Statement by Mohammed Daïri, Alternate Executive Director for Morocco

The Financial System Stability Assessment of Morocco reviews the reform program that is aimed at establishing a modern, market-oriented financial system that optimizes the mobilization of savings and the allocation of financial resources. It reviews the modernization of the banking sector and the development of competition within the sector, development of financial markets, and removal of constraints on financial system activity. It also provides reports on the Observance of Standards and Codes on Insurance Regulation, Securities Regulation, Payment Systems, and Monetary and Financial Policy Transparency.


The Financial System Stability Assessment of Morocco reviews the reform program that is aimed at establishing a modern, market-oriented financial system that optimizes the mobilization of savings and the allocation of financial resources. It reviews the modernization of the banking sector and the development of competition within the sector, development of financial markets, and removal of constraints on financial system activity. It also provides reports on the Observance of Standards and Codes on Insurance Regulation, Securities Regulation, Payment Systems, and Monetary and Financial Policy Transparency.

Over the past five years, Morocco has made important strides in modernizing its political system, continuously liberalizing the economy and increasing its resilience to shocks, and laying the foundations for faster and more sustainable growth, reducing poverty, and improving the living conditions of the population. In the context of a delicate political transition and unfavorable domestic and international economic environment—including three successive years of severe drought, the increase in oil prices, and global economic slowdown—the authorities maintained prudent fiscal and monetary policies and stayed the course of structural reform. As a result, real GDP growth accelerated and its vulnerability to volatile agriculture production declined, inflation was brought down to industrial countries’ levels, and the external position strengthened significantly with current account surpluses, improvement in debt indicators, and substantial reserve build-up. Attractiveness to foreign direct investment increased, as evidenced by the successful sale of a cellular phone license and privatization of the national telephone operator. My authorities thank staff for the constructive dialogue during the Article IV discussions. They have agreed to the publication of the staff report for the Article IV consultation.

I. Background

Successful democratic transition has been the overriding priority of the Moroccan authorities during 1998–2002. It was indeed crucial to maintain social cohesion to create the appropriate climate for an open and credible electoral process. Much of the authorities’ attention was devoted to reforming the electoral code, strengthening human rights protection, and achieving national reconciliation following past abuses. They demonstrated strong commitment to improving governance, transparency, and accountability. The legislative and executive branches were involved in parallel investigations on high profile mismanagement cases and their conclusions were brought to the judiciary through a transparent process. Last August, and for the first time in Morocco’s history, a democratically elected government reported to Parliament on implementation of its political and socio-economic program announced at its investiture, a major breakthrough in accountability.

The general elections held in September 2002 have been universally acknowledged as the fairest and most transparent in Morocco’s history. The new government and its program have the support of a wide spectrum of political parties and the business sector, which augurs well for policy implementation. Confidence has strengthened and market perception has improved as evidenced by the narrowing in spreads in the secondary market and improvement in Morocco’s outlook rating.

II. Macroeconomic policies and developments during 2001 – 2002

With lower-than-average agriculture performance and continued strengthening of non-agricultural activity, real GDP growth reached 4.5 percent in 2002 following 6.5 percent in 2001, allowing for an increase in real GDP per capita of 4 percent per year on average during 2001–2002. Improved government capacity to respond to droughts has helped attenuate their impact on the economy. The share of agriculture, including fisheries, declined from 15.4 percent of GDP during 1993–1997 to 13.8 percent during 1998–2002. While remaining high, urban unemployment has declined from a peak of 22.4 percent in 1999 to 18 percent in 2002.

Maintaining macroeconomic stability is key for achieving an enabling environment for high, sustainable, and private-sector-led growth. During 2001–2002, fiscal position improved significantly despite a decline in trade taxes following implementation of the FTA with the EU. After its peak of 6.4 percent of GDP in 2000, fiscal deficit, excluding privatization, declined to 5.8 percent in 2001—instead of increasing to 7.1 percent as projected in the 2001 Article IV staff report—and to 4.5 percent in 2002. The 6.1 percent of GDP privatization revenue received in 2001 was not used to increase expenditure, which declined as a share of GDP from 31.8 percent in 2000 to 31.1 percent in 2001 and 28.9 percent in 2002. Out of the DH 23.4 billion received in 2001, DH 8 billion was used to reimburse central bank’s statutory advance to the Treasury (which is unremunerated and is not included in public debt) and DH 10.6 billion was transferred to Hassan II Fund and sterilized in a central bank account. In 2002, the current fiscal balance reached close to 2 percent of GDP and the primary deficit was virtually eliminated. Total government debt, as a percent of GDP, declined from 75.7 percent in 2000 to 74.8 percent in 2001 and 69.4 percent in 2002.

