Morocco: Staff Report for the 2005 Article IV Consultation
Author: International Monetary Fund
Publication Date:
23 Nov 2005
eISBN:
9781451824766
Language:
English
Keywords:
ISCR; CR; authority; authorities' effort; targeted reduction; authorities' resolve; authorities' plan; current account; debt ratio; GDP deflator; government share; Moroccan authorities
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This 2005 Article IV Consultation highlights that economic growth in Morocco has been volatile and insufficient to significantly reduce poverty and unemployment. Growth averaged 3 percent over the last decade. It has been volatile because of the dependency of agriculture on rainfalls. In 2004, macroeconomic and financial conditions remained stable. The unfavorable agricultural campaign is expected to affect macroeconomic conditions in 2005. The current account is likely to register a small deficit partly because of a high level of imports of food products and a higher oil bill.

Abstract

This 2005 Article IV Consultation highlights that economic growth in Morocco has been volatile and insufficient to significantly reduce poverty and unemployment. Growth averaged 3 percent over the last decade. It has been volatile because of the dependency of agriculture on rainfalls. In 2004, macroeconomic and financial conditions remained stable. The unfavorable agricultural campaign is expected to affect macroeconomic conditions in 2005. The current account is likely to register a small deficit partly because of a high level of imports of food products and a higher oil bill.

I. Background

1. Morocco’s political situation remains stable. The current coalition government took power after the September 2002 parliamentary elections and the next parliamentary elections are scheduled for September 2007. The authorities believe that poverty, unemployment, and social exclusion are the root causes of Islamic extremism, which is a major political concern. Achieving social development is therefore at the top of the government’s agenda. To this end, the authorities are putting more emphasis on access to education, health care, housing, and basic infrastructure, and on rural development. New family and labor codes were recently passed reflecting their commitment to promote social cohesion and stability.

2. As noted in previous staff reports,1 Morocco has achieved macroeconomic stability since the early 1990s, but growth has been volatile and insufficient to reduce significantly unemployment and poverty. Real growth averaged 3 percent over the last decade, and urban unemployment was 18 percent in 2004. Poverty,2 which is particularly pervasive in rural areas, is estimated at 15 percent of the population, and the economically vulnerable reaches 40 percent. Overall real GDP growth has been volatile because cereal production, which accounts for a large share of Moroccan agriculture, is highly sensitive to droughts. Growth improved during 2001–04 because agriculture benefited from good weather conditions, while nonagricultural output growth accelerated (Table 1).3

Table 1.

Morocco: Selected Economic and Financial Indicators, 2000–05

Quota: SDR 588.20 million

Population: 29.8 million

Per capita income: US$ 1,677 (2004)

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

Commitment basis including Fonds Hassan II.

Gross debt including net central bank credit.

3. The balance of payments remains strong despite low export growth. After rising steadily between 1993 and 2001, export growth slowed since 2001 even though the dirham was devalued by 5 percent in 2001 (Figure 1). However, because of a surge in workers’ remittances and tourism receipts, the current account deficit turned into a surplus and national savings increased significantly. Balances on services, income, and transfers more than covered the trade deficit. The overall balance of payments remained in surplus, and international reserves increased to about 10 months of imports. As a result, Morocco’s foreign currency debt rating, although below investment grade, saw its outlook upgraded from stable to positive and secondary market spreads declined significantly (Figure 2).

Figure 1.
Figure 1.

Morocco: Nominal and Real Effective Exchange Rates, 1995–2005

(1990=100)

Citation: IMF Staff Country Reports 2005, 418; 10.5089/9781451824766.002.A001

Source: Internaional Monetary Fund, Information Notice System.
Figure 2.
Figure 2.

Morocco: Emerging Markets Bond Index Spread (EMBI), 1998–2005

(Basis points)

Citation: IMF Staff Country Reports 2005, 418; 10.5089/9781451824766.002.A001

Source: JP Morgan (EMBI).

