Public Information Notice: IMF Concludes Article IV Consultation with Morocco

June 25, 1999

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 9, 1999, the Executive Board concluded the Article IV consultation with Morocco1.


Sound macroeconomic management has given Morocco a commendable record of internal and external stability. During the past three years, inflation stabilized at under 3 percent, the external current account deficit remained below 1 percent of GDP, and official reserves strengthened. However, continued reliance on drought-sensitive crops in the context of larger-than-usual fluctuations in rainfall has induced considerable volatility in output, and average growth in the nonagricultural sectors has hovered around 3 percent in the 1990s, a level insufficient to reduce the high rate of unemployment (19 percent in urban areas). In 1998, a recovery in agricultural production allowed Morocco's GDP to grow by 6.3 percent. Growth was also sustained by favorable terms of trade, strong tourism receipts, and a resurgence of private investment, reflecting confidence in the new government.

The budget deficit for fiscal year 1998/1999, excluding privatization, was maintained at around 3.5 percent of GDP. However, increases in expenditure stemming from earlier wage commitments and a desire to upgrade social spending were not matched by increases in recurrent revenue. Consequently, the deficit target was achieved through exceptional revenue measures, including a tax amnesty and higher dividend payments obtained from a few state enterprises.

Continued low inflation allowed for a further reduction of interest rates. Bank Al Maghrib intervention rate, which had been set at 6 percent in February 1998, was reduced to 5.5 percent in March 1999. At the end of 1998, the rate on 52-week treasury bills had declined below 7 percent (around 4 percent in real terms). The banking system is being further strengthened by a number of actions aimed at restructuring the agriculture and real estate/tourism banks.

Positive terms of trade developments (with phosphate prices increasing against a decline in both oil and cereal prices) and strong exports receipts helped offset the surge in imports, linked to the pick-up of investment. Even though foreign direct investment declined well below the exceptional inflows of 1997, together with other private capital inflows they were sufficient to finance the low current account deficit and net repayment of public external debt. In addition, they permitted to increase official reserves to US$4.4 billion, covering 4.5 months of imports of goods and nonfactor services. Prudent external borrowing and active debt management policy succeeded in reducing Morocco’s external debt burden, including through refinancing and early repayment of expensive loans and debt-equity swaps.

Structural reforms advanced on several fronts. On the judicial front, the establishment of six commercial courts and their efficient functioning helped establish a more effective legal framework for resolving business conflicts, thus improving the environment for private sector investors. Simplified procedures and a substantial reduction in the time needed to complete custom operations positively affected trade transactions. However, progress in privatization was slowed down by the expiration of the previous privatization law. The new law establishes a more permanent legal basis and an expanded scope for privatization. Also, two important issues, more flexible labor legislation and the ineffective generalized food subsidy system, have not yet been resolved. On the other hand, progress was being made in liberalizing prices and road transportation and in expanding rural infrastructure and improving access to the poor of education and health services.

Executive Board Assessment

Executive Directors noted that the authorities' prudent macroeconomic management and steady progress in implementing structural reforms had allowed Morocco to maintain internal and external stability throughout the recent period of international financial turmoil, while rebuilding reserves and further reducing the external debt burden. Directors were encouraged by the broad-based nature of the economic recovery of 1998, in particular the rise in private investment demand. They were concerned, however, that growth had been insufficient to make a dent in the high rate of unemployment, and that social indicators had improved only marginally. In this regard, they endorsed Morocco's ambitious medium-term strategy that has the goals of accelerating growth, reducing poverty and unemployment, and improving social conditions in the country; they stressed that achievement of these objectives will require early and bold actions to achieve fiscal consolidation and to maintain the momentum of structural reforms.