The effectiveness of monetary policy in achieving price stability, in an environment of large foreign exchange inflows, has been strengthened. Improved coordination between Bank Al-Maghrib and the Treasury and timely and effective use of policy instruments made it possible to mitigate the effect of privatization revenue and of the large increase in workers’ remittances on liquidity. Money market rates remained within the central bank’s intervention rates, and money developments were broadly maintained within the target range.

The exchange rate peg has continued to serve the economy well and has helped maintain macroeconomic stability. The depreciation of the dirham in April 2001, together with very low inflation and favorable movements of the euro in respect to the US dollar helped reverse part of the previous real appreciation. The authorities also followed a moderate wage policy. In view of the high level of unemployment and to protect competitiveness, the minimum wage was increased only once, by 10 percent in 2000 since 1996, and has declined in real terms. The decline in interest rates and efficiency gains stemming from structural reforms also contributed to improved profitability and higher employment creation.

The tight macroeconomic stance, large workers’ remittances and FDI inflows, improved export performance—including from greater diversification to new, high value-added sectors—and active debt management policy led to significant improvement in the external position, notwithstanding the decline in tourism and global economic slowdown. The current account position turned from a deficit of 1.4 percent of GDP in 2000 to a surplus of 4.8 percent in 2000 and 3.7 percent in 2002. External debt to GDP ratio declined from 48 percent in 2000 to 35 percent in 2002, and debt service ratio declined further to reach 16.6 percent in 2002. Reserve coverage increased to the equivalent of 9 months of imports. As a consequence, the ratio of external public debt net of official reserves to GDP declined from 71.5 percent in 1990 to 10.2 percent in 2002.

III. Recent progress with structural reforms

The authorities do not agree with the assessment that only a limited part of the government’s reform agenda was implemented or that structural reform stalled for most of 2002. Despite the heavy political agenda and in addition to financial reforms, which will be highlighted in the following section, key reforms were implemented that included:

  • Dismantling of tariffs under the Association Agreement with the EU (AAEU), with the more sensitive phase of progressive elimination of tariffs protecting local production starting this year;

  • Elimination of reference prices and the adoption of customs valuation in accordance with WTO rules, leading to an improvement in Morocco’s rating in the Fund trade restrictiveness index from 8 to 5;

  • Modernization of customs administration bringing its performance on par to that of the most advanced economies and eliminating one of the most serious impediments to trade;

  • Liberalization of the Telecoms sector, with World Bank assistance, allowing its opening to private sector involvement, including the sale of a second cellular phone license and privatization of Maroc Telecoms;

  • Liberalization of the edible oil sector with elimination of the high tariffs and of consumer subsidies;

  • Elimination of the price control system and enactment of the competition law;

  • Enactment of the law liberalizing road transportation, and eliminating the state monopoly;

  • Enactment of the law liberalizing the petroleum and gas sectors;

  • Liberalization of the tobacco sector, and reform of its taxation consistent with IMF technical assistance recommendation, in order to prepare its privatization, expected to be completed later this year;

  • Creation of regional one-stop windows to streamline investment procedures;

  • Creation of working groups to identify and address impediments to key sectors development within a contractual framework, with priority given to improving their efficiency and export performance, reducing their costs, and improving access to land;

  • Adoption of a charter for small- and medium-sized enterprises and of employment support mechanisms, with particular emphasis on training;

  • Reform of rent legislation to improve landlord protection and increase attractiveness of the sector to domestic and foreign investors;

  • Revision of the privatization law to extend the list of public enterprises subject to privatization;

  • Transfer to public pension funds of unfunded retirement schemes of key public enterprises, including the railway company (ONCF) and the tobacco company (Regie des Tabacs), and mobilization of resources equivalent to 2 percent of GDP for meeting their liabilities, with government support. This transfer will improve these enterprises’ finances and transparency and help prepare them for privatization;

  • Restructuring of the airline and maritime transportation companies and of a number of other public enterprises, and liquidation of the coal and iron mines companies;

  • Adoption of a new law reforming public procurement regulation to enhance transparency and competition;

  • Reform of job intermediation system;

  • Strengthening of the judiciary with creation of commercial courts and regional courts of accounts and acceleration of execution of court decisions;

  • Creation of an Ombudsman position to mediate disputes involving government entities.

