. Thus, there is an important need for reform of the legal and regulatory system to rationalize water management and to address incentive issues, such as: (i) the rapidly rising marginal cost of water and sharp increases in investments costs, which are not matched by cost recovery; and (ii) the inadequate demand management, as reflected in losses of irrigation water and urban potable water supplies.


The public enterprise for electricity generation (Office national de l’électricité, ONE) shares the legal monopoly for distribution of electricity with a few regional public companies; its former monopoly on electricity production has effectively been abrogated by the authorization of private producers (see below). ONE is confronted with financial difficulties, arising notably from a distorted cost and pricing structure, which has hampered timely completion of planned investment and reduced maintenance outlays.14 In particular, following a very severe drought in 1995, larger fuel consumption necessitated by increased use of thermal plants to compensate for the shortfall in hydroelectric generation aggravated further ONE’s financial problems, in the absence of commensurate electricity tariff increases. These difficulties have led to the accumulation of substantial domestic arrears, in particular vis-à-vis the petroleum refineries and the Treasury with respect to debt service and payment of taxes, as well as to the postponement of the planned expansion of generating capacity.15 As a result, electricity generation fell substantially short of demand in 1995, and might again have been--as in some earlier years--a binding constraint on industrial production.

Tariffs, fixed by government decision, vary by type of consumer (industrial users pay higher rates than households), but also reflect other considerations.16 In 1994, the overall tariff levels were estimated to have fallen short of economic costs (based on c.i.f. fuel prices) by about 10-15 percent.17

A new tariff structure was introduced in January 1996, which increased tariffs by 17-20 percent for largest household consumers; tariffs for users of low tension (up to Kwh 100), however, ware kept unchanged. In addition, the new tariff structure eliminated the distinction made in the past between contracts that incorporated a minimum energy consumption per month and those that did not. As regards nontariff policy, ONE is to halve its own production of electricity and treble the amount it buys from private sources by the year 2000. The first build-operate-transfer (BOT) project involving also the leasing of some existing plants has already been signed with ABB Asea Brown Boveri and the U.S. CMS Energy Corporation, and the construction of two additional 330-MW units is to start at the end of the year. Tenders for a 300-650 MW combined cycle power station in Mohammedia are to be issued soon; this project is to be followed by a 300-500 MW combined-cycle plant at Kenitra. In addition, a 50 MW wind power station in Tetouane is being financed by Electricité de France and other private investors.

Consumer subsidies

Although a range of subsidies was abolished in the 1980s, Morocco has continued to maintain consumer subsidies for certain edible oils, sugar, and flour, essentially for social reasons. Under this system, prices for oils, sugar, and certain low-quality variants of wheat flour are controlled; and producers and distributors receive subsidies to compensate for the difference between costs and prices. The subsidies are paid by the price stabilization fund (Caisse de compensation), which receives tariff revenue from the import of the subsidized items, and transfers from the central government budget for the balance. While limiting the subsidy to low-quality variants implies an element of self-targeting, it is estimated that only a fraction of the subsidy actually reaches the poor. In mid-1996, the government liberalized imports of cereals, edible oils, sugar, and derivatives; and replaced open-ended subsidies for edible oils and sugar by a system of fixed unitary subsidies for these products. Reform of the wheat flour subsidy is currently under consideration. However, prices for these three items remain controlled.

4. Environmental issues

Morocco is faced with mounting environmental problems; the most severe of them relate to water scarcity and quality degradation; inadequate disposal of solid industrial waste and sewage, air pollution resulting from cement and phosphate plants and the heavy use of coal and leaded gasoline, loss of potentially arable land caused by excessive dam siltage, and deforestation and land erosion arising from poverty and the breakdown of traditional collective land management system. The Ministry for the Environment, which was set up in 1995, is formulating a comprehensive diagnosis and a remedial Environmental Action Plan. A new water code was passed in July 1995, which introduced a legal framework to allow an integrated water resource management; however, implementing regulations are yet to be passed. Draft laws and decrees have been prepared for environmental impact assessment procedures, pollution emission norms, and ambient quality standards, but these have yet to be adopted. The World Bank is currently providing technical assistance to prepare an Environmental Code.

