• Financial and Structural Reform
  
  

Financial and Structural Reform

Morocco was the first Arab country to embark on economic reform - in 1983. At that point the country had endured several difficult years. It was not an oil producer, which meant that the price rises of 1979/80 had worked to its disadvantage, and it had few of its nationals living in the Gulf and remitting wages home. It had also been borrowing heavily since the late 1970s to finance a programme of investment in infrastructure (which did not yield very impressive results) and in the production of phosphates, of which it had the biggest reserves in the world. For a few years a buoyant fertiliser market seemed to justify its investment, but then suddenly it was hit by a fall in prices, which coincided with several years of drought. In 1983 its debts were nearing $20bn, equivalent to 128 per cent of GDP, and debt service was taking some 60 per cent of current account foreign exchange earnings. It was forced to ask its creditors to allow it to reschedule.

The reforms then imposed on the country by the International Monetary Fund were a fairly standard package. The government had to control its spending, mainly by freezing salaries and reducing its hiring of new employees. A beneficial side effect of these measures was that graduates stopped taking it for granted that they would be able to get posts in the civil service. Further economies were achieved by the elimination or reduction of subsidies on some basic foodstuffs - though the most politically sensitive subsidies, applying to wheat, sugar beet and cooking oil, and benefiting producers more than consumers, remained in place. On the revenues side of its budget the government increased its income by lowering rates of personal and corporate tax, making the collection system more efficient and introducing value added tax. The effect of the measures was to cut the budget deficit from 12 per cent of GDP in 1983 to between 2 and 3 per cent in the mid-1990s.

A system of import licensing was abolished and the Moroccan dirham was devalued in small stages, until by 1990 its value against the French franc had been cut by 40 per cent. In 1993 the currency was made convertible for most current account transactions, though capital transactions involving Moroccans investing abroad are still not allowed. Although the authorities like to play up the liberalisation, in practice the restrictions on capital transfers mean that the dirham remains surrounded by a battery of controls. It is thought that steps towards true convertibility will be linked to the authorities floating the currency - allowing its parity to be determined by the market rather than by a formula involving a basket of currencies dominated by the franc.

Taken as a whole, the financial reforms brought down the country’s debt service ratio (the ratio of debt service payments to current account foreign exchange earnings) to around 35-38 per cent in the early 1990s. At the end of 1992 the government was able to announce that the debt rescheduling it had negotiated for that year would be its last. Since then, although it has continued to receive advice from the Fund, it has been free of formal IMF supervision.

Starting in 1990 the government switched the emphasis to structural reform. At the beginning of that year a decree made it legal for foreigners to own 100 per cent of a business in Morocco. In 1993 a series of measures was introduced to stimulate the stock market. These involved the privatisation of the exchange and the establishment of a regulatory body, a law authorising the marketing of mutual funds, and the transfer of the broking business from banks to independent brokers. These reforms have been a huge success. Activity on the stock market has increased enormously, and large amounts of capital held by quite unsophisticated Moroccans have been drawn into mutual funds and privatisation issues. Further measures began the deregulation of the banking system, substituting prudential regulation and adherence to Cooke Ratios for the old system under which the central bank directed the banks’ lending and told them what rates to charge.

Early in 1993, after a long period of planning, the state began a programme of privatisation of its holdings in industry and services. It began by listing for sale 37 hotels and stakes in 75 companies. These excluded holdings, such as the Office Chérifien des Phosphates and Royal Air Maroc, which were considered of special strategic importance - though once a few large sales had been completed successfully, the government added two oil refineries to its list and in 1996 put before parliament a bill to add the telecommunications company. By mid-1997 it had disposed of 18 hotels and its holdings in 31 other companies, including the two refineries. Two large companies - a fertiliser plant and a steel laminating mill in which the government owned all the shares - were being sold in stages, and negotiations were well advanced for the sale of an insurance company and a holding in a development bank.

By the standards of eastern Europe, the Moroccan programme has not moved fast and it has recently been slowing down as it has started to tackle the more difficult prospects - but at least it is showing no sign of coming to a halt. It has been hampered by an unenthusiastic bureaucracy. It has also suffered from the government wanting to implement it without causing anybody any pain, which may be socially desirable but has probably lessened its impact in changing attitudes in the economy. In every sale there has had to be a tacit understanding that the buyer will not lay off large numbers of workers. When a sale has risked having unpopular social consequences or has worried powerful interests in the ministries it has been frozen. This was the fate of the local sugar industry, comprising eight companies. Before these firms could be sold the government had to work out a new pricing régime involving a reduction of subsidies. The ministries of Commerce and Industry and Economic Promotion managed to agree on the issue, but in the spring of 1997 the Ministry of the Interior intervened and asked that nothing be done until some indefinite date after the election of a new parliament in the autumn. Similarly the sale of a Fiat assembly plant was frozen because the Ministry of Industry decided it wanted an "industry related" solution involving some form of management buy-out. In other cases political sensitivities have led to assets being offered at too high a price. In January 1997 nine hotels which had already failed to sell were offered a second time with their asking prices cut by 30 per cent. Again they found no buyers because the prices had not been reduced in line with the depreciation in their value caused by poor maintenance.

Outside the context of the official privatisation programme the government has invited foreign companies to take over the distribution of water and electricity in Casablanca - Lyonnaise des Eaux was given a 30 year concession in 1995. New power stations are being constructed by foreign companies on a build-own-operate-transfer (BOOT) basis.

The revival of the stock exchange and the privatisation programme have made necessary a modernisation of the country’s commercial legislation. In 1993 and 1994 the government tightened the provisions governing the reporting of companies and the qualifications of auditors, in order to make public companies more transparent. In 1996 the parliament passed a new companies law which expanded on these matters and outlined penalties for fraud. Since the law was passed the directors of a large number of companies have been discussing with the Ministry of Finance the "mise au niveau" of their balance sheets, which in effect means their bargaining for forgiveness for the past frauds and tax evasions which will be emerging when they bring their accounts to conform to the new law.

Further legislation, governing labour law, competition, consumer protection and patents, trademarks and other intellectual property, has been working its way through the system for several years and is still moving forward, very slowly.

Tariff liberalisation has come to a halt. In the 1980s the tariff régime was simplified and rates were reduced to a top level of 35 per cent, which has remained in force and is the most common current rate. Its burden is increased by various "special taxes"; that are periodically levied on imports. The failure of the Moroccans to reduce these trade barriers further is a major disappointment in the liberalisation programme. It stimulates the smuggling that is a big component of the country’s large black economy. (The other important component is the production of some $2bn a year of hashish in the Rif mountains in the north of the country.) High tariffs also postpone the reform of some extremely inefficient industries and increase the cost and/or lower the quality of imported industrial products that Moroccans want to buy. They greatly increase the cost of new cars, trucks and machinery. They account, in part, for the worn out and polluting vehicles that are common on Morocco’s roads. They are also partly responsible for the average Moroccan farmer having to equip himself with worn out machinery which is un-saleable to European farmers but can be auctioned by the tonne in northern Europe, for scrap or export to farmers in the former Communist countries or Africa.

Under the association treaty with the European Union which Morocco signed early in 1996, the Kingdom is obliged to remove in stages during the next twelve years all tariffs and taxes applying to industrial goods imported from Europe. There is so far little sign of the government starting work on this.