This 2003 Article IV Consultation highlights that Morocco’s growth performance over the last decade has not been strong enough to reduce poverty. Growth has also been volatile because of the impact of recurrent drought conditions on agricultural output. Economic conditions improved in 2002 despite a less favorable international environment, which was marked by a decline in tourism and external demand. Real GDP growth reached 4.5 percent reflecting a further rise in agricultural output and somewhat higher growth in the nonagricultural sectors.


This 2003 Article IV Consultation highlights that Morocco’s growth performance over the last decade has not been strong enough to reduce poverty. Growth has also been volatile because of the impact of recurrent drought conditions on agricultural output. Economic conditions improved in 2002 despite a less favorable international environment, which was marked by a decline in tourism and external demand. Real GDP growth reached 4.5 percent reflecting a further rise in agricultural output and somewhat higher growth in the nonagricultural sectors.

Background and Recent Developments

Overview and Structural Reform Issues

1. Morocco’s growth has been insufficient to reduce poverty and unemployment.Economic growth depends heavily on agricultural production and climatic vagaries (Chart 1). The structure of the economy remains dual, with a modern sector but also a large traditional agricultural sector employing about 45 percent of the labor force but accounting for only 16 percent of GDP. Poverty is pervasive and has increased in the 1990s while real per capita income has stagnated. Unemployment in urban areas is close to 20 percent, but reaches 35 percent for 15–24 year olds.

Chart 1.
Chart 1.

GDP growth is closely influenced by the high volatility of the agricultural output.

Citation: IMF Staff Country Reports 2003, 141; 10.5089/9781451824704.002.A001

2. The main policy challenge has, therefore, been to put the economy on a sustainable higher growth path. Against this background, Fund surveillance focused on the needs to: (a) implement a private-sector-led and export-oriented strategy and improve on external competitiveness; and (b) set fiscal policy on a sustainable basis and avoid relying on privatization proceeds to finance increased government spending.

3. The coalition government elected in 1996 succeeded in leading Morocco through democratization and political reforms, which culminated with the holding of fair and open general elections in September 2002; however, it only implemented a limited part of its economic reform agenda. The later included enhancing labor market flexibility, rural development, privatization, improving governance, trade liberalization, and increasing competition in the domestic economy. Major achievements encompassed the privatization of Maroc Telecom in 2000–01, the sale of a cellular telephone license in 1999, and a wide ranging modernization of customs; in addition, trade liberalization moved forward according to the schedule under the association agreement with the European Union ratified in 2000 and reference prices for customs valuation were eliminated in 2002. However, pressure groups and vested interests blocked a number of other crucial reforms that the government had started to prepare. These included a new labor legislation, a new competition law, a reform of the public sector, a strengthening of the judicial system, and a lowering and rationalization of the multilateral external tariff.

B. Macroeconomic Policies

4. From 1999, the fiscal position deteriorated considerably, as the wage bill rose and revenue performance weakened because of external tariff reduction and erosion of the domestic tax base. By 2001, the overall fiscal deficit was running at about 6 percent of GDP for the second consecutive year, while the government total debt-to-GDP ratio, including unremunerated debt, declined owing to substantial proceeds from privatization. The large budget deficits did not produce adverse effects on macroeconomic stability because they were financed by large privatization revenues and the fixed exchange rate provided a nominal anchor. Domestic demand remained sluggish which contributed to the maintenance of stability.

5. The fiscal outcome for 2002 indicates a substantial improvement in public finances. The central government deficit narrowed by about 1 percentage point of GDP compared to the 2001 outcome and to the initial budget for 2002. The debt-GDP ratio declined to 70.6 percent of GDP from 74.7 percent of GDP in 2001 (Box 1). The narrowing of the fiscal deficit in 2002 reflects various factors, some resulting in permanent savings, others being only one off:

  • lower interest spending, as a result of both lower debt and interest rates;

  • savings in the wage bill;

  • a significant surplus of the special treasury accounts assumed balanced in the budget; and

  • lower-than-budgeted capital spending from a special investment fund (Fonds Hassan II).

Debt Dynamics in Recent Years

Central government debt-to-GDP ratio, including unremunerated debt, declined from 86 percent in 1992 to 70.6 percent in 2002 (Table 3). This decline reflected the impact of surpluses of the primary balance until 2000, when it shifted into deficit. Nevertheless, the debt-to-GDP ratio continued to decline in 2001 and 2002 because of:

  • a rebound in overall growth following a severe drought brought the rate of growth of real GDP above the real interest rate, and

  • large privatization revenues contributed to deficit financing.


Primary Balance

(In Percent of GDP)

Citation: IMF Staff Country Reports 2003, 141; 10.5089/9781451824704.002.A001


Real GDP Growth and Real Implicit Interest rate

(In percent)

Citation: IMF Staff Country Reports 2003, 141; 10.5089/9781451824704.002.A001

In 2002, a favorable real interest rate/growth differential and a near primary balance contributed to reducing the debt-to-GDP ratio by 0.5 percent of GDP. However, the observed decline in the debt-to-GDP ratio was considerably larger (from 74.7 percent in 2001 to 70.6 percent in 2002) due to the following factors:

  • Nonbank financing from public-sector deposits consolidated at the treasury and not accounted for a debt in the Moroccan public accounting system (2.1 percent of GDP)—see below.

  • Valuation effects on external debt (1.2 percent of GDP) and debt/equity swaps (0.3 percent of GDP).

The consolidation of public-sector deposits at the treasury (so called “circuit du trésor” in francophone countries) allows the treasury to cover its financing needs while guaranteeing the liquidity of public-sector deposits. Establishments with deposits at the treasury generally include the postal system, public agencies, and some public enterprises. This source of financing delinks financing requirements and the recourse to debt generating domestic financing flows (see IMF WP/02/58 for a further details).