5. Financial sector

In recent years, Morocco has been pursuing a comprehensive reform of its financial sector. The conduct of monetary policy has been increasingly based on indirect market-related instruments, and by early 1996 nearly all interest rates were free from controls.18 Preferential access by the public sector (see below) to financial resources has been sharply reduced, breaks on interest income from holding government paper eliminated, and the shift by the government to market-based financing of the budget has contributed to the development of financial markets. The Casablanca stock exchange has been modernized, and its management privatized with a view to enhancing its role in the mobilization of savings and improving allocation of resources.

To strengthen the effectiveness of its indirect instruments of monetary control, in June 1995 the Central Bank ended all rediscounting operations, and limited the provision of refinancing to commercial banks to its intervention in the money market, mainly through weekly repurchase auctions.19 Banks were also given the possibility of requesting five-day repurchase agreements with the Central Bank at rates exceeding those of the auctions. At the same time, to establish the basis for possible open market operations in the future, in September 1996 the calculation of required reserves was shifted from a weekly and monthly basis to a daily average over a period of one month, so as to provide banks with a greater flexibility in the management of their liquidity and encourage operations in the money market. The liberalization of interest rates was largely completed by February 1996, with the removal of the ceiling on bank lending rates. Interest rates on deposits have been free since 1992, with the exception of passbook deposits and sight deposit.20

The public sector’s preferential access to financial savings has been substantially reduced. In the context of the phasing out of directed credit (coefficients d’emploi obligatoires), in 1994 mandatory holdings of bonds issued by specialized public financial institutions were eliminated and with the exception of the required minimum holdings of bonds issued by the Agricultural Credit Bank (CNCA). The minimum holding requirement of special treasury paper (plancher d’effets publics), issued at 4.25 percent (well below market rates), was reduced in several stages from 32 percent of short-term bank liabilities in July 1991 to 10 percent in September 1996. Effective in 1995, interest income from government and publicly guaranteed debt instruments has been taxed at the same rate as other interest income.

Measures have been taken to deepen the market for treasury instruments and increase its efficiency. The access to treasury bills sold through auctions has been widened to include since 1995 all resident and nonresident economic agents. While only banks may submit bids in the auction for their own account and on behalf of their customers, the range of participants eligible to directly submit bids for their own account was extended in August 1996 from a limited number of nonbank financial institutions to insurance companies, pension funds, and social security funds.21 The maturity structure of treasury bills and bonds was simplified and tap issues (bons assimilables) were introduced to enhance liquidity. In January 1996, the Central Bank established a clearing and settlement system for operations in the secondary market of treasury bills. The minimum denomination of the bills had been gradually reduced from DH 1 million originally to DH 250,000 by August 1996. With a view to harmonizing the yields on treasury instruments in the money and capital markets, beginning in March 1996 the government has reduced the premium on paper issued to nonfinancial institutions over treasury paper sold in the auction. Subscription to these types of government bonds and their trading in the stock market where they are listed have been opened to economic agents that are excluded from direct submission of bids in the treasury bill auctions.

In parallel with the liberalization of the financial sector, the regulatory structure of the banking system and banking supervision have been strengthened. In 1992 the risk concentration ratio was redefined to include all bank commitments. Effective in early 1993, the solvency ratio (net equity to sight and term deposits) was replaced by a minimum ratio of 8 percent of capital to risk-weighted assets, in accordance with international standards. In May 1993 new loan classification and loss provisioning regulations were introduced, while the new banking law enacted in July 1993 extended the Central Bank’s supervision of bank institutions to their subsidiaries and affiliates and established the requirement of independent audits. Together with some modifications of classification rules, in December 1995 the deadline for full provisioning was extended through end-1996, although banks had to reach 75 percent of required levels at the end of 1995. In July 1996 specialized financial institutions became subject to the capital adequacy and risk concentration ratio rules as part of their full integration in the banking system, under the new 1993 banking law. Also, in June 1996 prudential regulations became effective for the newly established interbank foreign exchange market (see below).