IV. Financial sector reform and the FSSA

Significant progress has been made over the past two years in strengthening the financial sector, including through improved regulation and supervision. In addition to the ongoing restructuring of specialized financial institutions, recent reforms include the overhaul of the accounting system to bring it on par with international best practices, the imposition of internal audit, the upgrading of loan classification and provisioning rules, and the imposition of prudential regulations on a consolidated basis. The draft law reforming the central bank’s charter to provide it with more operational independence has been revised to include key FSAP mission recommendations. The law will assign price stability as the primary objective of monetary policy, create an independent monetary policy committee, prohibit budget financing under normal circumstances, phase-out central bank’s shareholding in any financial institution, submit its accounts to independent external auditors, clarify the roles of the Ministry of Finance and the central bank in exchange rate policy, and open the possibility for the Governor to report to Parliament. The reform of the banking law aims at strengthening Bank Al Maghrib’s supervisory role, redefining the roles of the two consultative bodies, and enhancing coordination among financial sector supervisors. The two revised draft laws are to be considered soon by the Government. After transformation of its legal statute, the opening of the capital of the major public commercial bank (BCP) is proceeding according to schedule. Following sale of 21 percent of its capital to private regional banks last year, the floatation of 20 percent of the capital has been announced recently. The new Insurance Code has been approved. This Code increases protection of the ensured and improves the regulatory and prudential framework. As recommended by the FSAP mission, the 50 percent shareholding limit in any insurance company and the joint liability in case of co-insurance have been eliminated.

My authorities thank staffs of the Fund and the World Bank for the exhaustive work carried out under the joint FSAP. While they share many of the assessments of the FSSA and concur with the needed reforms, they consider that the report does not fully and accurately reflect the recent major reforms and those in progress. They also believe that some of the vulnerabilities highlighted in the FSSA are either overstated or based on unrealistic assumptions inconsistent with the recent stance and orientation of macroeconomic policy and financial sector reform. They are of the view that vulnerabilities should be assessed against the present stance of policy and not in relation to what would happen if the capital account was liberalized. Capital movements are already free of restrictions for non-residents, including Moroccan workers abroad. The authorities are also aware of the prerequisites for moving toward full capital account liberalization and exiting from the present exchange rate peg and, in particular, the need for further improvement in the fiscal position, monetary framework and instruments, and strengthening of the financial sector. In this respect, they have requested Fund technical assistance in bank and insurance supervision and pension reform. I will comment on a few areas of “vulnerability” identified by the mission.

1. The specialized banks

Two major factors explain the poor performance of the three specialized banks: the high cost of their long-term borrowing at historically high interest rates at a time when domestic interest rates have declined significantly, and difficulties faced by their borrowers, in particular in the drought-stricken agriculture and in tourism. These difficulties were exacerbated by poor governance which is being addressed forcefully. The restructuring and financial rehabilitation of the three institutions is being conducted in a transparent manner with reliance on the shareholders and direct or indirect government support. Despite the accumulation of reserves in the Deposit Guarantee Fund financed by contributions by the banking sector which could have been used for rehabilitation of the three institutions, these reserves were not used.

The Agricultural Bank (CNCA) received government support amounting to DH 1.2 billion during 1998–2000 (0.4 percent of GDP) and was recapitalized by the Government in 2001 for an amount of DH 1.2 billion. A draft law modernizing its charter to enable private participation and separating the commercial part of its activity from social development objectives is under discussion in Parliament. Under the new law, all non-commercial activities will be undertaken on a contractual basis and will be financed by the Budget. Following severe shortcomings identified by an audit, management of the CNCA has been changed and an improvement in its performance is underway with a significant increase in its deposit base and profitability.