Tax revenues continued to decline as a portion of GDP because of the impact of tariff reductions on EU imports and erosion of the tax base (Box 2). Tax collections were, however, higher than projected by the budget law for 2002.

Tax Revenues Performance

Tax revenues have declined from 24.1 percent of GDP in 2000 to 22.2 of GDP in 2002 because;

  • Trade taxes fell from 4.7 percent of GDP to 3.5 percent. This decline reflected both reductions in external tariff rates under the AAEU and the elimination of tariffs that financed subsidies on edible oils. Tariffs on imported inputs for the production of specific products were also lowered to reduce production costs and promote investment and exports. Examples include tariff reductions for capital goods in the construction, health, and information technology sectors, and inputs used in light manufacturing (e.g., tires, cosmetics, chemicals, automobile parts) in 2001 and 2002.

  • Indirect taxes declined from 10.4 percent of GDP to 9.8 percent because of declining VAT collections on imports, while collections on domestic goods stagnated.VAT revenues declined from 6.1 percent of GDP to 5.8 percent. This development reflected in part the erosion of the tax base on imported goods as trade liberalization proceeded but also increased exemptions on domestic and imported goods. Budget laws for both 2001 and 2002 introduced new VAT exemptions and special treatments for specific sectors. Examples include: (i) the reduction of the VAT rate on catering from 20 to 10 percent (2001); (ii) reduced VAT rate for rental buildings used as hotels (2001); (iii) the elimination of the VAT on health services (2001); (iv) the exemption from the VAT of international transport and related services (2002); (v) the deductibility of the VAT on diesel fuel for public transport companies and enterprises providing their own transport services (2002); and (vi) reduced VAT rates for pharmaceutical products, their production inputs, and their packing materials (2002). Consumption taxes (TIC) accounted for the remainder of the decline in indirect taxes mainly reflecting lower tax revenues on energy products since the authorities reduced the TIC on energy products in 2001 to contain the cost of electricity.

  • Direct taxes have remained at about their 2000 level in percent of nonagricultural GDP, with a small decline from 7.6 percent of GDP to 7.4 percent of GDP. The yield of the direct tax system is limited by various investment incentives and sector-specific tax exemption which have eroded the tax base. In 2001, Fund technical assistance pointed out the inefficiency of these measures which include, among others, (i) 100 percent exemptions of agricultural income (until 2010); (ii) 20 percent exemption on taxable revenue if reinvested within 3 years; (iii) 100 percent exemption for exporting companies the first five years and 50 percent thereafter; (iv) 100 percent exemption for low-income housing construction companies; and (v) a proliferation of tax exempt economic zones.

Table 1.

Morocco: Basic Economic and Financial Indicators, 1998-2003

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Sources: Data provided by the Moroccan authorities; includes Fund staff projections.

Includes in 2003, the impact of additional fiscal consolidation measures recommended by the staff.

Remunerated debt only.

Table 2.

Morocco: Balance of Payments, 1998-2003

(In millions of U.S. dollars; unless otherwise indicated)

article image
Sources: Ministry of Finance; Office des Changes; and Fund staff estimates and projections.

Includes the grant element of debt swap operations with France and Spain.

Excluding the reserve position in the Fund.

Public and publically guaranteed debt.

Excluding early amortization on account of debt swaps.

Table 3.

Morocco: Central Government finance, 1999/2000-2003 1/2/

article image
article image
Sources: Data provided by the Moroccan authorities; and Fund staff estimates.

Including Fonds Hassan II

Calendar years starting in 2000, fiscal years otherwise

Sum of realizations for the second half of the 1999/2000 budget and for the second half of 2000.

Includes tariffs earmarked for food subsidies (equivalent tarifaires) and revenues of the road fund (Fonds Routier) but excludes GSM license receipts in 1999/2000.

Includes food subsidies financed from earmarked tariffs (equivalents tarifaires). It also includes, for 1999/00 and July/Dec, petroleum product subsidies, which were financed by arrears accumulation. Their amlunt was estimated on the basis of the difference between domestic and international petroleum prices.

Budgetary capital expenditure excluding Fonds Routier and investment spending by the Hasan II Fund.

Corresponds to 30 percent of VAT revenue.

Remunerated and non renumerated debt.

6. In 2002, budgeted privatization proceeds failed to materialize, but were easily replaced by the issuance of additional government securities. Demand for fixed rate government securities from the nonbanking sector rose, pushed by abundant liquidity conditions and declining interest rates.

7. Following the 2001 Article IV consultation discussions, Morocco devalued the dirham by 5 percent in April 2001 after pegging it to a basket of currencies for about a decade, which had resulted in a substantial real effective appreciation. The currency basket was also modified to raise the weight of the Euro, to reflect higher integration with the EU. The dirham depreciated by 4.8 percent between 2000 and 2002 in real effective terms (Chart 2).

Chart 2
Chart 2

Real and Nominal Effective Exchange Rates, 2000-2002


Citation: IMF Staff Country Reports 2003, 141; 10.5089/9781451824704.002.A001

8. Monetary policy managed to avoid a rise in inflationary pressures despite large external inflows linked to workers’ remittances (Box 3). Flushed with abundant liquidity, commercial banks invested both in the money market and in government securities contributing to a decline in interest rates. Bank Al-Maghrib (BAM) started in May 2002 to absorb liquidity through short-term deposit auctions, and in mid-December, raised reserve requirements substantially.1 As a result, liquidity conditions tightened substantially, and the money-market interest rate stabilized; money growth returned within BAM’s target range of 6.5-7.5 percent (Figure 1).

Recent Increase of Private External Transfers

The strengthening of Morocco’s official reserves since 2000 is more than half due to the increase in private transfers from abroad. The rise was originally attributed to the one-off impact of the introduction of the euro on January 1, 2002: residents exchanged accumulated cash holdings of national European currencies for dirhams ahead of the introduction date. Indeed, commercial banks received unusually large amounts of foreign banknotes in 2000-01.1 However, private transfers channeled through banks increased as well, although less so, in 2001. Moreover, private transfers from abroad hardly decreased after the launch of the euro.