As provided for under the new securities market law of 1993, management of the Casablanca stock exchange was transferred to the brokers’ association in August 1995. An independent supervisory commission (Conseil déontologique des valeurs mobilères) was established in 1994 to supervise the functioning of the market, approve listings and ensure compliance with new regulations regarding transparency. By August 1996, 13 brokerage firms and 18 mutual funds had been approved; these had been mostly set up by banks, which themselves were no longer allowed to operate directly on the stock exchange. To support the latter’s development, a bias against floor transactions in the transactions fee structure was eliminated.

Ongoing efforts are directed at promoting and facilitating the use of the recently introduced new negotiable instruments (certificates of deposits, commercial paper), developing a secondary market in treasury paper, and enhancing efficiency of the stock exchange market through the establishment of a second market directed at smaller enterprises, the setting up of a central depository of securities, the introduction of an electronic quotation system, and a further strengthening of the regulatory framework.

Despite the considerable progress achieved so far, further reforms are necessary to enhance financial intermediation. Key issues that need to be addressed include: enhancing competition in the financial sector; deepening the secondary market for treasury bonds both to allow the Central Bank to include open-market operations in its monetary instruments and to provide financial markets with a meaningful yield curve; and strengthening contractual savings. Measures that the authorities are currently considering for implementation in the near future include in particular: the elimination of the remaining required holding of treasury bills at below market rates; and the unification of markets of government debt instruments. The planned privatization of BNDE and other banks would also help to increase competition within the banking sector. Moreover, to increase contractual and institutional savings, the government is currently preparing, with support from the World Bank, a reform of the pension system and the insurance sector as well as an overhaul of publicly owned financial institutions, such as the Postal Savings Bank (Caisse nationale d’épargne) and the Caisse des dépôts et de gestion. The former can play a potentially important role in mobilizing rural savings; the latter remains a major government-owned financial institution, essentially collecting resources from social security and pension funds and investing them in government paper and holdings in real estate and other financial institutions.

6. Factor markets

Land market and housing

The major constraints to efficient land use and development generally vary from urban to rural areas. In urban areas, the main problem is the incentive structure and lack of transparency in the real estate market (including land reserved for industrial zones). In rural areas, the main problem is the lack of an integrated market for land use as property rights are not well defined (the land is collectively owned or not registered).

Key objectives of planned reforms in this sector include: (i) increasing the pace of land registration in rural areas to allow the transfer and consolidation of land as desired by farmers, and the use of land as collateral to obtain credit; (ii) simplifying the process of transferring land titles in both rural and urban areas; (iii) increasing transparency of the real estate market by publishing zoning plans and sales prices, and increasing the availability of publicly held land to the private sector; (iv) changing the favorable taxation of land relative to other assets; and (v) providing appropriate public infrastructure and support services for the development of industrial zone and housing lots.

Labor market

The labor market faces significant rigidities, mainly as a result of the enforcement of stringent labor regulations, which have exacerbated urban unemployment and stimulated development of the informal economy (see also Section II).22 Despite relatively high government expenditures on education (over 5 percent of GDP), employers face shortages of certain skills (particularly in the managerial and technical fields). At the same time, greater emphasis in the provision of higher education has been at the expense of the promotion of basic education; illiteracy at about 55 percent on average is comparatively high.

Three main features of the regulatory system have contributed to rigidities in the labor market: (i) the minimum wage policy; (ii) mandated nonwage labor costs; and (iii) regulations governing hiring and dismissals.