4. In an attempt to spur growth in the late 1990s, the authorities ran an expansionary fiscal policy with increases in wage expenditures and tax and import tariff exemptions, which eventually triggered more wage increases and exemption demands. The fiscal deficits (including Fond Hassan II expenditures and excluding privatization receipts) increased from an annual average of 3.6 percent of GDP in 1996–99 to 5.5 percent in 2000–04, putting the fiscal position on a potentially unsustainable path.4 However, the debt-to-GDP ratio declined by about 15 percentage points during 2000–04 mainly because privatization receipts helped finance fiscal deficits and the authorities reduced debt through debt/equity swaps. In the absence of these operations, the debt-to-GDP ratio would have increased by about 6 percentage points.

5. In recent years, the authorities have taken measures in line with Fund policy recommendations (see Box 1 for details). Although progress has been slow in some areas, the authorities accelerated their reform agenda starting from 2002.

II. Recent Developments and Short-Term Outlook

6. In 2004, macroeconomic and financial conditions remained stable and nonagricultural GDP growth picked up. While overall GDP growth slowed down to 4.2 percent on account of a decline in growth in the primary sector, nonagricultural GDP growth picked up because of a dynamic tertiary sector and a recovery in mining and energy. On the external side, the trade deficit widened with the decline in agricultural exports due to supply constraints, the stagnation in textiles exports, and the increase in the petroleum import bill (Table 2). Nevertheless, the current account remained in surplus reflecting strong tourism and remittance inflows. With increased foreign direct investment and privatization receipts, gross official reserves increased further. The balance of payments surplus in the context of the pegged exchange rate continued to result in abundant liquidity in the banking system and led to a decline in interbank interest rates. The central bank allowed interest rates to decline given the very low inflation rate and moderate domestic demand.

Table 2.

Morocco: Balance of Payments, 2001–05

(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.

In 2005, a nonresident company (Vivendi) sold part of its shares in Maroc Télécom to a resident company.

The increase in 2004 is due to a sale of government shares of Maroc Télécom in the Casablanca and Paris stock exchange.

Includes the loans that Moroccan banks gave in 2003 and will give in 2005 to the company (Vivendi) that bought part of Maroc Télécom in 2003 and additional shares in 2005.

Excluding the reserve position in the Fund.

Public and publicly guaranteed debt.

7. The fiscal deficit declined in 2004, but some budgetary policies did not support fiscal consolidation. The fiscal deficit declined by 0.4 percentage point to 4.9 percent of GDP and was much lower than envisaged in the 2004 budget (Table 3). This development mainly reflected good revenue performance. Expenditures were higher than envisaged because of increases in: (a) investment following an acceleration in project executions; (b) the wage bill following new salary increases; and (c) subsidies because the food subsidy reform was postponed and the petroleum price adjustment mechanism was not fully implemented. The authorities were able to prevent further expenditure increases related to the El-Hoceima earthquake and a locust invasion by reallocating budgetary appropriations. Public debt declined to 66 percent of GDP because privatization receipts helped finance the deficit.

Table 3.

Morocco: Central Government Finance, 2001–05 1/

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

Including Fonds Hassan II.

Includes tariffs earmarked for food subsidies (équivalents tarifaires) and revenues of the road fund (Fonds Routier).

Includes food subsidies financed from earmarked tariffs (équivalents tarifaires).

Budgetary capital expenditures excluding Fonds Routier and investment spending by the Fonds Hassan II.

Corresponds to 30 percent of VAT revenue.

Gross debt including net central bank credit.

Past Fund Surveillance

Over the past five years, Fund surveillance has focused on policies aimed at maintaining macroeconomic stability, achieving fiscal consolidation, and accelerating growth to reduce unemployment and poverty. The staff recommended (a) tax and expenditure reforms to lower the fiscal deficit and debt-to-GDP ratios, dispel the risk of future tax increases and higher interest rates, and create fiscal space; (b) an exchange rate policy that would reverse the real effective exchange rate appreciation that took place in the 1990s; and (c) structural reforms to foster private investment, productivity, and the efficient allocation of resources.