The causes of the recent increase in private transfers are not fully understood. Improved confidence in the Moroccan economy and in the dirham, and larger migration flows may have had a positive impact on remittances but cannot explain such a sudden increase. Another possible factor could be linked to recent methodological changes in the statistical breakdown between private transfers and tourism receipts in cash. More convincing, although difficult to document, is the possibility that higher private transfers could reflect a portfolio reallocation of the Moroccan expatriates away from OECD countries. These capital inflows, which the statistical authorities capture as private transfers, could be triggered by the fallouts of the September 11 events. The tightening of AML/CFT banking regulations and increased fears that assets in western banks could be frozen may have induced capital repatriation. Similar fears, according to anecdotal evidence, could also have reduced illegal capital outflows by Moroccan residents, and thereby opportunities for informal private transfers to Morocco. This would have indirectly increased the amount of private transfers through official channels.


Morocco-Commercial Bank’s Foreign Cash Receipts, 1998-2002

Citation: IMF Staff Country Reports 2003, 141; 10.5089/9781451824704.002.A001

1 Cash private transfers increased by almost four-fold between 1999 and 2001, whereas during the same period, interbank private transfers increased by 40 percent. The impact of the introduction of the euro could be conservatively estimated at US$1 billion.
Figure 1.
Figure 1.

Monetary Developments, 2001–2002

(In percent, unless indicated otherwise)

Citation: IMF Staff Country Reports 2003, 141; 10.5089/9781451824704.002.A001

Source: Moroccan authorities, Bank Al-Maghrib.

C. Signs of Economic Recovery in 2002

9. Economic activity started to improve in 2002. Investment demand showed signs of revival in 2002, after stagnating in 2001. Private consumption also rebounded somewhat because of increased agricultural income, but overall domestic demand remained weak during the year possibly because of the uncertainties associated with the elections (Chart 3). Excluding agriculture, GDP growth edged up to 3.9 percent from 3.7 percent in 2001 despite a decline in tourism and the slowdown in external demand. Construction and other services led this acceleration. Inflation remained subdued (Chart 4). The external reserve coverage improved to more than nine months of imports. Exports rose despite adverse developments in the phosphate world market as a result of diversification (electronic and electrical products) (Chart 5). Workers’ remittances declined only marginally after the peak reached in 2001, and contributed greatly to the maintenance of a current account surplus despite the substantial drop in tourism receipts following the September 11, 2001 events.

Chart 3
Chart 3

Contribution to Domestic Demand Growth

(In percent)

Citation: IMF Staff Country Reports 2003, 141; 10.5089/9781451824704.002.A001

Chart 4
Chart 4

The 2002 Increase in Inflation Rate

Citation: IMF Staff Country Reports 2003, 141; 10.5089/9781451824704.002.A001

Chart 5
Chart 5

Volume Changes in External Trade 1998-2002

Citation: IMF Staff Country Reports 2003, 141; 10.5089/9781451824704.002.A001

III. Short-Term Outlook and Risks

10. Business confidence improved substantially following the September 2002 election. The socialist party (USFP) and the center-right nationalist party (Istiqlal) are the prominent members of the new coalition. The newly appointed Prime Minister, Mr. Driss Jettou, reportedly enjoys strong support from His Majesty Mohammed VI, who retains the key role in Morocco’s political system. The new government has raised expectations for a comprehensive reform effort and the pursuit of fiscal consolidation. During its first months in office, the government has already taken some measures. It has (a) taken steps to change the remuneration and promotion system in the civil service; (b) agreed with the employers’ association in the textile and tourism sectors on strategies to improve the sector’s competitiveness; (c) implemented the 1999 law liberalizing transportation of goods; and (d) continued the progress made in transferring to public pension funds the retirement schemes created by public enterprises. In February 2003, it initiated the process to privatize the tobacco monopoly (Régie des Tabacs), which it expects to conclude by end-June with foreign proceeds which could be close to 2 percent of GDP.

11. The new approach to economic reform has already started to affect market views on the Moroccan economy:

  • Secondary market spreads on Morocco sovereign debt have narrowed considerably since November 2002 (Chart 6).

Chart 6
Chart 6

Evolution of Market Spreads

(December 2, 2002-March 4,2003)

Citation: IMF Staff Country Reports 2003, 141; 10.5089/9781451824704.002.A001

  • A credit rating agency has modified its outlook on the Moroccan economy from negative to stable in February 2003.

12. With the improvement in business confidence and more favorable weather conditions since late 2002, the ongoing economic revival could gain momentum and accelerate growth in 2003 to 5.5 percent. Workers remittances are expected to remain at levels as high as the ones experienced in 2001-02, but the external current account surplus should narrow somewhat, reflecting higher imports linked to a recovery in private investment. Proceeds from privatization would help external reserves to remain close to nine months of imports. Money growth is prudently projected at 7 percent and inflation is expected to fall to about 2 percent.

13. Nonetheless, the military intervention in Iraq, together with anemic growth in the EU, could have serious adverse consequences on Morocco’s external economic environment and significantly worsen short-term prospects. In a worst case scenario, the fallout from the military intervention could have a major impact on both Morocco’s external position and growth outlook, but the high level of its external reserves should allow the country to withstand the shock. The military intervention could cause tourism receipts to fall by as much as one percentage point of GDP in 2003 while a slowdown in world economic activity could reduce the country’s proceeds from exports. A rise of crude oil prices equivalent to US$10 per barrel above the baseline scenario would narrow the external current account surplus by 2 percentage points of GDP in 2003. Given a likely halt to direct investment flows, this scenario could imply a decline in the country’s external reserve coverage to 7 months of imports. The rate of growth could slow by 1.0-1.5 percentage points, while assuming full pass through to consumption of higher import prices, average consumer price inflation might be in the range of 2.5-3.0 percent.