All firms are required to apply the minimum wage law enacted by the Dahir of June 18, 1936 for the agricultural sector (Salaire minimum agricole garanti, SMAG) and the nonagricultural sector (Salaire minimum interprofessionel garanti, SMIG). The SMIG, which appears to affect a large share of urban employment, has been rising in real terms by about 7 percent between 1989 and 1995, contributing to the high rate of registered unemployment in the urban area. By raising total labor costs contributing in the formal sector, the SMIG may have also encouraged the shift of production into the informal sector23 and the use of relatively more capital intensive techniques, and contributed to the decline of Morocco’s competitiveness in international markets.24 The gap between the SMIG and the SMAG (the latter being 35 percent lower) may partly explain the rural-urban migration. In August 1996, the government agreed to wage and salary increases in the public sector, as well as to an increase in the SMIG and SMAG of 10 percent, as part of the social pact.

Social charges levied by the mandatory social security organization, Caisse nationale de sécurité sociale (CNSS), represent about 19 percent of the take home pay. Firms also pay a levy (1.6 percent) for vocational training, and additional charges for various types of insurance (accident) which are not compulsory. These charges have driven a wedge between the cost of labor and the net take-home pay in the formal sector of the economy that varies between 20 percent and 35 percent.

The Moroccan system constrains the freedom of employers to discuss worker dismissal, and as a result discourages labor mobility and employment. Individuals may not be fired for economic or technological reasons. Collective layoffs are permitted for economic reasons only with prior approval by regional authorities. In addition, the labor code emphasizes severance pay and judicial recourse. By raising exit costs, these features have made it harder for firms in need of restructuring to adjust. The rigidity in firing has also affected hiring practices. Firms either tend to hire temporary workers or base their hiring decisions on personal contacts. Labor market intermediation (e.g., employment agencies) is not allowed under the present code, but firms have been able to rely on information provided by “consulting” firms to base their hiring decisions.

To eliminate a number of these rigidities, the authorities submitted a new draft labor law to Parliament in May 1996. To address existing deficiencies, the new labor code would need to liberalize substantially the provisions relating to: (i) dismissal on the basis of economic reasons; (ii) fixed-term employment; (iii) the scope of applying minimum wages; (iv) eligibility for severance pay; (v) collective bargaining procedures; and (vi) allow fully autonomous employment agencies.

7. Exchange system liberalization

A process of gradual liberalization of current transactions since the mid-1980s culminated in January 1993, with the establishment of full current convertibility and acceptance of the obligations under Article VIII of the Fund’s Articles of Agreement, sections 2, 3, and 4. As regards capital account transactions, Morocco has in recent years established virtual full convertibility for nonresidents: repatriation of profits and liquidation proceeds of direct and portfolio investments are free; and requirements to hold shares with a Moroccan depository were dropped in 1993. For residents, however, substantive restrictions on outward and inward flows still apply, although firms may borrow abroad for most business-related purposes and investments abroad related to exports (e.g., setting up foreign representations) are usually authorized upon request. A requirement to repatriate foreign exchange proceeds remains in place. However, the surrender requirements from the export of goods and services have gradually been relaxed, and with the establishment of an interbank foreign exchange market in June 1996, exporters of goods and services may surrender proceeds to commercial banks rather than the Central Bank; and keep up to 20 percent in foreign currency accounts. For Moroccans residing abroad, the minimum threshold for opening a foreign exchange account with a commercial bank has been gradually lowered, and eliminated in 1995.

An interbank foreign exchange market was set up in June 1996, with prudential limits on the allowable open foreign exchange position of participating banks (20 percent of capital, and up to 7 percent of capital for a position in a single currency). The Central Bank continues to set a central rate based on an unchanged peg to a basket of a few partner countries’ currencies. Banks may trade within a spread of ±0.5 percent around this rate. The interbank market is expected to motivate banks to develop instruments providing traders and investors with a possibility to hedge against short-term exchange risk. The authorities are currently considering steps to increase the scope of transactions between domestic commercial banks and their foreign correspondents.

