Morocco - Issues and prospects in the public sector

Report No. 10157-MOR The Kingdom of Morocco Issues and Prospects in the Public Sector June 8, 1992 Coun1try Operalions Division Coainlry Department I Middle East and North Africa Regional Office FOR OFFICIAL USE ONLY Document ol ihe 'W|/orid Bank This document has a restricted distribution and may be used by recipients only in the performance o, their official duties. Its contentk may not otherwise be disclosed wvithout World Bank authorization.  CURRENCY AND EXCIIAN(.F RAIT, Currency Unit = Dirham (DH) rH per USS, 1980 1981 1982 1,83 1984 1985 1986 1987 1988 1989 1990 DH per US$, End of Period 4.33 5.33 6.27 8.06 9.55 9.62 8.71 7.80 8.21 8.12 8.04 DH per US$, Period Average 3.94 5.17 6.02 7.11 8.81 10.06 9.10 8.36 8.21 8.49 8.24 FISCAL YEAR January 1st - December 31st  FOR OFFICIAL USE ONLY TIE KINGDOM OF MOROCCO ISSE AND PROSPECTS IN TE PUBLIC SEC]TOR Table of Contents Fa2e No. EXECUTIVE SUMMARY ............................................ I- INTRODUCTION .1 A. Macroeconomic Background .1 B. A Brief Overview of the Public Sector. 8 n - SAVINGS AND INVESMENT IN THE PUBLIC SECTOR . .18 A. The Flow of Funds in the Public Sector .18 B. Public and Private Investment .25 C. The Changing Structure o. the Public Sector Deficit .29 III - PUBLIC SECTOR STABILIZATION AND FINANCING IN THE EIGMWES ... 37 A. The Central Government .37 B. TheLocal Governments. 49 C. The Public Enterprises .57 IV - THE OUTLOOK FOR THE NINETIES .66 A. The Central Government .66 B. The Local Governments .................,............. 68 C. The Public Enterprises .69 I. I?rivation of the Flow of Funds .74 II. A Decomposition of the Central Government Budget .94 III. The Sustainability of Fiscal Policies .120 IV. Statistical Annex .......... 142 This report was prepared by a mission which visited Morocco in May 1991. The mission was Led by Alberto Antonini and consisted of Patrick Conway, Catherine Gorrete, Roumeen Istam, Tobias MOtter, and Nicolas Papandreou. Cynthia Angeles provided research assistance. Dominique Dietrich typed the report. A draft of this report was discussed with the Moroccan authorities in April, 1992, and the present version fncorporates their cofments. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of (cont(rit Pa2 No.. TEXT TABLES Table 1.1 - The Consolidated Central Government Budget .... ............ 9 Table L2 - The Consolidated Local Government Budget ................. 14 Table L3 - Structure of Public Enterprise Ownership ................... 16 Table 1.4 - Public Enterprises by Sector of Activity .................... 16 Table 11.1 - Public Sector Indicators, 1989 ...................... .. 20 Table M.1 - Decomposition of Central Government Budget .... ............ 39 Table E11.2 - Sources of Financing for the Central Government O)eficit .... ..... 41 Table m1.3 - Allocation of VAT Transfers to the LG ..................... 51 Table E11.4 - Investments Transferred to the LG ....................... 54 Table 111.5 - Total Budgetary Contributions to all PEs ................... 59 Table 111.6 - Financial Flows between the CG and the Major PEs .... ........ 60 Table 11L7 - Balance of Payments Inpact of Investment Programn of the Mlajor PEs 63 Table 1.8 - Budgetary Allocations and Actual Consumption of Utility Services, 1986-90 ............................ 64 Table 111.9 - Medium- and Long-Term Debt of the Major Non-Financial PEs ..... 65 Table A.1 - Flow of Funds - Current Accounts, 1989 .................... 75 Table A.2 - Flow of Funds - Capital Accounts, 1989 .................... 76 GRAPHSIDIAGRAMS Fgure 1 - Central Government Expenditures, 1973-90 ................ 2 FIgr 2 - Central Government Revenues, 1973-90 .......... 4 Figure 3 - Central Government Deficit, 1973-90 .................. 4 igWre 4 - Composition of Investment, 1982-89 .................. . 27 igure 5 - Gross Fixed Capital Forrnation ..................... . 28 Figure 6(a) - Savings-Investment Balance in Morocco ................ . 30 Figure 6(b) - Public Sector Financing Sources .......... .. ............. 31 Figure 6(c) - Public Sector Savings-Investment Balance ..32 Figtwe 6(d) - Piblic Sector Financing Needs ..32 Fiue 7 - Central Government Debt ............................. 45 Figue 8 - Domestic Debt Structure ..46 Figure 9 - CG External Debt Structure .. 48 Figure 10 - Budgetary Transfers to Local Governnnents, 1976-90 ......... 53 Diagran 1(a) - Public Sector Current Transactions, 1989 ......... 22 Diagram 1(b) - Public Sector Capital Transactions, 1989 ......... 