The authorities have taken steps along the lines of the Fund’s recommendations but progress has been slow in some areas.

Macroeconomic stability has been preserved but fiscal consolidation has not yet been achieved. The authorities have implemented a no net new hiring policy, but the wage bill ratio increased further because of ad hoc salary increases and promotions. The authorities eliminated edible oil subsidies, but flour and sugar continue to be subsidized and the automatic petroleum price adjustment mechanism has not been fully operating. On the revenue side, the authorities made progress in modernizing tax administration, but the provision of tax exemptions rendered the tax system more complex and its administration more difficult.

The authorities devalued the dirham by 5 percent in 2001, partly reversing its real appreciation during the 1990s, and the real effective exchange rate has depreciated further since then. Fund surveillance has recently focused on the desirability of moving gradually to a more flexible exchange rate regime. The authorities have entered into a dialogue with the staff on this issue.

The authorities accelerated structural reform. Trade liberalization is proceeding both at multilateral and bilateral levels. The authorities reduced the number and level of tariff rates, eliminated reference import prices, implemented customs reform, and have signed trade agreements with their major trading partners. Financial sector reform is proceeding in line with the Financial Sector Assessment Program (FSAP) recommendations. Major public enterprises have been privatized, the remaining ones are being reformed, and steps have been taken to put pension funds on a sounder footing. A new labor code has been promulgated. Progress in reforming the judicial system, improving contract enforcement, and rendering the public services more efficient are needed to further improve the business environment.

8. A decline in agricultural output, petroleum price increases, and the abolition of textile quotas will affect economic developments in 2005. The primary sector will contract sharply and some agro industries will be adversely affected because of bad weather earlier this year. Growth in the manufacturing sector is expected to slow down, reflecting the difficulties in the textile sector (see Box 2). Strong performance in tourism and construction sectors and remittance inflows are expected to continue. Consequently, overall GDP growth is projected to decline to about 1 percent and non agricultural GDP growth is expected to slow down. The external current account is projected to register a small deficit because of higher oil prices and food imports, and weak textile exports. The overall balance of payments position is expected to continue to register a surplus, even if the effects of privatization are excluded. With delayed implementation of domestic petroleum price adjustments, the impact of higher international petroleum prices on growth and inflation will be limited, and the budget will bear the subsidy cost (estimated at 0.8 percent of GDP). A recently announced policy package, which will reallocate budget appropriations, should help alleviate the impact of the poor harvest on rural areas.

Recent Developments in the Textiles and Clothing Sector

In 2004, the textiles and clothing sector accounted for 17 percent of manufacturing value added, 50 percent of manufacturing employment and 32.5 percent of merchandise exports. Therefore, the worldwide abolition of quantitative restrictions on exports of textile and clothing that came into effect on January 1, 2005 will have important consequences for Morocco.

During the first four months of 2005, Moroccan exports of clothing declined by 16.1 percent and exports of hosiery by 21 percent in local currency value compared with the first four months of 2004. These two product categories together accounted for 30.6 percent of Moroccan merchandise exports in 2004.

It is not clear yet to what extent the early adjustments following the abolition of the quota system are indicative of longer term trends. However, a study by the United Nations using the Global Trade Analysis Project (GTAP) computable general equilibrium model suggests that Morocco could experience a long-term reduction in textiles and clothing exports of respectively 11 and 18 percent as a result of the quota phase-out.1 This would correspond to a loss of 0.22 percent of GDP. Using an alternative GTAP specification, a recent World Bank study2 obtains similar results. In addition, it estimates the labor market impact of the quota removal. The findings suggest that 15 to 16 percent of unskilled workers in Morocco’s textiles and clothing sector could lose their job.

To avert these looming losses of employment and income, Moroccan policy makers have taken measures to accelerate the current transition of the sector towards higher value-added production and increased vertical integration. The recently concluded free trade agreement with Turkey—a large and diversified producer of textiles’is an important component of that strategy, since it will enable Moroccan firms to source textiles production in Turkey while respecting the rules of origin requirements of the European Union. The free-trade agreement with the US could also benefit the sector, since the US is currently a virtually untapped market.