The move to full convertibility remains a long-term objective of the government. It would essentially require dropping restrictions on Moroccan residents’ investment abroad, and eliminating remaining restrictions on borrowing abroad. Apart from strengthening macroeconomic stability, the authorities see a further deepening of financial sector reform, a stronger foreign exchange reserve position and a deepening of the foreign exchange market as essential prerequisites for such a move. Intermediate steps, however, could be implemented; these include further reducing surrender requirements, gradually relaxing repatriation requirements, and enhancing the scope for direct investment abroad.

ANNEX 1 Tax Measures in the 1996 Transitory Budget and 1996/97 Budget25

1. The 1996 transitory budget law (January-June 1996)

While it introduced some new general tax dispositions, the 1996 transitory budget law to a new fiscal year (July-June) essentially implemented most of the fiscal measures provided in the 1995 new investment charter.

General dispositions

* Increase in the normal VAT rate from 19 percent to 20 percent.

* Elimination of the VAT exemption for certain products such as pasta, soap, and methylated spirits.

* Increases in the VAT rate for wine and spirits to DH 100 per hectoliter and in the VAT rate for a few other products (such as tea, coffee, jam, and animal and vegetable fat) to 14 percent.

* Reduction of the annual vehicle tax for small automobiles and increased initial registration tax.

* Introduction of a 10 percent capital gains tax on capital stocks and corporate equities (see also the summary of tax system for details on exemptions—Appendix 1).

* Reduction of the number of tariff rates for import duties on industrial products (droits d’importation, DI) to 5 (2.5 percent; 10 percent; 17.5 percent; 25 percent; and 35 percent). However, import duties on agricultural products reach up to about 300 percent (excluding the fiscal levy--prélèvement fiscal à l’importation (PFI)).

* Elimination of privileges for public enterprises and the government regarding the payment of custom duties (by obligations non-cautionnées and crédit administratif, respectively.

Implementation of the fiscal provisions under the new investment charter (Charte de l’investissement)

In December 1995, a framework law (loi cadre formant Charte de l’investissement) was introduced to replace eight sectoral investment codes, aiming at promoting investment through general incentives. Most of the fiscal measures called for in the framework law were introduced with the 1996 transitory budget, including:

* Introduction of a minimum tariff for import duties at 2.5 percent ad-valorem.

* Introduction of a maximum import duties for equipment goods and all investment inputs at 10 percent ad-valorem.

* Exemption of equipment and other investment goods from the PFI (largely consolidating existing exemption).

* Exemption of equipment goods from VAT (largely consolidating existing exemption).

* Exemption of land acquisition from registration fees (droits d’enregistrement) for all investment projects, with the exceptions of building and housing industries that were made subject to a 2.5 percent registration fee.

* Elimination of the national solidarity contribution (participation à la solidarité nationale) on corporate profits (surtax on corporate profit tax), and introduction of a tax of 25 percent on the amount exempted from the corporate profit tax.

* Reduction of the corporate profit tax (impôt sur les sociétés, IS) from 36 percent to 35 percent, except for financial institutions and insurance companies, for which the rate remain unchanged at 39.6 percent.

* Tax breaks for the export sector on corporate profit tax (on profits generated by export activities) up to a full tax exemption for five years, and a 50 percent tax break thereafter. For services exports, the tax break applies only to the export turnover denominated in foreign currencies.

* 50 percent tax break on corporate profit tax for all enterprises operating in regions benefiting from preferential fiscal treatment (less developed regions) during the first five years of activities, except for certain foreign enterprises involved in public works projects, financial institutions, real estate companies, and enterprises involved in public works.

* 50 percent tax break on corporate profit tax for all handicraft enterprises during the first five years of activities.

* Reduction in the maximum marginal rate on general personal income tax (impôt général sur le revenu, IGR) to 44 percent and reduction of all the intermediate rates by one percentage point.

