A dramatic shift in growth levels




Criticism from economic reformers has led to the accusation that the government lacks a coherent reform strategy

By Mark Huband in Rabat

Financial Times, 20 December 1999

Drastic fluctuations in economic growth have been caused by heavy dependence on agricultural output. They have severely hampered Morocco’s efforts to take advantage of low inflation and accelerate the level of domestic investment.

The shift in growth levels has been dramatic. From 6.5 per cent GDP growth in 1998, year-end total growth for 1999 is expected to be almost stagnant at 0.2 per cent, caused by an 11 per cent contraction in the agriculture sector due to drought early in the season. By contrast, 2000 is expected to see a return to growth owing to good rains this year.

Reforms introduced steadily throughout the 1990s had led to a government forecast of 5 per cent growth outside the agricultural sector in 1998-2003. This would have meant doubling the 1990-97 average of about 2.8 per cent, which reached 3.4 per cent in 1998.

Average inflation of 1 per cent in 1999, compared with an average 2.7 per cent in 1998, is for the most part the result of a slowing in domestic demand.

Tough fiscal control has this year allowed the government to reduce the budget deficit from 3 per cent to 2.3 per cent of GDP, as a result of an 11.3 per cent rise in tax receipts and success in reducing domestic and foreign debt. It has set the goal of reducing the deficit to 2 per cent in 2000.

While favourable terms of trade, rising receipts from tourism, and potentially favourable macro-economic indicators have created the potential for steady improvements, the main weakness of the economy lies in its reliance upon the erratic agricultural sector.

Agriculture accounts for 18 per cent of GDP, an average increase of 1.9 per cent in 1990-97, though productivity is subject to frequent drought, which this year cut production levels by almost 50 per cent.

To facilitate diversification, the Bank al-Maghrib, the central bank, has sought to stimulate the economy through measures aimed at encouraging bank lending for industrial investment by cutting the banks’ cost of financing.

Interest rates have meanwhile remained low, averaging 5.9 per cent in 1993-99, though Morocco’s banks remain notoriously reluctant to pass the full benefits of interest rate cuts on to their customers.

A study of industrial output and investment patterns was launched in 1998 with a view to identify the areas of greatest potential. The study showed the annual rise in industrial investment averaging 4 per cent in 1994-98, a rise matched by the contribution of industry to overall exports.

The government is now aiming to achieve 5.5 per cent annual growth in advance of the disappearance of industrial tariff barriers for European exporters, which form the key part of the Euro-Med partnership agreement it signed with the European Union in 1995.

“This level of growth will be adequate for us to retain our competitiveness,” says Fathallah Oulalou, finance minister. He also emphasises the importance of legal and administrative reform – ranging from the adoption of international accounting standards to adherence to standards governing intellectual property rights – as key measures intended to prepare Morocco’s{A economy for the impending free market.

However, some financial analysts doubt that the measures introduced so far will be adequate to stimulate significant growth in investment or break the current lending pattern, which is dominated by short-term cash advances, rather than long-term investment finance.

The pace and pattern of investment has been influenced by the slow though steady liberalisation of the economy, the gradual implementation of the privatisation programme, and the expansion of the capital market.

Domestic investment increased by 13.7 per cent in 1998, as compared to an average annual increase of 3.5 per cent in 1990-97, driven by accelerated investment in the equipment and tools sectors, as well as in public works.

Foreign direct investment in 1999 meanwhile has seen a leap of 247 per cent to about Dollars 2bn, Mr Oulalou says. Two large investments accounted for 34 per cent of this total: a total Dollars 600m was paid by Telefonica of Spain and Telecom Portugal for their share as part of a consortium of local and foreign partners who paid a total $1.12bn for the second of two mobile telephone licences, from which the government had originally expected to earn $400m.

A further $90m investment was made by Coca-Cola in its purchase of bottling plants at Fez and Marrakech. In the tourism sector, Accor Hotels, the French hotel chain, and Majestic Hotels of the UK have also both made or committed substantial investments.

Foreign direct investment has remained largely subject to the pace of economic liberalisation. This has been seen most starkly in the telecommunications sector, which is now expected to see a slow down in reform owing to political opposition to rapid privatisation from within the coalition government.

New legislation

Since 1993, the privatisation programme has involved sales of government stakes in 60 companies, raising Dh5.6bn. Recent legislation reduced the number of companies for sale from 77 to 20, and abolished a time limit on the privatisation process. By 1998, only 56 of the 114 companies listed for privatisation in 1993 had been sold.

The remaining companies from the original list have been withdrawn from sale.

The privatisation ministry on November 1 invited offers to evaluate the privatisation of the state-run Royal Air Maroc (RAM). The government plans to sell up to 40 per cent of RAM’s capital, part of it to strategic foreign partners and the rest as a stock exchange flotation.

“The government is retaining the option of liberalising and privatising,” says Rachid Filali, minister for the public sector and privatisation. “The slow passage of the privatisation law, in part explains the slow pace of privatisation. But we are going to privatise everything that is ready to sell.”

The government is not dependent upon privatisation receipts for budgetary expenditure. Nor does it regard its role as being to accelerate privatisation to raise the level of activity on the Casablanca Stock Exchange.

“We need a bourse in order to have privatisation, but not the other way round,” Mr Filali says.

Differences in political outlook among the 41 ministers of the coalition government have undoubtedly hampered the rapid agreement, passage and implementation of laws regarding the liberalisation of the economy.

Growing criticism from economic reformers has led to the accusation that the government lacks a coherent reform strategy and has therefore adopted a piecemeal approach.

“Many of the people within the government don’t understand what the global economy is about,” a leading economic reformer says. “The objective of the structural adjustment was to allow the economy to move towards private sector-led and export-oriented growth. The reason there is such low private sector investment is because there is no rule of law in the economy,” he says.

© Financial Times