Public Information Notice: IMF Concludes Article IV Consultation with Morocco

September 1, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On June 7, 2000, the Executive Board concluded the Article IV consultation with Morocco.1


Macroeconomic stability has been successfully maintained in Morocco, as evidenced by the stabilization of trend inflation at around 2 percent, and of the external current account deficit at under 1 percent of GDP in 1999. The effects of a widening trade imbalance have been largely compensated by a strong recovery in tourism receipts; and, although the current account deficit is projected to increase in 2000 in conjunction with a significant deterioration in the terms of trade, Morocco’s external position remains strong. External debt is being reduced and reserves have been replenished to a comfortable level by large nondebt private capital inflows mostly linked to privatization. Such inflows are expected to continue on a large scale over the next few years, as the capital of major public enterprises will be opened to private sector participation.

Growth performance has weakened during the 1990s, partly as a result of a high frequency of droughts, with an increase in poverty and unemployment, notwithstanding a steady improvement in social indicators. Following a contraction in 1999, GDP growth has been affected by a second year of drought and is projected to reach only 2.5 percent this year. On the positive side, investment has picked up considerably over the last two years, reflecting a number of structural improvements in the economy, but also a catch-up effect from earlier years of low investment.

Progress toward further fiscal consolidation has been limited. Tax revenue increased significantly in 1998/99, including from the proceeds of a tax amnesty and the subsequent strengthening of corporate tax collection. The fiscal deficit (excluding privatization revenue) narrowed to 2.5 percent of GDP from 3.4 percent in 1997/98, leading to a further decline in public debt. In FY 1999/00, the budget deficit (excluding privatization revenue and GSM license receipts) is expected to widen to 4.8 percent of GDP. Including privatization revenue and GSM license receipts, the overall fiscal balance is expected to decline from 2.4 percent of GDP to 1.9 percent of GDP. The availability of these exceptional revenues (GSM license receipts amounted to 3.2 percent of GDP) has contained the government’s borrowing requirement. However, the budget continues to suffer from important rigidities, namely the size of the wage bill (12 percent of GDP), distortions in the tax system (in particular tax exemption in agriculture) and an inefficient, although not very costly, system of food subsidies.

The budget plan for the second half of 2000 (calendar year budgeting will resume in 2001) envisages a further widening in the fiscal deficit (to over 7.5 percent of GDP on an annualized basis), reflecting both one-off drought-related and investment expenditures and a rise in the wage bill. However, the considerable resources to be generated by the privatization program will ease financing pressures; including privatization revenue, the overall deficit for calendar year 2000 is expected to reach 4.1 percent of GDP. The underlying deficit (corrected for one-off and cyclical factors) has also been on an upward trend which is likely to continue, in the absence of new measures, because of projected losses in customs revenues stemming from the Association Agreement with the European Union.

In addition to the fixed exchange rate commitment, monetary policy has been guided by indicative monetary growth targets and the objective of maintaining the money market rate close to the floor of 5 percent for the 7-day liquidity auctions without exceeding the 6.5 percent rate for the 5-day repurchase agreements. Remarkable improvements in monetary policy management and the financial sector have been made in recent years. The large liquidity injection stemming from the GSM receipts in 1999, which resulted in a temporary decline in money market rates below the floor in October, was absorbed through open-market operations, the setting up of an open deposit facility at the Central Bank, a temporary change in implementation rules for reserve requirements, and the return of the Treasury to the primary market. These measures allowed money market rates to rapidly return to a normal level.

Progress toward modernizing the economy has been made on several fronts including in judicial reform, enlarging the scope for private sector activity, achieving greater transparency and efficiency of the public administration (notably in public procurements and in customs administration), and improving the government’s cash and debt management with the repayment of domestic arrears (reduced to a normal stock equivalent to less than 0.5 percent of GDP as against 3.8 percent at end-1998) and an end to their use as a short-term financing instrument. However, several challenges are still to be addressed: a revised labor code, providing for greater labor market flexibility, has yet to be approved, and the reform of the civil service and of the system of food subsidies, along with further price liberalization in agriculture, are still under discussion.

The regulatory environment and the trade regime are also in need of further reform. Trade liberalization with the EU, by exposing domestic producers to stronger competition, will act as an important stimulus toward the modernization of Morocco’s economy. However, the increase in effective protection during the initial phase of the Association Agreement with the European Union and the growing differential between EU and Most Favored Nation (MFN) tariff rates may create new distortions that could adversely affect resource allocation.

Despite the strong external position, the external competitiveness of some export sectors has been likely affected during the 1990s by an appreciation of the real effective exchange rate. This, along with other important factors, may have contributed to some losses in export market shares when compared to more export-oriented developing countries. The substantial rise in capital formation over the last couple of years should reinforce export capacity, and tourism receipts and related activities have already rebounded over the last two years. Even though the rate of real exchange rate appreciation has slowed down considerably with declining inflation, tariff dismantling under the Association Agreement with the European Union, combined with the phasing out of textile quotas under the WTO, will put added competitive pressures on the economy.

Executive Board Assessment

Executive Directors commended the authorities for maintaining macroeconomic stability through a period of recurrent severe droughts and international financial turmoil as well as changes in the political landscape. Noting that these factors made economic management all the more challenging, Directors welcomed the authorities’ pursuit of prudent financial policies and steady structural reforms. They were concerned, nevertheless, by the significant slowdown in growth observed during the 1990s, and the associated increases in poverty and unemployment.

