IMF hails morocco's success in maintaining macroeconomic stability and curbing external account deficit
Morocco, Economics, 9/4/2000

Macroeconomic stability has been successfully maintained in Morocco, as evidenced by the stabilization of trend inflation at around 2%, and of the external current account deficit below 1 % percent of GDP in 1999, says a report of the International Monetary Fund's governing board released Friday.

The effects of a widening trade imbalance have been largely compensated by a strong recovery in tourism receipts, says the document which expects Morocco's external position to remain strong despite an increase in 2000 of the current account deficit in conjunction with a significant deterioration in the terms of trade.

Meanwhile, the document says external debt is being reduced and reserves have been replenished to a comfortable level by large non-debt private capital inflows mostly linked to privatization. The IMF expects such inflows 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.

However, growth performance has weakened during the 1990s, partly as a result of a high frequency of droughts, notwithstanding a steady improvement in social indicators, reads the document released following the conclusion of the Article IV consultation.

Following a contraction in 1999, GDP growth has been affected by a second year of drought and is projected to reach only 2.5% this year.

On the positive side, the IMF says, 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. The report notes progress toward further fiscal consolidation has been limited and tax revenue increased significantly in 1998/99, including proceeds of a tax amnesty and the subsequent strengthening of corporate tax collection. The fiscal deficit (excluding privatization revenue) narrowed to 2.5% of GDP from 3.4% in 1997/98, leading to a further decline in public debt.

The IMF report expects the budget deficit (excluding privatization revenue and GSM license receipts) to widen to 4.8% of GDP In FY 1999/00. Including privatization revenue and GSM license receipts, the overall fiscal balance is expected to decline from 2.4% of GDP to 1.9% of GDP. The availability of these exceptional revenues (GSM license receipts amounted to 3.2% 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% 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 IMF notes Morocco still needs to address several challenges: 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.

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.

IMF 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 also 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. 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' efforts 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.

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