1/ See UNECA (United Nations Economic Commission for Africa), “Comment Sauver le Textile Maghrebin?”, 2005, paper presented at the UMA/CEA conference in Tunis (February 14–15, 2005).2/ See Manole, V., “Winner or Loser? Effects of Quota Abolition in World Markets for Textile and Apparel,” 2005, World Bank Working Paper.

9. Current policies are expected to lead to a deterioration in the fiscal deficit to about 5.5 percent of GDP in 2005, despite a continued favorable revenue performance. Expenditures would significantly increase taking into account the repercussions on wage payments of the 2004 wage negotiations, the voluntary retirement program, the new universal health insurance program, the delay of the food (wheat and sugar) subsidy reform, and the partial adjustment in mid-May of domestic petroleum prices. Excluding the cost of the early retirement program and other one-off wage related payments, the 2005 fiscal deficit is projected at 4.5 percent of GDP. The authorities intend to eliminate outstanding arrears (0.7 percent of GDP), which have been used to partly finance subsidies in 2004 and early 2005. Large privatization receipts from the sale of government shares in Maroc Telecom will again help finance the deficit. At end-2005, the debt-to-GDP ratio is projected to increase to 70 percent of GDP, taking into account the issuance of debt to cover old pension fund arrears (2.4 percent of GDP).

III. Report on Policy Discussions

10. Policy discussions focused on gaining a common understanding of the economic environment and drawing an integrated strategy to address the growth and unemployment challenges. Meeting these challenges will require putting conditions in place to foster investment and productivity growth.

A. The Economic Environment and Key Challenges

11. The Moroccan economy remains characterized by three key features: (a) output growth has been volatile and insufficient to significantly reduce unemployment and poverty (Figure 3); (b) the country is facing increased competition from abroad; and (c) the macroeconomic environment has been stable despite relatively high fiscal deficits.

Figure 3.
Figure 3.

Real GDP Growth

(In percent)

Citation: IMF Staff Country Reports 2005, 418; 10.5089/9781451824766.002.A001

Source: Moroccan authorities and IMF Staff estimates.

12. Morocco’s growth performance reflects extreme volatility of the agricultural sector and low nonagricultural growth. The share of the agricultural sector has fluctuated around 15 percent since 1991, but its growth has been extremely volatile. Indeed, the standard deviation of the agricultural sector growth rate for the period 1991–2004 has been 35 percent, while that of the nonagricultural sector has been only 1.3 percent. During the same period, growth of the nonagricultural sector has been low, averaging 3.2 percent per annum. An acceleration of growth in the nonagricultural sector, by increasing its share in total GDP, would therefore help reduce overall volatility over the medium term. Moreover, cross-country empirical evidence suggests that a reduction in output volatility could have growth-enhancing effects.5 To these ends, increases in investment and total factor productivity in the nonagricultural sector are needed.6 In addition, measures to attack some structural causes of agricultural output volatility, such as the plan announced by the authorities in May 2005 to encourage crop diversification over the next five years, would also help improve economic performance over the medium term.

13. In the context of ongoing trade liberalization, the nonagricultural sector is subjected to increasing international competition. To maximize exports opportunities and better withstand competition from abroad in the domestic market, efforts to improve Morocco’s competitiveness will need to be accelerated. Such an environment would also foster investment. In the past few years, nongovernment investment has shown signs of revival, contributing significantly to domestic demand growth. However, domestic demand remains sluggish despite the abundance of national savings and low monetary policy interest rates, suggesting the existence of structural constraints to its dynamism.