IV. Policy Discussions

14. Morocco needs to reinvigorate its economic reforms. A forceful implementation of economic reforms could boost the credibility of the authorities’ medium-term strategy and trigger favorable market reactions. This would, in turn, lead to improved growth and employment prospects. Otherwise, recent improvements in private expectations will be reversed, leading to sluggish economic performance and a deterioration in social conditions, which may eventually weaken macroeconomic stability. The policy discussion with the authorities focused on the key elements of their economic reform strategy. The staff stressed, at the outset, the need for a comprehensive policy approach, including not only structural actions to improve productivity and the private investment climate, but also appropriate fiscal, monetary, and exchange rate policies in support of the growth objective.

A. Accelerating Structural Reforms

15. The authorities and the staff agreed that achieving growth rates in the 5-6 percent range on a sustainable basis was the minimum required to significantly improve per capita income, reduce unemployment, and poverty. To achieve this objective, policies would need to aim at raising total factor productivity and private investment by removing the major obstacles to an efficient allocation of resources and market functioning. The staff and the authorities agreed that private-sector activity was stifled by the lack of domestic competition, limitations of the judicial and financial systems, and labor-market rigidities. The staff indicated the following priorities:

  • Public sector reform. The aim is to reduce government intervention and regulation, and improve efficiency in the delivery of basic public services. The authorities pointed out that significant preparatory work had already been done. A recently completed public-expenditure review had helped identify expenditure priorities and made proposals to enhance the effectiveness of health and education spending. Moreover, the ongoing reform of the promotion system for civil servants should help in providing adequate incentives for civil services.

  • Upgrading the overall business environment. The increasing openness of Morocco’s economy calls for efforts to improve competitiveness of domestic firms, which are not equipped to face the challenge. Efforts should focus on creating a level playing field and on removing the obstacles to the creation of new enterprises. The authorities have already taken steps in this direction: (a) the law on domestic competition is to be implemented; (b) one-stop investment windows at the regional level are being established; and (c) a working group comprising representatives of the authorities and of the industrialists are studying measures to improve competitiveness of the economy (“la à niveau”) and are expected to make concrete proposals in the very near future. The staff stressed the need to avoid ad hoc sectoral measures or special incentives and/or tax privileges, which could distort the allocation of resources, and urged the authorities to move forward with measures to favor industrial restructuring.

  • Reform of the labor market. Reducing unemployment remains the most challenging objective (Box 4). The authorities and the staff agreed that Morocco’s labor-market rigidities, in particular legal obstacles to the dismissal of employees, have a long-term adverse impact on employment. The authorities intend to submit to parliament in spring 2003 a new labor code proposal that would reduce these rigidities.

Unemployment Challenge

Morocco suffers from a long-lasting unemployment problem that persisting demographic trends are likely to worsen in the medium term. The working-age population is expected to continue to grow at a relatively high rate, about 2 percent annually. Participation rates are low (only one out of two adults participates in the labor force, of which one out of 4 is a woman) and could increase substantially. Unemployment remains high, notably in the urban areas. A reduction of the unemployment rate seems to reflect a temporary decline in participation rates as result of discouraged job seekers.

The labor market suffers from serious rigidities which contribute to a deep segmentation between a high-pay, low-mobility formal sector and a low-pay, unregulated informal sector. Within the formal sector, public sector employees benefit from substantial wage and non-wage premiums in comparison to the private sector. The urban minimum wage is high (1.6 the 2002 GDP per capita) and well enforced. Non wage labor costs are high: before 2002, social security contributions accounted for 24 percent of the gross wage earned in the private sector on average and the total wedge on labor income is large, also reflecting income taxes, the compulsory workers’ accident insurance coverage, and optional but frequent complementary medical and retirement plans partly financed by employers. The raise in social security contribution rates, implemented in April 2002, contributed to increase this wedge. Hiring and firing regulations are severe and tightly enforced; individual layoffs are prohibited, except for disciplinary purposes, and follow long and uncertain judiciary procedures.

The government is keen to change the more restrictive aspects of the existing labor code. Trade unions have long opposed any change in the existing labor code that would ease the dismissal regulations. In a move aimed at circumventing this opposition, the authorities have recently offered a broader negotiation that would also include a possible enhancing of social rights and improvements in the coverage of social security benefits (including severance payments and protection against accidents at work). The government is faced with a difficult balancing act: between offering concessions that would enhance labor flexibility and maintaining social peace while keeping the concessions within reasonable bounds to avoid an excessive cost.

  • External Trade. To fully reap the benefits of the progress made under the AAEU, unilateral trade liberalization should progress rapidly by reducing the levels and number of rates on multilateral trade. The authorities stressed that they were complementing the efforts under the AAEU with a trade agreement with the United States and that they were pursuing trade liberalization initiatives with a number of MENA countries. Mindful of the risk of trade diversion that the AAEU and other agreements could present, they intended to lower the multilateral tariff over time to limit the preferential rates within a reasonable margin. They also noted that by eliminating reference prices on imports, the Moroccan trade regime had become significantly less restrictive (Box 5).

Trade Reforms

The authorities ratified the Euromed Agreement in 2000, when import duties for raw materials, and goods and equipments not produced locally began to be reduced. Import duties on the latter goods declined by 25 percent in 2000, 50 percent in 2001, and another 25 percent in 2002. They are expected to be abolished in 2003. The first round of 10 percent reduction in custom duties on goods which compete with domestic production kicked off in March 2003. The objective of the agreement is to reach free trade by 2012 by reducing customs duties by 10 percent per year for non agricultural products. An agreement has not yet been reached on agriculture.

In the second half of 2002, Moroccan authorities started to negotiate a free trade agreement with the United States. Moroccans expect the agreement to include agricultural products.