* Tax breaks for the export sector on general personal income tax (generated by export activities) up to a full tax exemption for five years and a 50 percent tax break thereafter. For services export, the tax cut applies only to the export turnover denominated in foreign currencies.

* 50 percent tax break on general personal income tax for all enterprises operating in regions with preferential fiscal treatment (less developed regions) during the first five years of activities, except for certain foreign enterprises involved in public works projects, financial institutions, real estate companies, and enterprises involved in public works.

* 50 percent tax break on general personal income tax for all labor intensive handicraft enterprises during the first five years of activities.

* Exemption of individuals from the real estate capital gains tax on the first sale of modest housings (logements sociaux).

* Elimination of the variable rate of the business licence tax (patente).

* Exemption from business licence tax of all individuals and businesses for the first five years of activities, except for foreigners, foreign businesses, financial institutions, and real estate companies.

* Exemption from urban tax (taxe urbaine) for all new buildings and extension of existing constructions for five years after the completion of the investments, except for foreign enterprises, financial institutions, and real estate companies.

2. The 1996/97 budget law (July 1996-June 1997)

International taxes

* Replacement of quantitative import restrictions by tariffs for cereals, edible oils, sugar, and their derivatives.

* Increase in the excise tax (taxe intérieure à la consommation, TIC) on diesel (enacted by government decree in August 1996).

* Harmonization and adjustment of the excise taxes for different fuel categories. Adjustment in the calculation of the excise tax for fruit juices, and other non-alcoholic beverages.

* Introduction of two new tariff rates at 24 percent and 43.5 percent, which apply mostly to meat and poultry products.

* Exoneration of import duties for certain products, such as books, foreign bank notes, commercial freight ships, and ships for personal maritime transport.

* Reproduction of import duties and PFI on certain products, such as potatoes, tractors, water pumps, wood, paper, phosphorus and derivatives.

* Reduction of import duties for certain categories of meat and minor adjustments in import tariffs of certain other products.

Domestic taxes

* Extension of the VAT to all retailers with turnover exceeding DH 2 million.

* Increase in the different levels of the minimum general personal income tax.

* Introduction of a tax to promote quality national television broadcasting.

* Introduction of specific provisions aimed at reducing fraud, including in particular: (1) the obligation to provide appropriate invoices to justify the assessment for VAT, income tax and corporate profit tax; (2) on-site visits from tax officials; (3) payment of bills by bank checks, bank transfers, or credit card, in order to assess the taxable basis for income, corporate profit taxes, and VAT; (4) penalization of certain kinds of tax fraud (such as faking or destroying tax-related documents); and (5) improving the functioning of the “fiscal commissions” with a view to shortening investigation periods and the decision process.


Prepared by K. Enders and J.-P. Chauffour, with contributions from S. Sheybani, O. Kanaan, and E. de Callatay.


For a review of the adjustment experience through 1993, see Nsouli, et al. (1995).


A summary of the tax system as of end-July 1996 is provided in Appendix I.


However, the determination of the base continues to rely on five different schedules: (1) professional income; (2) wages and salaries; (3) real estate rental income; (4) dividend and interest income; and (5) agricultural income, although this last source of income is presently exempted.


The import levy surcharge has 3 rates: zero percent for investment good imports; 12.5 percent for pharmaceutical products; and 15 percent for all other imports. Total customs duty inclusive of the import surcharge, thus vary between 2.5 and 50 percent for industrial products and up to around 300 percent for certain agricultural products.


WTO (1995).


Administratively set import prices used as the basis for calculating import taxes, and typically substantially higher than the actual import prices.


For details on the impact of the AAEU, see Section IV.


As a result, the cost of capital differed from sector to sector, favoring in particular the real estate sector because of capital gains exemptions; this, at the expense of productive investment; this approach also did not help improve persisting shortage of social or lower income housing.