A restructuring plan covering 2000–2006 has been negotiated by the new management of the Housing and Tourism Bank (CIH). This plan calls on shareholders as well as government support for a total of DH 6.6 billion (over 1.5 percent of GDP), together with a program of loan recovery and cost reduction, including early repayment of expensive debt. Implementation of the plan is proceeding satisfactorily, with most of the financial support already disbursed. Two years into implementation, the plan has achieved a 30 percent decline in nonperforming loans, 20 percent increase in deposits, a significant increase in net banking product, and a decline in operational costs. While recognizing that the situation of the CIH is still difficult, the authorities and the CIH management are confident that the plan is working and that the bank will be put on a sound footing even earlier than anticipated under the program. Following its financial rehabilitation, the CIH could be privatized, or merged with another institution.

In addition to its deteriorating financial position, the role of the industrial development bank (BNDE) within the liberalized financial system was put into question. After considering several options, the authorities decided to liquidate the bank and transfer its retail bank activities to the Agricultural Bank (CNCA), which needs to develop its urban branch network, and its investment bank activities to the Caisse de Depots et de Gestions (CDG) which is a public asset management bank and also the second largest shareholder after the Treasury. A contract has been signed between the Government and the CDG giving this institution responsibility for the liquidation, with the final cost being borne by the CDG pro-rata to its shareholding and by the Government for the remainder.

While remaining committed to completing the rehabilitation and restructuring of the three specialized banks, the authorities do not believe that their situation had at any time posed serious risks to the stability of the financial system. The links between these institutions and the private financial sector are not very strong. Public disclosure of these institutions’ weaknesses also provided assurance that the necessary restructuring and recapitalization measures would be taken by the authorities. Finally, the cost of recapitalizing the two insolvent institutions, to comply with the minimum capital adequacy ratios, was estimated by the FSAP mission at 1 percent of GDP.

The authorities do not see systemic risks to credibility of bank supervision arising from the exemption from prudential regulations granted to the two specialized banks. These exemptions are transparent and temporary and are accompanied by restructuring plans which are at an advanced stage of implementation. Furthermore, these exemptions do not create unfair competition to private banks in view of their significantly larger interest margins as well as the relatively small size and the sectoral concentration of the specialized banks.

2. Risks related to the macroeconomic stance and public debt

The authorities have demonstrated commitment to macroeconomic stability, and their stance of policies does not pose risks to the financial system. Indeed, the significant decline in government external debt and the increase in foreign reserves have mitigated most of the risks stemming from exchange rate and interest rate shocks. While part of the decline in external debt was replaced by domestic debt, this was achieved in a context of a general decline in domestic interest rates and has been instrumental in developing the financial system. Moreover, overall public debt has declined significantly, and this trend, under current policies, is expected to continue. The share of domestic debt in banks’ assets is also relatively small, not exceeding 20 percent, and a significant part of it is held by a public bank. While there were episodes of accumulation of domestic arrears—the most recent being at end-2000 and was due to the delay in receiving the proceeds from the sale of the cellular phone license—there has never been any incidence of accumulation of domestic debt arrears. With strengthened fiscal position and expenditure control, enhanced cooperation with the central bank, and improved liquidity and debt management, the authorities are confident that there is no risk of accumulation of debt or non-debt arrears.

3. Workers’ remittances

Workers’ remittances have increased significantly over the past two years. Past episodes of rapid increases were typically followed by stability of the inflows with no incidence of sharp declines. Deposits held by expatriate Moroccans are maintained for liquidity purposes to face family support needs or for potential investments. Also these deposits are held in dirham, often in unremunerated accounts, whereas expatriate Moroccans have the opportunity of maintaining them in foreign currency, or in convertible dirham accounts. The authorities, therefore, do not see any risk of a sudden decline in these deposits.

4. Interest rate formation

The authorities do not agree that participation of public entities (CDG, BCP) in the Treasury bill market creates potential conflict of interest. The two institutions have full operational independence and make their investment decisions consistent with their own strategies. Interest rates are dictated by market conditions on an auction basis, and there is no evidence of collusion between the Treasury and these public entities. In the authorities’ view, interest rate structure in the Treasury bill market appropriately reflects the preferences and anticipations of market participants and provide a credible benchmark.

