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Public Information Notice (PIN) No. 04/52
May 12, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2004 Article IV Consultation with Morocco

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On May 5, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Morocco.1

Background

Morocco has maintained macroeconomic stability during the past decade. In the context of the exchange rate peg and prudent monetary management, inflation has remained low. The external current account has shifted into surplus since 2001, and external reserves increased further. Fiscal performance has however deteriorated in recent years mainly because of revenue losses and wage expenditures. Nevertheless, the government debt to GDP ratio has declined significantly because of large privatization receipts.

Growth has been insufficient to reduce poverty and unemployment. Furthermore, growth remains volatile because of the dependency of agriculture to rainfalls, and recurrent droughts contributed to increasing poverty in rural areas. Although nonagricultural growth has become less vulnerable to developments in the agricultural sector and has shown signs of revival, it has remained too low to reduce unemployment.

Structural reforms have gained momentum in recent years and efforts are being made to improve social conditions. Large state-owned enterprises have been privatized and remaining public enterprises are being restructured or prepared for privatization. Trade liberalization has proceeded in line with the schedule of the Association Agreement with the European Union, Morocco's main trading partner, and new trade agreements have been signed with the United States, Tunisia, Egypt, and Jordan. MFN tariffs have also been reduced to avoid trade diversion. A new labor code has been approved and is expected to improve labor relations and foster investment. Significant steps have also been taken to reform the financial system. Efforts being made to fight poverty and improve social conditions include the development of rural infrastructure, the construction of affordable housing for the low income population, and the passage of a family code that enhances the rights of the female population. The impact of these reforms should be observed in the medium term.

Macroeconomic conditions remained strong in 2003. Growth increased to 5.5 percent because of an exceptionally good cereal production, while non-agricultural growth showed signs of revival. Inflation was below 2 percent and the external position strengthened further. External reserves reached the equivalent of 10 months of imports of goods and services and covered the totality of external public and publicly guaranteed debt. However, after improving in 2002, the fiscal deficit (excluding privatization and including Fonds Hassan II expenditures) increased from 4.7 percent of GDP to 5.5 percent in 2003. This deterioration resulted from a higher wage bill due to salary increases and promotions for the education personnel, increased security-related spending after the Casablanca bombings in May 2003, and weaker revenue performance on account of ongoing trade liberalization and tariff reductions on selected imports. Nevertheless, because of large foreign exchange inflows related to the privatization of the tobacco monopoly in 2003, the public debt to GDP ratio declined significantly.

Macroeconomic conditions are projected to remain broadly unchanged in 2004. Under assumptions of normal agricultural production, overall GDP growth would drop to 3 percent. The external position is likely to remain strong with external reserves projected at the equivalent of 10 months of imports and the current account surplus at 2.3 percent of GDP. Inflation should remain subdued. The fiscal deficit is projected at 5.4 percent of GDP, broadly unchanged from 2003 but significantly lower than projected by the budget law (6.8 percent of GDP). Because of expected proceeds from privatization, mainly the sale of additional government shares in Maroc Telecom, the debt to GDP ratio should decline further in 2004.

Executive Board Assessment

The Executive Directors commended the Moroccan authorities for maintaining macroeconomic stability and accelerating structural reforms in 2003. Inflation remained low, nonagricultural output accelerated, and foreign exchange reserves fully covered the outstanding public and publicly guaranteed external debt. Despite a higher fiscal deficit, the debt-to-GDP ratio continued to decline and structural reforms progressed on several fronts. These developments contributed to improved market confidence in the Moroccan economy.

Directors emphasized that the key challenge facing Morocco is to achieve sustainable high rates of economic growth to reduce unemployment and poverty. They observed that higher growth in nonagricultural output will be essential to reduce the volatility of overall growth. To achieve higher growth in the context of Morocco's increasing integration into the world economy, Directors stressed the importance of supportive macroeconomic policies and accelerated structural reforms with a view to promoting private investment and increasing the productivity of the economy. They congratulated the authorities for measures being taken to assist the low-income population, noting that efforts to maintain social cohesion are an integral part of the sustainability of structural reforms.