14. Abundant liquidity, supported by a surge in remittance flows, has facilitated the financing of high fiscal deficits at low costs without crowding out private credit or undermining macroeconomic stability. Indeed, interest rates have been on a declining trend along the maturity spectrum. In the circumstances, the authorities did not accelerate fiscal consolidation. However, they took advantage of the situation to substitute domestic for external debt, develop a domestic debt market, and reduce external vulnerability.7 Nevertheless, if economic activity picked up, the balance of payments surplus disappeared, and/or the capital account opened up to resident outflows, the current fiscal policies could spur an increase in interest rates and become a binding constraint on growth.

15. In the above described context, policy discussions focused on two areas that could help achieve sustained growth to significantly reduce unemployment and poverty: (a) maintaining macroeconomic stability and reducing the fiscal deficit while creating fiscal flexibility for demand management and room for productive expenditures; and (b) accelerating structural reforms, including trade liberalization. Discussions were also held on the pros and cons of alternative exchange rate regimes as the economy undergoes structural transformation and faces greater international competition.

B. Fiscal Policy

16. The fiscal stance and the debt level do not pose a risk to macroeconomic stability in the short term in the present macroeconomic environment, but current policies would not put public finances on a sustainable path. If current policies continue, the debt-to-GDP ratio would be increasing, with no cushion to absorb shocks, especially output shocks (Table 5 and Figure 4). Standard debt dynamics suggest that a primary surplus of 0.8 percent of GDP would be required to stabilize the current debt-to-GDP level given Morocco’s growth experience and the average implicit interest rate on public debt, compared to the projected primary deficit of 1 percent of GDP in 2005, excluding exceptional expenditures. The debt ratio is sensitive not only to slower fiscal consolidation but also to slower growth. The fiscal deficit should therefore be reduced to at least 3 percent of GDP over the medium term (corresponding to a primary surplus of 1 percent of GDP) to lower the debt ratio on a sustained basis, and enhance fiscal flexibility and resilience to output shocks.

Table 4.

Morocco: Selected Vulnerability Indicators, 2000–05

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Sources: Moroccan authorities; and Fund staff estimates.

Staff estimates, projections, or latest available observations as indicated in the last column.

Current account deficit plus amortization of external debt.

Public sector covers: central government.

Based on averages for the last five years for the relevant variables (i.e., growth, interest rates).

Overall balance plus debt amortization.

ST debt and maturing medium- and long-term debt, domestic and external, excluding external debt to official creditors.

Debt in foreign currency or linked to the exchange rate, domestic and external, excluding external debt on concessional terms.

ST debt and maturing medium- and long-term debt at variable interest rates, domestic and external.

Financial sector includes banks.

Sum of on- and off-balance sheet exposure.

Gross debt including net central bank credit to government.

Table 5.

Morocco: Public Sector Debt Sustainability Framework, 2000–10

(In percent of GDP; unless otherwise indicated)

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Public sector debt refers to central government gross debt including net debt to the central bank (excludes arrears on which reliable data is not available).

Derived as [(r- π(1+g) -g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the numerator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

Derived as nominal interest expenditure divided by previous period debt stock.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

The implied change in other key variables under this scenario is discussed in the text.

Real depreciation is defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Figure 4.
Figure 4.

Debt-to-GDP Ratio

(in percent)

Citation: IMF Staff Country Reports 2005, 418; 10.5089/9781451824766.002.A001

Moroccan authorities; and IMF Staff estimates.

17. The authorities agree with the staff that fiscal consolidation is an essential part of the high growth strategy. They do not consider the current fiscal stance as unsustainable. However, they remain committed to reducing the fiscal deficit to 3 percent of GDP by 2009 (Table 6). The achievement of this objective and its compatibility with a high growth scenario will require actions on both the revenue and expenditure sides (Figure 5).

Table 6.

Morocco: Central Government Finance, 2004–10 1/

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

Including Fonds Hassan II.

Includes tariffs earmarked for food subsidies (équivalents tarifaires) and revenues of the road fund (Fonds Routier).

Includes food subsidies financed from earmarked tariffs (équivalents tarifaires).

Budgetary capital expenditures excluding Fonds Routier and investment spending by the Fonds Hassan II.

Corresponds to 30 percent of VAT revenue.

Gross debt including net central bank credit.