Statement by Mohammed Daïri, Alternate Executive Director for Morocco

Morocco has been able to establish macroeconomic stability and industrial country levels of inflation, despite adverse weather conditions and terms-of-trade developments. Executive Directors welcomed these developments, and stressed the need to reduce unemployment and poverty. They appreciated the robust banking system, and emphasized the need to tighten macroeconomic policies and accelerate structural reforms. They commended the efforts taken in improving the timeliness and dissemination of statistical data, and agreed to undertake a Report on the Observance of Standards and Codes on statistics.


Morocco has been able to establish macroeconomic stability and industrial country levels of inflation, despite adverse weather conditions and terms-of-trade developments. Executive Directors welcomed these developments, and stressed the need to reduce unemployment and poverty. They appreciated the robust banking system, and emphasized the need to tighten macroeconomic policies and accelerate structural reforms. They commended the efforts taken in improving the timeliness and dissemination of statistical data, and agreed to undertake a Report on the Observance of Standards and Codes on statistics.

Morocco has been undergoing major political and social changes over the past three years. The new government was successful in maintaining political and social stability during the period immediately preceding and following the passing away of King Hassan II and the enthroning of King Mohammed VI in July 1999. Significant progress was also made in opening up the political system, strengthening transparency, governance, the rule of law, and human rights protection. Moreover, at a time when the country was hit by two consecutive catastrophic droughts, the authorities have maintained their good track record in stabilizing and reforming the economy, and have strengthened their fight against poverty and exclusion. My authorities wish to express their appreciation for the hard work and useful analysis and advice of the staff. They highly value the Executive Board’s views and recommendations, and broadly agree with the thrust of the staff appraisal. In what follows, I will comment on recent economic and social developments, monetary and financial policies in 2000 - 2001, and the main challenges for the period ahead.

I. Macroeconomic stability and growth during 1996–2000

Growth performance was limited to an average 3.4 percent during 1996–2000, mainly as a result of three years of drought, including the two severe droughts of the past two years, leading to a further decline in the primary sector’s real value added in 2000 by 17 percent after a drop of 20 percent in 1999. Cereals crop in 2000 fell to an all-time low of 1.9 million tons, half of its already very low level of 1999 (against a long-term average of 5 million and a record of 10 million in 1996). While growth of non-agricultural GDP was affected by the lower demand from rural population (45 percent of the total), it was maintained at 3½ percent. Investment increased to 25 percent of GDP in 2000 from 20 percent in 1996; however, this was insufficient to avoid an increase in unemployment, especially among the young and the educated. National savings also increased over the period from less than 20 percent of GDP to 23 percent. The impact of the droughts on the population was attenuated by emergency programs implemented by the authorities, including drinking water supply, assistance to cattle breeders, small irrigation schemes, well-targeted public works, and limited support for job-creating activities. These programs were carried out in a transparent and efficient manner, with full participation of stakeholders and in full compliance with budgetary controls and procedures.

Despite the droughts and the low growth performance, the authorities succeeded in maintaining macroeconomic stability. Inflation was kept at industrial countries’ level (1.9 percent on average), and the current account deficit averaged ½ percent of GDP despite the effect of the higher energy prices in 2000, equivalent to 2 percent of GDP, the higher cereal imports, the sharp drop in agricultural exports stemming for the lower production, and the significant decline in phosphate derivatives prices. Private capital flows, mainly relating to privatization, together with active debt management policy, helped to achieve a further reduction in external public debt (to 48 percent of GDP in 2000 from 58 percent in 1996) and to maintain a comfortable level of foreign reserves (five months of imports of GNFS). The strengthening of the external position coincided with the first repayments falling due after the grace period under the London Club rescheduling of 1990 (tranche A), amounting to some US$300 million per year (1 percent of GDP), starting from 1999.