In 2002, Moroccan authorities eliminated the use of reference prices as recommended by the WTO. As a result, Morocco’s rating in the trade restrictiveness index of the IMF changed from 8 to 5. There are 8 multilateral tariff rates which vary from 0 to 50 percent for non agricultural products and can reach 350 percent on some agricultural products. The simple import average rate is 30 percent.

With Fund technical assistance, customs management has been thoroughly modernized. Computerization encompasses movements of goods, processing declarations by importers and customs agents, assessment of tariffs, and payment of obligations. As a result, the time needed for clearing imported goods has shrunk from 2-3 days to a few hours. The authorities expect that the system will be operational at 100 percent of its capacity in 2½ years. The authorities are also creating offices in the different regions for the operators to be able to communicate with the office that is the nearest to their location. Firms will have the right to request that imported merchandise be inspected at the warehouse site. Customs procedures are also streamlined for firms with a good inspection track record.

B. Continuing Fiscal Consolidation

16. One of the most pressing challenges is ensuring that the fiscal position can continue to improve after the favorable outcome of 2002. The staff stressed that fiscal consolidation will need to continue in 2003 in order to bolster investors’ confidence, regain budgetary flexibility to respond to shocks, and signal that the deterioration in public finances experienced during 1999-01 has been reversed on a permanent basis. For these reasons, the mission proposed that the authorities aim at reducing the deficit as close as possible to 4 percent of GDP in 2003, (i.e., a significant tightening of the fiscal position compared to the 2002 outcome, taking into account the favorable one-off factors in that year).

17. The authorities viewed the original budgetary deficit target for 2003 (6.5 percent of GDP) as no longer relevant. Based on the 2002 outcome, they agreed with the staff that in the absence of new expenditure cuts, the fiscal outcome was likely to hover around 5 percent of GDP in 2003; or 0.5 percent of GDP higher than in 2002.

18. In particular, two key factors had modified the budgetary outlook:

  • The recent government decision not to increase public employment by limiting new hires to offset attrition in 2003. The staff welcomed this new policy, which constituted a significant break with past practices.

  • The original budgetary revenue projections appeared excessively conservative in light of the revenue performance in 2002 (Chart 7). There was scope for more ambitious targets than envisaged by the 2003 budget law, since there were no reasons for expecting a decline in tax collection, apart from the scheduled reductions in external tariffs. Thus the staff and the authorities agreed that domestic taxes would need to remain, at least, unchanged as a portion of GDP from 2002.

Chart 7
Chart 7

Budget Revenues are Cautiously Projected 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2003, 141; 10.5089/9781451824704.002.A001

1/ 2003, Projection.

19. Moreover, the staff encouraged the authorities to take further fiscal deficit reduction measures for an amount of at least 0.8 percent of GDP to bring the deficit as close to the above target. These could include:

  • Ending the subsidization of sugar and flour consumption, which could yield saving for as much as 0.5 percent of GDP. The authorities indicated that they were considering actions in this area, but a decision had yet to be taken. These subsidies, not only have a significant budgetary cost but also produce adverse incentives for agricultural production.

  • Reducing the allocations for contingency spending, which are close to 1 percent of GDP and appear to be generous, for a saving of about 0.3 percent of GDP.

The authorities agreed that a further decline in the fiscal deficit was desirable and stressed that they would make efforts to achieve a lower deficit in 2003. However, they could not commit to a precise target. They also agreed that there was no scope for loosening the fiscal stance to offset any slowdown in external demand.

20. They also agreed with the staff that the expected privatization proceeds could be viewed as a financing item, but objected to the staff consolidating the operations of the special investment fund (Fonds Hassan II) with that of the central government. Spending from this fund was fully financed by privatization proceeds, moreover, they noted the fund had acquired status equivalent to that of a public enterprise since the 2002 budget law had placed it outside the central government coverage. The staff, noted that the data ROSC mission recommended to maintain the fund within the central government, it reiterated that spending from the Fonds Hassan II needed to be monitored as any other government spending for its demand effects, as well as for its possible implications on fiscal sustainability in the event that revenues from privatization receipts are depleted. However, the staff acknowledged that the assessment of Morocco’s current fiscal position was not significantly affected by including or excluding the fund’s operations.

21.Privatization proceeds were expected to finance a substantial portion of the deficit in 2003. These proceeds would result from the sale of the tobacco monopoly and part of the remaining government owned portion of the capital of Maroc Telecom. The former appears quite likely to materialize in 2003, but the latter is more uncertain in light of the current downturn in the telecom market. In case of a shortfall, the authorities intend to avoid accumulating budgetary arrears and raise, instead, additional domestic non-bank financing, even if this implies an increase in borrowing costs.

22. Fiscal deficit reduction should continue well beyond 2003 to lower the debt burden, promote private-sector activity and maintain macroeconomic stability even in the event of adverse shocks. Fiscal consolidation is a necessary condition for the success of the overall government reform program. The staff discussed a medium-term strategy aimed at bringing the fiscal deficit to 2.9 percent of GDP, and the public debt-to-GDP ratio to about 60 percent, and indicated that a more ambitious fiscal consolidation bringing the debt-to-GDP ratio significantly below 60 percent would be preferable. Achieving results in this direction requires bold policy actions both on the expenditure and revenue fronts (Figure 2).

Figure 2.
Figure 2.

Fiscal Developments and Medium-Term Projections

(In percent of GDP)

Citation: IMF Staff Country Reports 2003, 141; 10.5089/9781451824704.002.A001

Source: Moroccan Authorities and IMF staff estimates

23. As regards expenditures, the top priority is to ensure that the trend toward reducing the high wage bill as a share of GDP continues beyond 2003. It is encouraging that the authorities are planning not only to curb public employment expansion but are also modifying promotion and compensation policies with a view to reduce wage drift. Moreover, they intend to introduce an early retirement scheme, which should help reduce wage costs over the medium term.2 The authorities were confident that these actions could lead to a drop of 2 percentage point of GDP in the wage bill burden by 2008.