Directors considered fiscal consolidation an essential element of the medium-term high-growth strategy, and welcomed the authorities' intention to reduce the deficit over the medium term. Several Directors favored an early start to fiscal adjustment in order to provide room to absorb possible shocks along the way and to prevent expectations of higher taxes and interest rates that could constrain growth. Such a strategy would also enable a somewhat more ambitious reduction in the debt-to-GDP ratio. Other Directors, however, felt that front-loading the consolidation may not be necessary, provided that there is a clear and well-communicated commitment to adjustment. In this context, Directors welcomed the authorities' intention to begin to strengthen the fiscal position in 2004. They noted that the increase in the fiscal deficit in 2003 stemmed in part from lower import tariff revenues as well as an increase in the wage bill and security-related spending. Therefore, they welcomed the continued freeze on net new hiring and the provision in the 2004 budget for an early retirement program to reduce the size of the civil service. Directors urged the authorities to step up tax collection and to move ahead in 2004 with the planned reform of the food subsidy system, while ensuring that an appropriate social safety net is in place.

Directors emphasized the importance of fiscal reforms for sustained reduction in the fiscal deficit and the debt-to-GDP ratio over the medium term. In particular, they urged the authorities to push ahead with their public administration and civil service reform plans in order to reduce the wage bill on a lasting basis, and to streamline expenditure in the context of their ongoing efforts to strengthen accountability in public management. A number of Directors supported the staff's inclusion of the Fonds Hassan II spending, which is excluded from the government budget, in the overall fiscal balance in view of its direct impact on economic activity and its implications for central government investment spending. Directors also welcomed the authorities' plans to work on a broad-based tax policy and tax administration reform that will increase the efficiency of the tax system, reduce exemptions, and offset revenue losses stemming from the ongoing trade liberalization. Directors considered the authorities' request for a fiscal Report on the Observance of Standards and Codes to be a very positive step.

Directors agreed that the current monetary framework has served Morocco well. They noted that the nominal anchor provided by the peg of the dirham to a currency basket has contributed to keeping inflation low, and that there are no signs of an exchange rate misalignment. Nevertheless, they generally welcomed the authorities' intention to review the desirability and operational modalities of alternative exchange rate regimes before further opening of the capital account. In this regard, several Directors emphasized that strengthening the fiscal position and the financial sector are a higher priority at the moment and, in any case, are pre-conditions for any eventual move to greater exchange rate flexibility as the economy becomes more integrated with international capital and goods and services markets.

Directors agreed with the structural reform priorities outlined by the authorities, which will complement fiscal reforms in promoting private sector activity and enhancing the productivity and competitiveness of the economy. Directors commended the authorities' decision to lower import tariffs on a multilateral basis so as to minimize trade diversion and urged continued liberalization and simplification of the trade regime. They noted that the trade agreements with regional partners, the European Union, and the United States represent significant steps towards increased integration to the world economy that would help attract foreign investment and achieve improved efficiency and competitiveness.

Directors welcomed the importance given by the government to strengthening the financial sector and the progress made in implementing the recommendations of the Financial Sector Assessment Program. In particular, they supported the authorities' intention to restructure troubled state-owned banks and strengthen non-bank financial institutions. They also welcomed plans to introduce new central bank and banking legislation in 2004 that would make it possible to further modernize the financial system and the monetary policy framework, and to strengthen the independence of the central bank. They welcomed the anti-terrorism legislation and the central bank's directives on anti-money laundering. They recommended that the draft legislation on anti-money laundering, consistent with international standards, be finalized expeditiously.

