Morocco - Impact of liberalization on trade and industrial adjustment (Vol. 3 of 3) : Technical and statistical annexes

Report No. 6714-MOR Morocco: The Impact of Liberalization on Trade and Industrial Adjustment (In Three Volumes) Volume Ill: Technical artd Statistical Annexes March 15, 1988 Europe, Middle East & North Africa Country Department II Country Operatiions Division FOR OFfICIAL USE ONLY 0 . o)-. . o~~~~~~~~~~~~~~~~~~) - i. ,, - . - ) -9 onyi th,.promneo hi fiildte.Iscnet a o otews e be 4, O o ~~~~~a 4,~~ ~ ~ ~ ~ ~ : '14 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ o 'J4 :4~~~~~~ 4) 4 >/ Donnt of the Wo,rld Bank 4) This report has a restricted distribution and.may be used by recipients' a only in the performance of their official duties, lts contents may not oterwise . 4 be disclosed without Wo,rIl Bank authorization. - * 4) i, o o~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- (:4 :4~~~~~~~~  KINGDOM OF MOROCCO CURRENCY EQUiVALENT Currency Unit: Dirham (DH) Officid Exchanme Rate: Dfrham (DH) per US Dollar 1975 4.053 1981 5.172 1976 4.419 1982 6.023 1977 4.503 1983 7.111 1978 4.167 1984 8.811 1979 3.899 1985 10.062 1980 3.937 1986 9.104 1987 8.359 FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS BNDE = Banque Nationale pour le Developpement Economique (National Bank for Economic Development) BTN = Brussels Tariff Nomenclature CAP = Common Agricultural Policy CCCN = Customs Cooperation Council Nomenclature CGE = Computable General Equilibrium Model CIH = Credit Industriel et HOtelier (Housing Finance) DRC = Domestic Resource Cost GATT = General Agreement on Tariffs and Trade IBP = Corporate Income Tax IHS = International Harmonized System ITPA Industrial and Trade Policy Adjustment Loan MC Domestic Market Regime MCIT = Ministere du Commerce, de l'Industrie et du Tourisme (Ministry of Commerce, Industry and Trade) MFA Multifiber Arrangement MFN = Most-Favored Nation NTB = Non-Tariff Barrier ONT = Office National du Transport PERL = Public Enterprise Rationalization Loan PMIs Petites et Moyennes Entreprises (Small- and Medium-Scale Firms) QR = Quantitative Restriction SAL = Structural Adjustment Loan SIT = Special Import Tax TA = Temporary Admission Regime TFP a Total Factor Productivity TPS = Taxe sur les Produits et les Services (Turnover Tax) VAT = Value-Added Tax VER = Voluntary Export Restraint  NOR OFFICIAL USE ONLY LIST OF TECHNICAL ANNECES Page No. Annex I Cost of Capital Calculations................. 1 Annex II The Structural Deficit ....................... 3 Appendix A.l I ............................... 8 Annex III The Industrial Survey ........................ 9 Annex IV The External Trade Regime of Morocco*......... 11 Annex V Model of the External isctor................. 15 Annex VI The Industrial Investment Codes*. ..........** 25 Annex V'I The Financing of Industry .... .... 29 Annex VIII The Labor Market............................. 31 Annex IX Energy Pricing in Morocco..................... 33 Annex X Total Factor Productivity...,*...**......... 35 Annex XI The Relationship of Capacity Utilization, Output, and TFP Grow th....................... 37 Asnnex XII Productivity and International Competitiveness 39 7016B I This document ha a eced ditdbuonandu may be ud by r*IInsu on In th pefomane c of thew offici dutis Its contnts may not otewbe be dicoed wbout Wodd BDnk authiatio  - 1 - ANNEX I C0 OF CAPITAL CALITCO Capital costs have 1een affected to a significant extent by the evolution of the system of incentives granted to Moroccan industrial firms by the various investment codes. A full quantitative assessment of the impact of the codes on the costs of capital is however made difficult by the somewhat complex and time-varying taxonomy introduced by the various investment codes. Furtberore, some incentives may be difficult to quantify or their quantitative importance may be relatively unimportant. Many of the codes' provisions have aimed at redressing regional imbalan0es. As a result, capital costs have varied significantly across regions. Regional boundaries, however, have been defined in different ways by the various codes. In what follows, three zones will be distinguished throughout the whole period: a) Zone I (the Casablanca area); b) Zone II (the Fes area; and c) Zone III (the Tanger area). In the 1983 code, the Fez and Tanger areas have been aggre$ated together. These three areas cover the quasi-totality of the invest4ient expenditures approved under the codes. The codes distinguish between extension and creation investments, i.e. between new and existing plants. However, the following discussion focuses on the impact of the incentive system on investment decisions in new plants only. The provisions for old plants are indeed fairly complex and a full assesment of their impajt would require some (unavailable) information on the age structure of existing firms. While this omission may bias somewhat the point estimates of capital costs, it should not affect to any significant extent the analysis of the ttend that capital costs exhibit over time. The 1973 code. Its main provisions were: a) custom duty and indirect tax exemption on imports of investment and intermediate goods; b) full (50X) corporate tax exemption in Zone III (II) and accelerated depreciation allowances in Zone I for new firms. For existing firms, the corporate tax eemption Is granted for a ten year period starting from their creation date; c) flivo-year exemption on the patent tax (basically a capital levy); d) 22 interest rate rebates on BNDE loans. The 1983 code. Its main provisions are: a) custom duty and indirect tax exemption on imports of .nvestment and intermediate goods. The exemption is fairly general. Only new firms which are located la the Casablanca area are not entitled to it; b) a 501 corporate tax exemption for firms in Zones II and III; c) the five year expmption from the patent tax is granted only to new firm located in Zones II ani III; d) accelerated depreciation allowances are abolished; e) interest rate rebates are eliminated for firms located in Zone I.  - 2 - The cost of capital. Suppose that interest payments are fully tax deductible for the firm, an appropriate assumption in the Moroccan context. Then the cost of capital (c) can be shown to be equal to: (l) c = q (r (1- r) + tp + 6 ) where q is the price of investment goods, while r, T , Tp and 6 are respectively the lending interest rate, the corporate tax rate, the patent tax rate and the depreciation rate. When computing q, allowance must be made for the system of fiscal and financial incentives. As noticed earlier, depreciation allowances and tax holidays in Morocco have always been, at least since 1973, the main components of the incentive package. Therefore: (2) q a qx (l-ts)/(l-