24. As regards revenues, staff recommended a stabilization of the tax-to-GDP ratio in the medium term. In the staff’s view, an overhaul of the VAT to partially offset the impact of lower external tariffs on customs collections should be a priority. The authorities agreed with the staff that the existing VAT was overly complex with too many rates, limited coverage, and widespread exemptions. The staff stressed the urgency of transferring the responsibility for VAT collection from the Trésorerie Générale du Royaume to the tax department, which would greatly enhance VAT administration with significant results on collection. In addition to these reforms, the staff suggested phasing out tax holidays and special exemptions, which had mushroomed over the years and eroded the corporate income tax base.

C. Reshaping Monetary and Exchange Rate Policies

25. The authorities’ exchange rate policy and prudent approach to monetary policy have ensured macroeconomic stability over the years, a necessary condition for tackling the structural impediments that hold growth performance below potential. The fixed exchange rate policy has provided a nominal anchor for the Moroccan economy and allowed the easing of monetary conditions without inflationary consequences during 2001-02.

26. The BAM has already shown its determination to mop up the excess liquidity conditions, which characterized most of 2002. Had these conditions persisted, they would have sooner or later generated higher inflation. As the BAM is successful in tightening liquidity, recovery and rising investment demand will place upward pressures on interest rates in 2003. This possible increase in interest rates should be accepted as necessary and the BAM should base its monetary policy stance in attaining its money target growth (7.5- 8.5 percent), which reflects cautious assumptions on money velocity and is consistent with keeping inflation low.

27. The staff and the authorities agreed that the significant real effective depreciation during 2001-02, the strong external reserve position, the surplus of the external current account balance, and the improved export performance did not point currently to a misaligned exchange rate. The 2001 devaluation of the dirham and the adjustment in the composition of the currency basket to which it is pegged has not generated inflationary pressures. Exports have experienced in 2002 signs of growth and further diversification (electronic and electric sectors) while there are indications that the decline in profitability in the textile sector has been partially reversed.

28. The growing integration of the Moroccan economy into the international financial markets will provide both opportunities and challenges for monetary and exchange rate policies. Maintaining external competitiveness will be a crucial condition to increase Morocco’s potential growth and reduce unemployment. As this integration progresses, in the staff view, the authorities should consider moving to a more flexible exchange rate system because:

  • a fixed exchange rate in the context of substantial international financial integration constrains the independence of monetary policy;

  • maintaining the peg could become increasingly costly and riskier because foreign investors may unduly rely on implicit exchange rate guarantees;

  • a flexible exchange rate policy could facilitate trade integration with the EU by helping competitiveness, since productivity gains would likely materialize only in the medium term. It would also facilitate a reduction of existing capital account restrictions;3 and

  • a flexible exchange rate would help to deal with the high volatility of the Moroccan balance of payment flows, such as tourism, workers’ remittances and phosphate exports.

Moving to a flexible exchange rate regime would require changing the role of monetary policy, which would need to become the economy’s nominal anchor. In this context monetary policy should adopt price stability as its primary objective.

29. The authorities were open to considering the opportunity of modifying the exchange rate regime and the role of monetary policy over the medium term. The staff cautioned that in addition to establishing a strengthened monetary framework, three key conditions needed to be satisfied before abandoning the peg:

  • significant progress toward fiscal consolidation;

  • strengthening the financial system, in particular by dealing as soon as possible with the problems of two financially troubled banks discussed below; and

  • reorganizing bank supervision and preparing it for operating in an environment of growing financial integration as suggested in the FSAP recommendations.

D. The Reform of the Financial Sector

30. The results of the FSAP have shown that the immediate risk of financial crisis appears low, the financial system is unlikely to be a source of macroeconomic risk in the short run, and commercial banks are in a reasonably good condition to withstand adverse shocks to their portfolio. This situation is due to a protected environment, including the maintenance of capital account restrictions and the government preventing problems from spreading and becoming systemic, as well as the shallowness of financial markets.

31. However, important weaknesses exist in the financial sector. Two specialized public banks are insolvent and should be quickly brought to comply with BAM’s prudential regulations.4 Clear procedures to handle problem banks are lacking; nonbank financial institutions (insurance companies, pension funds, and the securities industry) are fragile; key financial system infrastructure (accounting and auditing systems, legal and judicial systems, and payments systems) need upgrading; financial supervision is weak implying that problems may not be detected early enough for adequate corrective action; and the interbank and government securities markets are shallow.

32. In the medium to long run, a likely increased openness will require a strengthening of the financial system (Box 6). In particular, existing shortcomings in systemic liquidity arrangements and markets functioning need to be addressed as increased volatility that openess may bring could be dampened by deeper and competitive money and government securities markets. Strengthening financial supervision and enhancing transparency would also be essential. The mission noted with satisfaction that the authorities had already started work to address weaknesses in financial supervision and had obtained Fund technical assistance in this area; they had also drafted new central bank and banking laws.

Key Recommendations of the FSAP Report

To maximize the benefits and minimize the risks of increased financial integration and expected opening toward the rest of the world, efforts are needed to strengthen the financial system, and create an appropriate environment to foster the system’s development. This will require measures in several areas:

  • First, the issue of the two troubled state-owned banks needs to be addressed promptly, choosing between their closure or rehabilitation, and ending the current prudential exemptions as soon as feasible.

  • Second, procedures to handle problem banks will need to be reviewed.

  • Third, the fragility of certain non bank financial institutions (i.e., retirement funds and insurance companies) will need to be addressed.

  • Fourth, the role and future of the remaining state-owned financial institutions will need to be clarified, in order to limit potential conflicts of interest and implement the authorities’ intention to disengage from the sector; and

  • Fifth, financial supervision will need to be reinforced, by promoting independent oversight bodies, establishing greater coordination or integration among them, and by developing a more risk-based supervisory approach. MAE is already providing technical assistance in this area.