II. Poverty reduction

The authorities are deeply concerned about the high proportion of the population living below the poverty line (19 percent in 1999). In view of the higher frequency and severity of the droughts, the government has redoubled its efforts at fighting poverty mainly in rural areas. While poverty has increased in the late 1990s, compared to the early 1990s, this trend was largely accounted for by direct and indirect effects of the more frequent and severe droughts. In cooperation with the World Bank and NGOs, the authorities have strived to improve poverty tracking and to identify the most vulnerable groups. Efforts were geared at improving access to education, health, and other basic services, with a special focus on remote areas and women. Social spending increased as a share of total spending from 21 percent to 24 percent over the past four years. The authorities’ efforts yielded noticeable success, particularly as regard to the most vulnerable groups, but greater efforts are still needed to improve social indicators which remain weak, compared to the region as a whole. The authorities believe that, together with strengthened and well-targeted social policies, significant strides in reducing poverty could only be achieved through establishment of an enabling environment for private sector development.

III. Structural reforms and private sector development

Efforts at enhancing efficiency and increasing the private sector role have continued unabated, although the difficult circumstances of the droughts and the recent terms of trade shock did not facilitate a faster pace of reforms. The opening of the political system and the new areas of reform—including in decentralization, governance, human rights, transparency, and gender issues—rendered the reform agenda more demanding. However, strengthened consultative approach and greater involvement of the civil society have also made the reform process more sustainable.

Important progress has been achieved in major structural reform areas over the past three years. These include privatization and public enterprises reform, opening of new sectors for private sector investment, liberalization of prices and adoption of a competition law, liberalization of the edible oil sector and phasing out of related subsidies, liberalization of road transportation, reform of the education system to achieve general enrollment and improve the adequacy of education with labor market needs, modernization of job intermediation, and further financial sector reform with strengthening of bank supervision, modernization of capital markets, and reform of the insurance sector.

The authorities are addressing the problems faced by the two public financial institutions (CIH and CNCA). A restructuring plan has been drawn for CIH, including recapitalization by shareholders and government guaranteed loans. It is expected that this bank will also benefit from the strong recovery in tourism and housing. A recapitalization plan for CNCA has been recently announced, together with the restructuring of agricultural loans with due consideration to repayment capabilities and drought-related losses, while avoiding moral hazard. This plan includes partial debt relief (15 to 40 percent) for over-indebted farmers in rain-fed areas. It is expected that this plan will facilitate restoration of the culture of debt repayment and normal access to credit in the agricultural sector.

Significant progress is also being made in the area of governance, including the reform of public procurement and customs administration, the adoption of a code of good governance in the civil service, and the anti-corruption campaign, including inquiries carried out by a parliamentary commission. It is widely recognized that the high standards of professionalism and transparency that have characterized the recent privatizations in Telecoms were responsible for their success.

IV. Key economic and financial policy issues during 2000–01

1. Budgetary policies during 2000–01: Progress in fiscal consolidation was hindered by the lower-than-expected growth performance and by the extension to other civil servants of wage measures taken under the previous government. However, the authorities do not believe that financial policies in 2000–01 were expansionary or procyclical. The fiscal stimulus, as measured in the staff report, is small relative to the fall in private consumption following the droughts of the past two years and did not jeopardize recent gains in macroeconomic stabilization. Inflation remained low, and the external position strong, despite the terms of trade shock and the droughts. Interest rates, while remaining positive in real terms, declined in tandem with progress in disinflation. Credit to the private sector increased by 10 percent on average in 1999 - 2000, as against less than 2 percent growth in credit to the government. Furthermore, reform of the process of Treasury’s domestic borrowing with greater transparency, reliance on market mechanisms, and elimination of directed credit at below market rates has enabled a leveling of the playing field and higher efficiency.

The underlying fiscal balance, which is adjusted for one-off revenue and expenditure measures, did not reflect a significant deterioration in 2000 despite the weaker growth performance. The overall balance, including privatization, increased in 2000 since the sale of the 35 percent of Maroc Telecom, expected for end-2000 and amounting to more than 6 percent of GDP, did not materialize until early-2001. This explains the involuntary increase in domestic arrears at the end of 2000. It was indeed difficult to fully offset the shortfall in privatization revenue of such magnitude through domestic borrowing without putting unsustainable pressures on interest rates in a context of depressed economic activity. Budgetary developments in 2000 (on a commitment basis) were also affected by the sharp hike in international petroleum prices, compounded by the depreciation of the dirham against the US dollar, which could not be fully passed through to the consumer. The authorities announced that they would temporarily subsidize domestic petroleum prices, and the necessary appropriations were provided for in the 2001 budget. Prices (before taxes) were brought back to parity with international prices by end-2000. On the basis of resumption of growth to 6 percent, the 2001 budget deficit on a commitment basis, including privatization, is expected to decline to 0.9 percent of GDP from 6.5 percent of GDP in 2000.

