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Morocco and the IMF
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IMF Concludes 2001 Article IV Consultation with Morocco
On July,11, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Morocco.1
Due to two successive years of severe drought, Morocco experienced in 2000 a second year of economic stagnation. As agricultural production contracted by 17 percent, GDP real growth was limited to 0.3 percent (after -0.7 percent in 1999). Nonagricultural GDP growth declined slightly, from 3.0 percent in 1999 to 2.8 percent in 2000. The most dynamic sectors were construction and public works (5.7 percent), and transport and communications (5.2 percent). Major projects in electronics, tourism, and motor vehicle components were launched with foreign direct investment. On the demand side, the most dynamic components were private consumption and exports.
Consumer price inflation remained subdued in 2000 at about 2 percent year-on-year. Inflation data through May 2001 point to continued price stability.
External reserves amounted to US$4.8 billion at end-2000 and are expected to reach at least US$6 billion (the equivalent of 5.5 months of imports) by end-2001, as a result of the privatization proceeds of Maroc Telecom. The external current account deficit widened to 1.5 percent of GDP in 2000 from 0.5 percent in 1999 because of increased agricultural imports, large imports of telecommunication equipment goods, and a substantial increase in oil import prices coupled with a decline in phosphate exports prices. During the first four months of 2001, exports declined in dirham terms by 0.9 percent compared to the same period of 2000, while imports increased by 1.9 percent. However, performance of tourism receipts and workers remittances was strong, increasing by 30 percent and 20 percent, respectively.
Financial policies have taken an expansionary stance since mid-2000. Fiscal policy has been adding stimulus to aggregate demand, and monetary policy was loosened to encourage private investment. The fiscal deficit reached 4.3 percent of GDP in FY 1999-2000 (excluding privatization receipts) up from 2.5 percent in the previous fiscal year when the government benefited from proceeds of the tax amnesty totaling 1.4 percent of GDP. While tax revenue (excluding the effect of tax amnesty) improved in 1999-2000, this was offset by higher wage outlays, price subsidies for petroleum products, and a decline in non-tax revenues due to non-renewal of the fishing license with the European Union. The special six-month budget covering the second half of 2000 envisioned a substantial increase in government outlays (investment and drought-related spending); and resulted in a widening of the deficit to be financed through the proceeds from the sale of 35 percent of Maroc Telecom, which was expected by end-2000. Since these proceeds were only received in February 2001, the treasury incurred budgetary arrears for more than 3 percent of GDP to avoid issuing government securities that would have resulted in a substantial increase in interest rates. During the first four months of 2001, budgetary revenues and expenditures were in line with budgetary projections, whereas domestic arrears built-up at end 2000 were eliminated.
Bank Al-Maghrib (BAM) loosened monetary policy starting from end-2000 in response to the tightening in bank liquidity stemming from the accumulation of budgetary arrears. As a result broad money grew by 8.4 percent in 2000, 1.5 percentage points above the upper limit of the target range set by BAM. This overshooting of the monetary target reflected substantially higher than expected credit to government (despite the buildup in budgetary arrears), which increased by more than 12 percent in 2000. The accommodating stance of monetary policy continued during the first quarter of 2001 with a reduction in BAM's benchmark interest rates in March.
After a decade of fixing the nominal exchange rate against a currency basket, during which there was a significant appreciation of the real exchange rate, the authorities modified the basket to better reflect the growing importance of the euro area in Morocco's trade accompanied by a 5 percent average depreciation of the dirham on April 25, 2001. Notwithstanding a strong balance of payments position, this action was taken in response to the appreciation over the last two years of the dirham in nominal terms vis-à-vis the euro, as a result of the appreciation of the U.S. dollar against the euro, which accounts for more than two-thirds of Morocco's export transactions.