Directors supported the policy objectives of the authorities’ medium-term plan aimed at realizing the country’s growth potential, notably the commitment to continue structural reforms and to reduce the fiscal deficit to a more sustainable level. They underscored the importance of restructuring the budget toward more productive expenditures and of accelerating structural reforms to ensure the steady increases in private investment and exports that will be needed to face future competitive pressures.

On fiscal policy, Directors noted the significant widening of the fiscal deficit in 2000. Several Directors also pointed to the structural deterioration in the deficit owing to a further increase in the wage bill. Against this background, Directors underscored the need for budgetary reforms. Of particular importance were measures to curb the wage drift and to reform the civil service. Such measures would generate the increase in government savings that is necessary for higher public investment and social outlays as well as for deficit reduction.

Directors also urged the authorities to take measures to expand the coverage of the tax system and to take concrete steps to phase out the generalized consumer food subsidies. In this connection, some Directors encouraged the authorities to liberalize prices in the agricultural sector and subject it to taxation. However, recognizing the difficult tax administration issues involved, they noted that the authorities should first seek to develop the necessary administrative machinery for this purpose, possibly with Fund technical assistance. Directors did not expect the rising budgetary imbalance to have adverse macroeconomic effects in the short run, inasmuch as there is substantial slack in the economy and as proceeds from the sale of the Global System for Mobile Communication (GSM) license and privatization receipts would help finance the deficit. They noted that, under unchanged policies, financing problems were likely to emerge down the line in the face of declining tariff revenues and rising expenditure commitments and pressures. Directors therefore encouraged the authorities to use privatization receipts to reduce public debt further and to finance costly and politically sensitive structural reforms needed to ensure a durable reduction in the underlying deficit.

Directors congratulated the authorities on the significant achievements realized in modernizing the economy, citing the successes in judicial reform, improved efficiency in public administration, and greater scope for private sector activity through privatization, concessions, and demonopolization. They encouraged the authorities to continue with their reform program in these areas. Directors noted that efforts on other fronts could be accelerated, in particular toward liberalizing the trade regime, adopting a revised labor code providing for greater labor market flexibility, simplifying and liberalizing the regulatory framework, and eliminating price distortions in agriculture that favor drought-sensitive crops.

Some Directors took note of the decline in competitiveness over the 1990s, and several Directors considered that, in conjunction with structural reforms and fiscal consolidation, a more flexible exchange rate policy could play an important role in strengthening competitiveness and spurring faster growth. They noted the added competitive pressures that will result from trade liberalization. Other Directors took the view that the current fixed exchange rate arrangement has served Morocco well and remained appropriate when viewed against the strength of external accounts and the need for preserving financial stability. Furthermore, productivity gains realized as structural reforms take hold would improve competitiveness.

Directors welcomed the improvements made in monetary policy management and financial modernization over the last few years, and commended the central bank for its role in preserving price stability.

Directors commended the authorities for the efforts employed to improve the dissemination and timeliness of statistical information, including through Internet websites. They noted that further efforts were needed to broaden the coverage of government finance statistics to include local governments.

Morocco: Selected Economic Indicators

  1995 1996 1997 1998 1999

Domestic economy In percent
Change in real GDP -6.6 12.2 -2.2 6.8 -0.7
Change in real nonagricultural GDP 2.3 3.6 3.2 3.9 3.0
Urban unemployment rate 22.9 22.9 18.1 16.9 19.1 22.4
Change in consumer prices 6.1 3.0 1.0 2.7 0.7
External sector In billions of U.S. dollars 1/
Exports, f.o.b. 6.9 6.9 7.0 7.1 7.4
Imports, f.o.b. 9.4 9.1 8.9 9.5 10.0
Tourism receipts 1.3 1.7 1.4 1.7 2.0
Private transfers (net) 2.3 2.5 2.2 2.3 2.1
Current account balance -1.2 0.0 -0.1 -0.1 -0.3
In percent of GDP -3.6 0.1 -0.3 -0.4 -0.8
Direct investment and other private flows 0.9 0.4 1.2 0.8 1.7
Public borrowing, net -0.2 -0.3 -0.9 -0.3 -0.5
Overall balance -0.5 0.2 0.2 0.4 1.2
Gross official reserves 3.8 4.0 4.2 4.6 5.8
Financial variables In percent of GDP 1/
Central government balance 2/ -5.6 -3.4 -3.4 -2.5 -4.8
Central government debt 3/ 83.2 75.6 78.0 74.6 75.6
Of which: external 3/ 47.3 41.0 39.8 36.4 36.0
Debt service ratio (in percent of exports of goods nonfactor services and private transfers) 31.1 27.9 26.7 23.9 23.7
Change in broad money 7.7 4.8 9.0 5.8 10.2
Interest rate 4/ 9.0 9.0 7.5 7.0 4.8

Sources: Data provided by the Moroccan authorities; and IMF staff estimates.

1/ Unless otherwise noted.
2/ Excluding privatization and GSM receipts. Starting in 1996, data refer to fiscal years July 1996-June 1997, July 1997-June 1998, July 1998-June 1999, and July 1999-June 2000.
3/ End-year debt over calendar year GDP.
4/ 52-week treasury bills, last available observation in the year.

1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. In this PIN, the main features of the Board’s discussion are described.


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