My authorities consider that privatization revenues have a restructuring effect in that they enhance prospects for higher growth and fiscal revenue. They also believe that the use of such revenue for investment—mainly in areas where it could play the role of seed money and remove infrastructure bottlenecks for private investment at a time when growth is clearly below potential—is appropriate. Moreover, investments carried out in the context of the Hassan II Fund are selected and implemented in full consistency with budget priorities and control procedures and with due consideration to their future recurrent spending implications. In view of their strategy with regard to privatization revenue and their intention to widen its scope in the future, my authorities prefer to treat such revenue above the line while avoiding its use as a means of financing current expenditure. Recognizing that privatization revenues are temporary, they are utilizing these resources mainly for debt reduction and to finance exceptional investment expenditures which are also temporary. The overall level of expenditure would be expected to decline, once privatization revenues dwindle.

The improvement in weather conditions in 2001 benefited only the Northern part of the country; a large area, particularly the South, was subject to a severe drought for the third consecutive year. The authorities strengthened their emergency assistance programs in favor of the affected population with a budgetary cost of 0.6 percent of GDP. Moreover, as indicated in the staff report (para. 8), it is likely that most of the increased agricultural income will be saved in view of uncertainties regarding future weather patterns.

2. Monetary policy: Monetary policy during 1999–00 did not deviate from its well-established prudence. In 1999, Bank Al-Maghrib did face some problems in its attempt to sterilize the large and unexpected GSM license inflows. This resulted mainly from insufficient coordination between the Treasury and Bank Al-Maghrib. However, by the fourth quarter of 1999, Bank Al-Maghrib took the necessary measures to bring the interbank rate within the policy range. In 2000, the short delay in receiving the payment from the sale of Maroc Telecom (over 6 percent of GDP) could not be offset by Treasury’s borrowing in the market, and this led to accumulation of domestic arrears. Bank Al-Maghrib had to alleviate some of the resulting liquidity squeeze by purchasing Treasury bills held by the banks.

Bank Al-Maghrib’s decision to reduce policy rates in early-2001 was justified by the still weak domestic economy. While the budget will exert a positive fiscal impulse in 2001, this stimulus will be limited and should not pose a threat to macroeconomic stability. In view of the improved coordination between Bank Al-Maghrib and the Treasury, there is evidence that the present policy mix is appropriate and does not signal any undue relaxation of macroeconomic policy. In any case, the monetary authorities will continue to monitor developments closely and will not hesitate to adjust interest rates, if warranted.

3. Exchange rate policy: The authorities continue to monitor closely exchange rate developments and to assess competitiveness trends. The external position remains comfortable, with continued improvement in debt indicators and the reserve position. After increasing by 6½ percent in 1999, exports of goods and services in US dollar remained broadly constant in 2000, in part as a result of the sharp decline in food exports following the drought and because of the continued appreciation of the US dollar vis-à-vis the euro. While import volumes grew faster than export volumes by an average of 1.3 percent per year during the 1990s, this trend was reversed in 1999–2000 with export volumes outpacing imports by an average of 4 percentage points. There is also indication of export diversification with a rapid increase in electronics and electrical products. Some restructuring of downstream textiles may be unavoidable in view of the on-going reorientation of the world supply toward countries with the lowest wages. More job losses in low value-added textile exports maybe looming in view of the upcoming dismantling of reference prices and of the multifibre agreement.

The authorities believe that the present phase of trade liberalization under the FTA with the EU—where tariffs are reduced, starting with equipment and raw materials—provides the industry with an opportunity to restructure and enhance productivity before the harder phase of tariff dismantling on manufactured goods is reached. Indeed, the staff point to recent improvement in productivity resulting from structural reforms, and it is very likely that this trend will accelerate, with further progress in implementing the reform agenda.