Structural reforms proceeded on several fronts. The liberalization and privatization of the telecommunication sector has not only brought in substantial financial benefits, but also increased efficiency and competition resulting in reduced communication prices while creating a large number of jobs. The government has also eliminated the generalized subsidy on edible oil in conjunction with its price and import liberalization, which caused adverse incentives for agricultural production and mostly benefited large producers and intermediaries. The rural infrastructure programs (electricity, drinking water, and roads) have accelerated; a social fund has been established to address pressing poverty needs; and a program that helps disadvantaged women and children has been reformed. Better labor market intermediation has been established through the New National Agency for Employment. The Royal Commission for Educational Reform has launched a program to reach universal primary education by 2003. Trade liberalization has progressed as planned in the context of the Association Agreement with the European Union, with a 25 percent reduction in tariffs on some industrial and processed agricultural products. The problems of the two troubled financial institutions, Credit Immobilier et Hotelier (CIH) and Caisse Nationale du Crédit Agricole (CNCA), are being addressed by a restructuring plan for CIH and by a recapitalization of CNCA. The government has also started to take actions to improve governance, including the reform of public procurement and customs administration, and a code of conduct for civil servants.
Economic prospects have brightened during the first quarter of 2001 with the privatization of 35 percent of Maroc Telecom for US$2.1 billion (6 percent of GDP). This privatization process was open and transparent, and the price obtained substantially exceeded expectations, considering the downturn in the world telecommunication market.
Better rainfall—although unevenly distributed—should lead to a 25 percent increase in agricultural output in 2001 with favorable spillovers on other sectors. Real GDP growth is projected at 6 percent in 2001. Nonagricultural output is expected to increase by 3.8 percent driven by construction activity, telecommunications, and tourism, which has benefited from the government's efforts to attract foreign investors and tour operators. Inflation should increase to 3 percent in 2001, largely on account of the April 2001 devaluation of the dirham. The fiscal deficit is now projected to reach 7.2 percent of GDP (on a commitment basis and excluding privatization proceeds). The external current account balance should improve slightly.
Executive Board Assessment
Executive Directors commended the authorities for achieving macroeconomic stability, as evidenced by the comfortable external position and the maintenance of inflation at industrial countries' level, despite adverse weather conditions and terms of trade developments. The economic reforms initiated over the last five years are beginning to yield tangible results as witnessed by increasing productivity, expansion in tourism, and higher foreign direct investment. Directors also welcomed the authorities' increased emphasis on improving social conditions as well as their efforts to improve governance and transparency in the management of public resources.
Directors noted that Morocco faces important remaining challenges in raising growth sufficiently to reduce unemployment and poverty on a sustained basis. To achieve this objective, they considered that macroeconomic policies will need to be tightened and structural reforms accelerated.
Directors noted the widening of the fiscal deficit excluding privatization since 1999-2000, particularly the reduction in budgetary flexibility resulting from the growing wage bill. They recognized that special factors, including drought-related spending, have contributed to this widening and that the substantial proceeds from privatization have thus far allowed increased spending without increasing government debt. Directors agreed, however, that the fiscal stance could be placed on an unsustainable path unless measures are taken to bring the fiscal position more in line with the authorities' medium-term objectives.
Directors, therefore, welcomed the authorities' determination to achieve a significant budget deficit reduction, as confirmed by the prime minister's recently issued guidelines setting the overall deficit target for 2002 at 3 percent of GDP (including privatization proceeds). They underscored the importance of strict adherence to this target and of further deficit reductions over the medium term. Directors noted that fiscal consolidation will require bold actions both on the revenue and expenditure side, with civil service reform—aimed at curbing the growth of the wage bill—to be given the highest priority. They also highlighted the importance of rationalizing remaining subsidies and reducing tax exemptions. A number of Directors also encouraged the authorities to envisage broadening the coverage of the value-added tax in order to offset future declines in custom revenues.
Directors agreed that the relaxation of both fiscal and monetary policies in 2001 presents limited risks for macroeconomic stability in the near term. Noting the recent monetary easing, they emphasized that BAM should be ready to tighten monetary policy in response to any sign of inflationary pressures. Directors highlighted the continued strong performance of Morocco's private banks as well as the recent progress in strengthening banking supervision and extending prudential requirements to the specialized public banks. They urged the authorities to address promptly the nonperforming loans of two public banks and ensure their full capitalization. Directors welcomed the authorities' decision to participate in the Financial Sector Assessment Program.