V. Social sectors and poverty reduction

With assistance from the World Bank, the EU, and other donors, the authorities are implementing a broad strategy to increase delivery of social services and reduce poverty. This led to improvement in key indicators, including in education, health, access to drinking water and electricity, and significant progress in reducing geographic and gender disparities. Primary school enrollment increased from 65 percent in 1998 to 81 percent in 2001 on average. The gender gap is being closed with the rates of girls to boys increasing over the period from 0.94 percent to 0.99 percent in urban areas and from 0.73 percent to 0.80 percent in rural areas. Between 1997 and 2001, access to drinkable water in rural areas increased from 26 percent to 48 percent and access to electricity from 24.5 percent to 51 percent. An important breakthrough was the adoption of the Education Charter comprising several laws and regulations establishing a tight timetable for achieving universal enrollment, improving the quality of education, and strengthening its link to job market needs. An ambitious private-sector-led program for reducing housing shortages, particularly for the low-income population, is underway. Key social reforms also include the creation of the Social Development Agency with World Bank assistance to address poverty issues, rehabilitation of key social protection agencies, including the Social Security Fund, and generalization of job accident and healthcare protection. The authorities also succeeded in developing a decentralized and efficient system for alleviating the social and economic effects of droughts, thereby strengthening the economy’s resilience to weather-related shocks. This system has enabled a timely reallocation of budgetary resources while maintaining fiscal discipline and accountability.


My authorities express their appreciation to the staff of STA for the comprehensive review of data dissemination and quality and concur with their conclusions and recommendations. The authorities have agreed to the publication of the report which has been already posted on the Fund’s web site. This review has helped identify areas where more efforts are needed to enable Morocco to meet the SDDS requirements and to subscribe to the SDDS by end-2003.

VII. Policies for 2003 and the medium term

The government’s economic program announced last November aims at further modernizing the economy and enhancing its competitiveness to achieve higher and more balanced growth and job creation. In pursuit of this objective, the Government will rely on macroeconomic stability, structural reforms, human resource development, and strengthened governance and policy predictability to improve the attractiveness of the economy to domestic and foreign investors. Recent strengthening of business confidence and favorable weather developments so far augur well for acceleration of growth to 5.5 percent in 2003, the average for the past two years. With improved outcome for 2002, the traditionally conservative revenue projections, and strong revenue administration and expenditure control, the fiscal deficit could be closer to 4 percent than to the 5 percent projected during the Article IV discussions. Medium-term fiscal consolidation will remain at the core of the authorities’ priorities, with the overall deficit, excluding privatization, projected to decline further to reach 3 percent of GDP by 2008. In reaching this target, priority will be given to civil service reform, including a substantial retrenchment program based on early retirement and changing promotion into a merit-based system, liberalizing the sugar and cereal sectors and overhauling the untargeted subsidy system, and reforming the tax system to increase its buoyancy and offset the decline in trade taxes. The social orientation of the budget will also be strengthened to enhance the delivery of key public services.

Closer consultation with social partners augurs well for achieving early consensus on some of the pending issues, including the adoption of a new Labor Code. Broad consultation with the business sector will also help introduce the necessary reforms for raising efficiency and competitiveness to enable the economy to reap the benefits of globalization and of the AAEU and the free trade agreements with Arab countries. Prospects for improved cooperation among Maghreb countries and of early conclusion of ongoing negotiations for a Free Trade Agreement with the U.S. are also encouraging.

The effect of the war in Iraq has not been as severe as expected. Indeed, oil prices seem to have stabilized and the tourism sector, so far, has been affected less than in other countries in the region. Fiscal and price developments for the first two months have been favorable. Tourism receipts and workers remittances, in particular, have increased, while the trade deficit has widened, with an increase in exports more than offset by a surge in imports, especially for investment goods. However, foreign reserves were maintained at their historically high level of end-2002. While it is too early to assess the extent of the fall-out from the war, the authorities believe that the traditional political stability in Morocco and the safe environment, together with the large reserves cushion, will help maintain investor confidence and strengthen their resolve in the pursuit of their economic and social objectives.

My authorities attach high importance to their close cooperation with the Fund. The extensive exchange with staff during the Article IV, the FSAP, and data ROSC missions has been very useful. The authorities look forward to Board’s discussion and advice in articulating and implementing their strategy.