In recent months, the authorities were concerned with the continued appreciation of the dirham against the euro, resulting from further depreciation of the latter against the US dollar when most analysts expected a reversal of this trend. They were also cognizant of the slowdown in export value growth in 2000 and the erosion in 1999–2000 of the terms of trade gains of the earlier period. Under these circumstances, to better reflect the growing importance of trade and financial flows with the euro-zone while providing exporters with some breathing space, the authorities decided to change the basket of currencies used for determining the exchange rate by increasing the weight of the euro. The change was accompanied by a depreciation of 5 percent.

The authorities are confident that the current policy stance will enable the achievement of their macroeconomic objectives. Exports of phosphates and derivatives are recovering strongly in volume and price, and it is expected that other exports would also recover following the exchange rate change. Tourism receipts and workers remittances have increased so far at a much faster pace than assumed during the consultation discussion, and it is very likely that the external position in 2001 will be stronger than originally projected. Inflation is also running at a slower pace than in 2000, and there is a good chance that it will remain below the 3–3.5 percent range. However, in view of the uncertainties regarding future developments in the exchange rate of the euro vis-à-vis the US dollar, and to protect competitiveness, the authorities have indicated their readiness to examine the feasibility and appropriateness of moving to a more flexible exchange rate system.

V. Policies for 2002 and beyond

The upcoming elections will be a major test of the on-going democratization process. Major reforms of the election process are underway to improve its credibility. The authorities have indicated their firm commitment to maintain fiscal discipline during the run-up to the elections, to return to their original path of fiscal consolidation as soon as possible, and to accelerate and broaden their structural reforms. This is indeed necessary in order to achieve their objective of higher growth and a significant reduction in unemployment and poverty.

To signal the authorities’ strong resolve to further fiscal consolidation in 2002, the Prime Minister has recently issued guidelines for the preparation of the budget. On the basis of growth forecast of 4–5 percent (assuming an average crop), inflation of 3 percent, and a current account deficit of ½ percent of GDP, the budget deficit target has been set at 3 percent of GDP. The guidelines call on ministries to observe strict limits on expenditures, including reduction in non-interest current spending, freeze on new hiring, except for priority areas, and strict selectivity in investment spending. A FAD mission has visited Morocco last February to help identify the necessary reforms in both tax policy and administration. The authorities express their gratitude to the mission for the quality of their work and recommendations to which they will give their highest attention.

The authorities believe that the ongoing political and economic reforms will result in enhanced private sector confidence and higher growth. However, they are also fully cognizant of the remaining agenda of reforms. They are encouraged by the strong interest expressed recently by major international groups in key areas, such as telecom, electronics, and tourism—with large projects being implemented with significant effects in terms of employment, exports, and transfer of technology. They are firmly committed to improving attractiveness of Morocco to domestic and foreign investors through continued liberalization and modernization of the economy, enhancing policy visibility and credibility, strengthening transparency and accountability, removing impediments to growth and private investment, and upgrading human resources and the institutional framework. The labor code has reached the final stage of preparation, and its discussion in Parliament should take place later this year. A Communal Charter is under preparation aimed at achieving greater decentralization and broader participation.

The authorities attach high priority to strengthening and modernizing the financial system, including through greater autonomy for bank and financial sector supervisory bodies. The authorities have requested participation in the joint Fund/Bank FSAP, which has been scheduled for early-2002. Following the modernization of corporate laws and accounting and auditing standards, greater attention will be given to monitoring large conglomerates and improving corporate governance. A World Bank mission will soon conduct a ROSC on corporate governance with the objective of helping the authorities in identifying weaknesses and vulnerabilities as well as the needed reforms. The authorities also recognize the importance of improving quality, access, and timeliness of economic data in order to enhance the efficiency of the decision-making processes and level the playing field. A STA mission is scheduled to visit Morocco in October 2001 to review the data system and propose the necessary enhancements in order to meet the SDDS requirements.

The privatization program is to be accelerated and expanded with further opening of the capital of Maroc Telecom, preparation of the privatization of the remaining public banks, and extension of the program to new sectors, including the Tobacco Company (Regie des Tabacs), the national airline (RAM), and the phosphates sector. Domestic and foreign investments, as well as access to markets, will benefit from the recent adoption of legislation on industrial property rights. This legislation has been presented recently to the WTO and has been favorably received by Morocco’s partners.