To promote private sector activity, Directors underscored the need to improve the business environment—in particular, to streamline administrative procedures, strengthen the judicial system, and implement the provisions of the new labor code. They also called for further improvements in governance and transparency, and a further withdrawal of the state from sectors that are in the private sector domain. They were encouraged by the efforts to improve the financial viability of the public enterprises, which would facilitate the ongoing privatization program. Directors welcomed recent actions taken to improve the financial position of the pension funds, and urged elaboration of a comprehensive plan to put the pension system on a sound footing.

Directors commended the authorities' efforts to improve the statistical system. They encouraged the authorities to accelerate progress toward early subscription to the Special Data Dissemination Standard.


Morocco: Selected Economic and Financial Indicators, 1999-2004


         

Est

Proj

1999

2000

2001

2002

2003

2004


             
 

(Annual percent change; unless otherwise indicated)

Production and income

           

Nominal GDP

0.5

2.5

8.2

3.8

7.0

4.5

Real GDP

-0.1

1.0

6.3

3.2

5.5

3.0

Real non-agricultural GDP

3.2

3.6

3.6

2.8

3.1

3.8

GDP deflator

0.5

1.5

1.8

0.6

1.4

1.5

Consumer price index (CPI), average

0.7

1.9

0.6

2.8

1.2

2.0

             
 

(In billions of U.S. dollars; unless otherwise indicated)

External sector

           

Exports of goods, f.o.b.

7.5

7.4

7.1

7.8

8.7

10.2

Imports of goods, f.o.b.

10.0

10.7

10.2

10.9

13.1

15.4

Net services

0.1

0.3

1.1

1.2

1.7

1.9

Net transfers

2.1

2.4

3.5

3.2

4.0

4.4

Current account (in percent of GDP)

-0.5

-1.4

4.8

4.1

3.1

2.3

Overall balance (deficit -)

1.6

-0.4

3.8

0.6

1.8

1.3

             
 

(In percent of GDP)

Central government

           

Revenue, excluding grants and privatization

26.9

26.2

24.9

24.7

24.1

24.0

Total expenditure (including Fonds Hassan II)

31.4

32.4

31.1

29.9

30.1

29.7

Overall balance 1/

-4.5

-6.4

-5.8

-4.7

-5.5

-5.4

Privatization and GSM receipts

3.2

0.0

6.1

0.2

2.8

2.7

Overall balance, incl. privatization

-1.3

-6.4

0.3

-4.5

-2.7

-2.7

             

(Annual percentage change; unless otherwise indicated)

Money and credit

           

Broad money

10.3

8.4

14.2

6.3

8.6

8.3

Interest rate (Avg, money market rate, in percent)

5.6

5.4

4.6

3.0

2.5

...

             

Official reserves

           

Gross official reserves (in billions of US$, end-period)

5.7

4.8

8.4

10.1

13.6

15.2

In months of imports of goods and services, c.i.f.

5.7

4.6

8.2

9.1

10.3

9.8

             

Debt (short, medium and long term)

           

Total external debt (in billions of US$)

19.8

18.0

15.9

15.8

16.4

16.2

Total external debt (in percent of GDP)

56.1

53.9

46.9

43.7

36.2

31.7

Domestic government debt (in percent of GDP)

45.6

47.3

45.9

48.2

49.7

51.4

Total government debt (in percent of GDP)

81.3

81.5

74.8

71.5

68.2

67.6

             

Memorandum items:

           

GDP at current prices (in billions of Dh)

345.6

354.2

383.2

397.8

425.6

444.9

Exchange rate: dirham/US$ (average period)

9.80

10.63

11.30

11.02

9.54

...

Real effective exchange rate (appreciation +)

1.0

2.8

-4.1

-1.1

-1.0

...

Terms of trade (deterioration -)

-3.4

-11.1

-1.6

4.9

-0.2

...

 

 

 

 

 

 

 


Sources: Data provided by the Moroccan authorities; includes IMF staff projections.

         

1/ On a commitment basis including Fonds Hassan II.


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.




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