Improvements in the environment for financial activities would support the development and strengthening of the system. To that effect, ongoing efforts in the legal and judicial area, payment systems, and auditing and accounting would have to be extended. Further potentially important improvements include a clear mandate and enhanced transparency in monetary policy, the removal of distortions created by taxes on foreign exchange transactions, the establishment of databases on bad debtors, and information and education initiatives aimed at fostering a stronger financial culture.

E. Medium-Term Outlook and Sustainability

33. The authorities’ reform plans and fiscal consolidation, if implemented up front and vigorously, could generate an acceleration in total output growth to an average 5 percent during 2003-08. These efforts would improve the economy-wide climate for private economic activity, eliminate supply-related obstacles to growth, and translate into higher total-factor productivity. The resulting growth pick-up would in turn lower unemployment and poverty. Investment could also rise to about 26 percent of GDP to sustain the higher growth, while the fiscal deficit would drop to 2.9 percent of GDP and bring the debt-to-GDP ratio to about 60 percent. On the external side, the recovery in domestic demand, and in particular, of private investment would reduce the surplus of the current account, which would eventually shift into a modest deficit; the opening up of the capital account would translate into foreign-investment inflows that would help maintain the external reserve coverage at 9 months of imports.

34. Standard external sustainability analysis shows that external vulnerabilities are limited. Morocco’s external debt has been declining as the government replaced it with domestic debt. A substantial part of the external debt is at concessional terms resulting in lower interest rates than the assumed growth rates. Under the baseline, external debt would decline to 23 percent of GDP in 2008 from 44 percent of GDP in 2002.

35.The decline in the public debt-to-GDP ratio over the medium term would be the result of declining current outlays, while capital spending would remain close to 5 percent of GDP and broader domestic taxes offset the revenue losses deriving from external tariff reductions. Lower growth or higher interest rates would require substantially higher primary surpluses to achieve the desired debt reduction. Standard fiscal sustainability analysis underscores the need for ambitious fiscal consolidation targets, since sensitivity analysis indicate that real interest rate, two-standard deviations higher than the historical average and real growth one standard deviation lower in 2003-04 could bring the government debt-to-GDP ratio to about 70-80 percent by 2008.

F. Other Issues

36. The ongoing projects of regional integration, including the Arab Maghreb Union, can contribute to boost Morocco’s growth potential through the development of intraregional trade flows as long as trade diversion is limited. The authorities welcomed staffs involvement in the promotion of regional integration within Maghreb countries, and confirmed their broad agreement with the main recommendations of a recent mission in Maghreb countries to facilitate intraregional trade. The recommendations focused on the needed harmonization of domestic regulations, in particular in the trade, customs, competition, freight, bank, and insurance areas. Several initiatives in these areas under the Euro-Mediterranean partnership are also expected to facilitate regional trade, not only with the European Union, but also with Morocco’s trading partners of the Maghreb region.

37. Morocco provides adequate statistical information for surveillance. The authorities intend to improve the quality and the dissemination of statistical information along the priorities identified by the recent Report on the Observation of Standards and Codes (ROSC) on statistics. The staff encouraged the authorities to work toward eventually subscribing to the SDDS, and it welcomed the decision of publishing the ROSC.

38. Governance issues have come to the forefront as a result of the authorities’ efforts to disclose two major financial scandals, one concerned two government-owned banks (CNCA and CIH) and the other the social security institution that covers private sector employees (CNSS). Acting forcefully and in a transparent manner against those involved in these scandals has provided a clear departure from past practices and helped to improve the climate for private-sector activity.

V. Staff Appraisal

39. During the last two years, against the background of impressive progress toward a more open and democratic society, Morocco has started to consolidate the progress made in macroeconomic stability achieved in the 1990s. The current account has shifted from modest deficits to surpluses since 2001, official reserves have reached quite comfortable levels, while both the external debt-to-GDP ratio and the debt-service ratio have declined substantially. Inflation is now low, and down to levels comparable to those achieved by Morocco’s main trading partners. Three consecutive years of severe drought adversely affected Morocco’s agricultural performance, but the real growth rate in non agricultural sectors edged up in 2002 for the fourth year in a row. Some reform progress has been achieved since 1999. In particular, privatization of major public assets (including Maroc Telecom, a cellular telephone license, and other public enterprises) attracted strong interest from domestic and foreign investors, and a few public enterprises were restructured.

40. Growth performance has, nevertheless, been insufficient to significantly reduce the high unemployment rate, lower poverty incidence, and raise the living standards of the Moroccan population. In particular, until 2002, private-sector activity remained largely sluggish and insufficient to generate the jobs and income needed. In addition, the relaxation of the fiscal stance in 1999-01 had until recently raised concerns about debt sustainability.

41. Therefore, shifting the economy to a higher sustainable growth path remains the main challenge toward which both structural and macroeconomic policies need to respond. This requires first that the authorities embark on a comprehensive and ambitious program of structural reforms aimed at revitalizing private activity. Second, macroeconomic management, in particular, fiscal policy, must remain consistent with the maintenance of stability. Moreover, in the longer run, once prerequisites are met, adopting a more flexible exchange rate regime and a more formal monetary framework where monetary policy would provide the nominal anchor, would help to sustain higher growth.

42. Against this background, the staff welcomes the business friendly and reform-oriented attitude of the newly appointed government. The staff and the authorities concur on the need to implement a set of mutually reinforcing structural reforms that will remove the existing distortions and unleash private sector activity and investment.

43. The government during its first few months has shown early positive results, with no net creation of civil service positions in the budget law for 2003 and the initiation of a program to privatize the tobacco company Régie des Tabacs. Similarly, the resumption of a dialogue with all social partners on a reform of the labor legislation is encouraging.