Directors supported the authorities' objective of reducing the fiscal imbalance to make room for private investment and to free resources within the budget to support more growth-oriented expenditures, including on social infrastructure. However, they generally considered that the draft budget for FY 1999/2000 could have set a more ambitious target for deficit reduction. Directors welcomed the authorities' announced intention of reforming the civil service to reduce its cost and improve its quality, as well as their intention to reform the generalized food subsidy system, and they urged them to realize progress in these areas as soon as possible. They stressed that a forceful approach to civil service reform, coupled with immediate steps to moderate additional net recruitment, will be essential in reducing the burden of the wage bill. Similarly, a gradual elimination of generalized food subsidies would provide resources for a better-targeted assistance system and improve the allocation of resources in agriculture. On the revenue side, Directors encouraged the authorities to extend tax coverage to untaxed or undertaxed sectors, especially agriculture, and to broaden and harmonize the value-added tax and excise taxes. They also encouraged the authorities to refrain from further tax amnesties and to eliminate tax exemptions.

Directors commended the authorities for their broad-based program of structural reforms, which is addressing the main structural rigidities of the Moroccan economy. While recognizing the importance of establishing a supportive social consensus, they encouraged the authorities to proceed more forcefully on privatization and the liberalization of prices and markets, including the labor market. In particular, they considered that the high level of unemployment called for increased flexibility in labor laws.

Directors agreed that the exchange rate peg had served Morocco well, not only by providing a firm nominal anchor during the disinflation process, but also by helping enforce fiscal discipline and encouraging productivity gains to improve competitiveness. Most Directors supported the authorities' preference for maintaining the nominal anchor, while addressing the remaining structural rigidities, because they shared the concerns of the authorities about the risks of changing the anchor under present circumstances. They welcomed the authorities' readiness to continue to monitor developments in the exchange rate closely. A few Directors encouraged the authorities to consider a more flexible exchange rate strategy, while others thought that such a strategy should be considered over the medium term.

Directors welcomed the improvements being made in monetary policy management in coordination with the Treasury. Particularly noteworthy were the developments of the secondary market and the introduction of additional monetary instruments. They believed that the financial system was sufficiently sound so as not to pose serious financial risks for the economy. Still, they strongly encouraged the authorities to continue monitoring closely developments in the financial sector.

Directors supported the authorities' efforts to improve social conditions. They praised the decision to establish the new social development agency, which should provide better targeted assistance to the most disadvantaged segments of the population, and also welcomed the refocusing of existing programs toward those most in need. They stressed that a rapid dismantling of the generalized subsidy system would be an effective way to free additionalresources to finance those programs. Directors noted that a concerted effort on developing rural infrastructure, as well as expanding health and education services accessible to the poor, particularly rural women, would help to raise social indicators to levels prevailing in other middle income countries.

Morocco: Selected Economic Indicators

  1994 1995 1996 1997 1998

Domestic economy In percent
Change in real GDP 10.4 -6.6 12.1 -2.0 6.3
Nonagricultural GDP 2.6 1.9 3.5 3.3 3.1
Unemployment rate 20.3 22.9 18.1 16.9 19.0
Change in consumer prices 5.1 6.1 3.0 1.0 2.7
External economy In billions of U.S. dollars 1/
Exports, f.o.b. 5.5 6.9 6.9 7.0 7.3
Imports, f.o.b. 7.6 9.4 9.1 8.9 9.6
Private transfers 2.1 2.3 2.5 2.2 2.3
Current account balance -0.7 -1.2 0.0 -0.1 -0.3
In percent of GDP -2.4 -3.6 0.1 -0.3 -0.7
Direct investment 0.8 0.3 0.5 1.1 0.4
Public borrowing, net -0.3 -0.2 -0.3 -0.9 -0.5
Capital account balance 2/ 1.3 0.6 0.2 0.5 0.5
Gross official reserves 4.6 3.8 4.0 4.2 4.6
Financial variables Percent of GDP 1/
Central government balance 2/ -3.9 -5.6 -3.3 -3.5 -3.4
Central government debt 82.4 83.1 77.5 76.6 75.6
Of which external 48.8 46.9 41.5 39.1 35.5
Debt service ratio (in percent of exports of goods nonfactor services and private transfers) 32.9 31.2 27.3 27.2 25.2
Change in broad money (in percent) 10.6 7.7 6.7 9.0 6.3
Interest rate 3/ 8.5 9.0 9.0 7.5 7.0

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

1/ Unless otherwise noted.
2/ Commitment basis, excluding privatization receipts. Starting in 1996, data refer to fiscal year (June/July).
3/ 52-week treasury bills, last available observation in the year.

1Under 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 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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