Directors were encouraged by the recent decision to change the basket of currencies used for determining the exchange rate of the dirham, which was accompanied by a devaluation of 5 percent. They particularly welcomed the authorities' readiness to examine the feasibility and appropriateness of moving to a more flexible exchange rate system. Nearly all Directors considered that such a move would help Morocco to respond better to exogenous shocks, meet the challenge of competitiveness against the backdrop of ongoing trade liberalization, and pursue a more ambitious growth target. Directors noted that increased flexibility in exchange rate policy would need to be supported by fiscal consolidation, a strict wage policy, and a monetary policy framework that can provide a nominal anchor to replace the exchange rate. A few Directors considered that such a framework should be in place before moving toward greater flexibility.
Directors commended the authorities for proceeding with wide-ranging structural reforms that are key to achieving higher investment and growth levels in the medium term. They welcomed the trade liberalization achieved in the context of the Association Agreement with the European Union and encouraged its extension on a multilateral basis to avoid the risks of trade diversion.
Directors had a useful discussion on the agricultural sector in Morocco. They welcomed the decision to eliminate the consumption subsidy and external protection for edible oils but noted the need for additional steps to improve, in various ways, agricultural performance. Directors encouraged the authorities to explore further opportunities for price liberalization which would help reorient incentives toward a cropping pattern better suited to Morocco's climatic conditions as well as closer to the longer-term comparative advantages of the country. Some Directors noted that such a reorientation should also be supported by a removal of trade barriers which Morocco's agricultural sector is facing in its export markets. Directors also stressed the importance of developing a social safety net to safeguard poorer farmers during the transitional period.
Directors congratulated the authorities for the transparency that had characterized the liberalization and privatization of the telecommunications sector, and commended their ongoing efforts toward better governance in the public as well as the corporate sectors. They looked forward to further progress in strengthening the judicial system, simplifying the regulatory environment, and adopting the new labor code, which will enhance labor market flexibility and employment creation.
Directors supported the authorities' determined efforts in achieving universal schooling by 2003, improving the status of women, and attacking rural poverty. They expected that the forthcoming public expenditure review will help set appropriate spending priorities toward progress in these areas.
The authorities' efforts aimed at improving the timeliness and dissemination of statistical data are yielding results, and Directors welcomed their request to undertake a Report on the Observance of Standards and Codes on statistics this year, with the objective to subscribe to the Special Data Dissemination Standard.
|Morocco: Selected Economic Indicators|
|Domestic economy||In percent|
|Change in real GDP||12.2||-2.2||6.8||-0.7||0.3|
|Change in real nonagricultural GDP||3.6||3.2||3.9||3.0||2.8|
|Urban unemployment rate||18.1||16.9||19.1||22.9||21.5|
|Change in consumer prices||3.0||1.0||2.7||0.7||1.9|
|External sector||In billions of U.S. dollars 1/|
|Private transfers (net)||2.5||2.2||2.3||2.1||2.3|
|Current account balance||0.0||-0.1||-0.1||-0.2||-0.5|
|In percent of GDP||0.1||-0.3||-0.4||-0.5||-1.5|
|Direct investment and other private flows||0.4||1.6||0.7||2.1||1.0|
|Public borrowing, net||-0.3||-1.0||-0.4||-0.7||-0.8|
|Gross official reserves||4.0||4.2||4.6||5.7||4.8|
|Financial variables||In percent of GDP 1/|
|Central government balance 2/||-3.4||-3.4||-2.5||-4.3||-6.5|
|Structural fiscal balance 3/||-4.0||-4.1||-4.4||-4.2||-4.5|
|Central government debt 4/||75.6||78.0||74.6||77.4||77.8|
|Of which: external||41.0||39.8||36.4||35.9||34.3|
|Debt service ratio
|Change in broad money||4.8||9.0||5.8||10.3||8.4|
|Interest rate 5/||9.0||7.5||7.0||4.8||6.3|
Sources: Data provided by the Moroccan authorities; and IMF staff estimates.
1/ Unless otherwise noted.
2/ Excluding privatization and GSM receipts. From 1996 to 1999, data refer to fiscal year beginning in June. In 2000, data refer to calendar year.
3/ Cyclically adjusted balance, excluding one-off revenue and expenditure measures.
4/ End-year debt over calendar year GDP.
5/ 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. This PIN summarizes the views of the Executive Board as expressed during the July,11, 2001 Executive Board discussion based on the staff report.
IMF EXTERNAL RELATIONS DEPARTMENT