State-owned enterprises and participations together account for about 20 percent of GDP and employ about 10 percent of the urban labor force.


The value-added of the firms to be privatized (as a proportion of the total value-added of the corresponding sector) was as follows: agriculture: 0.1 percent (3 firms); mining companies 6.3 percent (5 firms); manufacturing companies: 6.1 percent (41 firms); financial institutions: 31.3 percent (10 firms); commerce: 4.2 percent (9 firms); transportation and communications: 1.0 percent (2 firms); and services: 0.3 percent (4 firms).


The reforms included changes in the utility tariffs and pricing policies and reductions of domestic cross-arrears, as well as strengthening of the planning, evaluation, and monitoring of investment within the framework of three-year performance contracts with the government.


World Bank (1994b), (1994d).


ONE accounts for about 90 percent of total electricity generation. The rest is generated directly by industrial end-users, notably the Office chérifien des phosphates (OCP). ONE also imports some electricity (typically less than 5 percent of domestic production) from Algeria. Distribution, however, is divided between ONE (mostly direct, high tension connections to large industrial users) and ten government-owned municipal and electricity companies (Régies autonomes de distribution).


Arrears have also affected ONE’s financial activities on the revenue side owing to an accumulation of payment arrears by the local distribution companies.


Most of the supply to the electricity local companies (régies) and high and medium-voltage end-users is subject to charges consisting of a fixed component based on maximum monthly demand and of a variable component based on quantity consumed, differentiated as between day and night usage. For agricultural users, charges consist of a fixed component based on yearly demand and a variable component based on quantity consumed and differentiated among day, night, summer, and winter usage. Finally, for households, charges consist only of a variable component aside from a one-time connection charge.


However, heavy fuel oil, the major intermediate input in thermal electricity generation, is subject to taxes bringing its domestic ex-refinery price to almost three times the c.i.f. import price.


All bank lending rates are currently free with the exception of those on credits to young entrepreneurs, which are expected to be liberalized shortly. No interest is allowed on sight deposits, while passbook accounts carry a minimum interest rate of 7 percent.


Every Wednesday banks submit bids for one week refinancing credit with an indication of the interest rate at which they want to borrow. Only bids at or above the rate set by the Central Bank (Bank Al-Maghrib) are eligible. Bids are satisfied as a proportion of the total amount of refinancing offered by the Central Bank equivalent to their share in total bids.


The minimum interest on passbook deposits with banks has been set at 7 percent since 1994, when it was lowered from 8.5 percent; in real terms, it rose from 0.5 percent in 1991 to a range of 1 to 3 percent over 1992-96. The share of total passbook deposits in broad money has remained stable, accounting for 8-9 percent of total broad money during 1991-96. The share of sight deposits, which cannot be remunerated, declined from 43 percent in 1991 to 41 percent in June 1996.


The nonbank financial institutions include the Caisse marocaine des marchés (CMM) and the Fonds d’équipement communal (FEC); the pension and social security funds comprise the Caisse marocaine des retraites (CMR), the Régime collectif d’allocation de retraite (RCAR), the Caisse nationale de sécurité sociale (CNSS), the Caisse interprofessionnelle marocaine de retraite (CIMR), and the Caisse nationale de retraite et d’assurance (CNRA).


The rate of unemployment in the urban areas is estimated at 22.9 percent in 1995, and even higher for the 15-24 age group (about 37 percent). In rural areas, although unemployment is considered to be relatively low (around 9 percent), there is evidence of widespread underemployment.


Firms circumvent the minimum wage and ease firing restrictions by using temporary workers and reducing hours for permanent workers. Many workers, even in large firms, are not registered.


According to a recent World Bank report (1994a), unit labor costs in this sector declined less rapidly over the last decade (1980-1990) than in competitor countries such as China, or Indonesia, or Malaysia.


A summary of the specific tax measures adopted in 1994 and 1995 is provided in SM/95/231, September 8, 1995; pp. 29-31.