44. However, much remains to be done to strengthen private activity. The staff and the authorities have agreed on (a) the need to show progress in the modernization of the public sector (through a reduction in government intervention, an improvement in the delivery of public services, and a rationalization of the civil service); (b) concrete measures to underpin the establishment of a business-friendly environment; and (c) the development of enhanced flexibility of the labor-market policies. The staff welcomes the elimination of the reference import prices in 2002 and the government’s intention to proceed with a lowering of the external tariff in line with the reduction in preferential rates under the association agreement with the EU. At the same time, it also encourages the authorities to proceed to rationalize the tariff aimed at reducing the number of rates and lowering them.

45. The financial system stability assessment (FSSA) has found that the immediate risk of a financial crisis is limited and that the financial system is unlikely to be a source of macroeconomic risk in the short run. However, a significant number of weaknesses exists. The contribution of the financial system to Morocco’s development also remains subject to improvements. The authorities have taken early action to deal with some of these weaknesses with the preparation of several draft laws, and requested Fund technical assistance in banking supervision. Looking ahead, the staff urges the authorities to reduce the role of the state, to deepen their financial sector reforms and in particular, to further strengthen banking supervision and restructure the specialized banks, while eliminating their exemption from prudential regulation and reserve requirements. This strengthening of the financial system is essential to allow it to meet the challenges that increased integration of the Moroccan economy would present.

46. The government needs to make further headway and show concrete results in a number of reform areas so as to definitively establish credibility of its structural reform strategy. First steps have already been taken to implement the government’s structural reform program and macroeconomic strategy. However, the authorities need to move further to implement in the spring of2002 a scheduled reform of labor legislation and to adopt further measures to streamline and modernize the civil service. These will be early tests of the government’s capacity to implement its reform program and to overcome the vested interests that have impeded significant reforms in the recent past.

47. The government needs to further strengthen the fiscal position. Acknowledging the risks of placing fiscal policy on an unsustainable path that would lead to a significant increase in the government’s debt-to-GDP ratio once privatization had run its course, the government tightened the fiscal stance in 2002, achieving a far stronger fiscal outcome than projected in the budget law despite the election campaign. The halt in the fiscal deterioration is welcome, in particular, the decline in the ratio of the wage bill to GDP and the staff supports the government’s intentions to further reduce this ratio over time through civil service reform measures. Without additional expenditure tightening, it is, however, likely that the 2003 fiscal deficit would be higher than in the previous year by about half a percent of GDP taking into account the one off factors that helped improve the fiscal outcome in 2002. The staff believes that a further tightening of the fiscal outcome in 2003 would greatly reinforce credibility of the government’s attempt at returning fiscal policy to a sustainable path. Therefore, it urges the authorities to continue further strengthening of the fiscal stance in 2003 by, for instance, adopting measures aimed at reducing food subsidies. Looking ahead, tax reform measures aimed at enlarging the tax base, and a strengthening of tax administration are needed. The staff recommends, over the medium term, to bring down the fiscal deficit below 3 percent of GDP and the debt to GDP ratio to below 60 percent.

48. The peg of the Moroccan dirham to a basket of currencies has so far served the economy well and helped ensure macroeconomic stability over the years by providing a useful nominal anchor. There is no evidence that the exchange rate is misaligned. Looking ahead, the growing integration of the Moroccan economy into the international financial markets and the ongoing liberalization of the external trade will provide opportunities and challenges for the monetary and exchange rate policies. As this integration progresses, the staff recommends that the authorities consider moving to a flexible exchange rate regime. This, in turn, would require changing the role of the monetary policy to become the economy’s nominal anchor and operate in a more formal framework. However, the new exchange rate/monetary policy mix requires a few prerequisites to be satisfied, such as further progress toward fiscal consolidation and financial sector reform.

49. Accelerated structural reforms, fiscal consolidation, and the adoption over time of a flexible exchange rate regime and of a monetary anchor, would significantly improve Morocco’s outlook over the medium term and its capacity to grow at the 5- 6 percent real growth rate needed to reduce unemployment and poverty and improve the living standards of the population. The staff is convinced that such a strategy would place Morocco in a good position to take advantage of a more open economy and of closer integration to world financial markets.

50. The government strategy faces significant short-term risks as the current account is subject to shocks. In particular, a deterioration of the international environment and the fallout from the military intervention in Iraq could have an important adverse impact on the short-term prospects for growth in Morocco. Morocco’s external position could be weakened by a substantial drop in tourism receipts and a rise in oil prices. At this stage, the external reserve positions seems more than sufficient to absorb the shocks and avoid a balance of payments crisis, but the recommended shift toward a more flexible exchange rate regime would certainly increase Morocco’s resilience to these shocks.

51. It is recommended that the next Article IV consultation with Morocco be held on the standard 12-month cycle.

Table 4.

Morocco: Monetary Survey, 1998-2003

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Sources: Bank Al-Maehrib; and Fund staff estimates.
Table 5.

Morocco: Medium-Term Baseline Scenario

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Sources: Ministry of Finance, Bank Al-Maghrib, and Fund staff estimates and projections.

Ratio of nonagricultural fixed capital formation to change in nonagricultural GDP.

Includes public enterprises.

Includes stockbuilding

Central government overall balance excluding privatization and GSM revenues but including expenditures by the Fonds Hassan II.

Domestic and external remunerated central government debt, end of calendar year.

Table 6.

Morocco: Balance of Payments, 2002-2008

(In millions of U.S. dollars; unless otherwise indicated)

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Sources: Ministry of Finance; Office des Changes; and Fund staff estimates and projections.

Includes the grant element of debt swap operations with France and Spain.

Excluding the reserve position in the Fund.

Public and publically guaranteed debt.

Excluding early amortization on account of debt swaps.

Table 7.

Country: External Debt Sustainability Framework, 1998-2008

(In percent of GDP, unless otherwise indicated)

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