23 m:\9abecro\ps\toc  ABBREVIATIONS AND ACRONYMS BMCE Banque Marocaine pour le Commerce Extcricur (Moroccan Bank for External Trade) BRPM Burcan de Recherchcs et de Participations Minieres (National Mining Bureau) CB Central Bank (Banque Centrale) CC Charges Communes (Shared Expenditures) CDG Caisse de Dcp6ts et de Gestion CG Central Government (Gouvernement Central) CMR Caisse Marocaine de Retraite (Moroccan Pension Fund) COMvANAV Compagnie Marocaine dc Navigation (National Shipping Company) DB Commercial Deposit Banks (Banques de D6p6ts) DEPP Directorate of Public Enterprises (Direction des Etablissements Publics et Participations) DOD Debt Outstanding Disbursed (Encours de la Dette) EPA Etablissements Publics A Caractere Administratif (Public Administrative Establishments) EPICs Etablissements Publics A Caractere Industriel et Commercial (Industrial and Commercial Public Enterprises) FDI Foreign Direct Investment (Investissement Direct Etranger) FEC Fonds d'Equipement Communal (Municipal Finance Fund) GDP Gross Domestic Product (Produit Interieur Brut) GFCF Gross Fixed Capital Formation iBP Imp6t sur les Bencfices Professionnels IGR Impot General sur le Revenu (Global Income Tax) IMF International Monetary Fund (Fonds Monctaire International) IS Imp6ts sur Ics Soci6tds (Corporate Profits Tax) LG Local Governments (Collectivit:s Locales) OCP Office Cherifien des Phosphates (National Phosphate Company) ODEP Office d'Exploitation des Ports (National Port Authority) ONAREP Office National de Recherche et d'Exploitation Petroliere (National Petroleum Compary) ONCF Office National des Chemins de Fer (National Railway Company) ONDA Office National des Adroports (National Airport Company) ONE Office National de l'Electricite (National Power Company) ONEP Office National de l'Eau Potable (National Water Company) ONICL Office National Interprofessionnel des Cereales et Legumineuses (National Cereal Marketing Board) ONPT Office National des Postes et Tel6communications (National Post and Telecommunications Company) ORMVA Office Regionai de Mise en Valeur Agricole (Agricultural Regional Office) PE Public Enterprises (Entreprises Publiques) PERL Public Enterprise Rationalization Loan (Pret A la Rationalisation des Entreprises Publiques) PFI Prdlevement Fiscal A l'importation (Import Surcharge) PS Private Sector (Secteur Prive) PSBR Public Sector Borrowing Requirement (Besoin de Financement du Secteur Public) PSN Participation A la Solidarite Nationale (National Solidarity Participation) RAM Royal Air Maroc (National Airline) RW Rest of the World (Reste du Monde) SAL Structural Adjustment Loan (Pret A I'Ajustement Structurel) SAMIR Societe Anonyme Marocaine de l'Industrie du Raffinage (National Petroleum Refinery Company) SFI Specialized Financial Institution (Organisme Financier Specialisd) SIT Special Import Tax (Taxe Speciale A l'Importation) TSI Taxe Speciale A l'lmportation VAT Value-Added Tax (Taxe sur la Valeur Ajout6e) XGS Exports of Goods and Services (Exportations de Biens et Services)  TILE KINGDOM OF MOROCCO ISSUES AND PROSPECTS IN THE PUBLIC SECTOR EXECUTIVE SUMMARY i. The Moroccan authorities are about to initiate work on the next Five- Year Plan (1993-97). This is the right time to highlight the key iBsues to be confronted during the Plan period and beyond. This report focuses on public sector issues, in particular on the public sector strategy necessary to achieve the Plan's objectives of economic and social development. ii. The unifying theme of the report is that the increase in Central Government (CG) savings during the eighties was not supported by similar results in other parts of the public sector. This has rendered fragile, if not precarious, the adjustment and stabilization results attained by Morocco particularly in view of the gradual decentralization of public investment and the end of foreign debt rescheduling by 1993. iii. Future public sector strategy will have to be based on an incentive framework capable of promoting increases in public savings outside of the CG in order to ensure the achievement of the country's economic and social objectives without recourse to exceptional foreign financing. THE GOVERNMENT AGENDA iv. Prior to preparing the next Alan, the Moroccan authorities are establishing an ambitious set of objectives for this decade. The elements of this strategy are being discussed with the Bank and the IMF in the context of the last adjustment and stabilization programs being prepared with the support of the two institutions. The key elements of the economic policy agenda are: * To attain balance of payments viability by 1993, when the last round of foreign debt rescheduling would expire, followed by convertibility of the dirham. * To achieve a balanced CG budget within the next two years and to keep inflation at the moderate levels of the recent past. * To promote the private sector through infrastructure rehabilitation, technology development, and financial sector liberalization, enabling economic growth and employment creation to resume at levels well above the rate of the population increase thus raising per capita incomes.  - ii - * To rationalize the public enterprise (PE) sector through (a) restructuring and divestiture, including privatization, (b) replacing ex-ante controls on day-to-day PE activities with ex-post evaluation and macroeconomic monitoring to ensure the compatibility of objectives at the enterprise level (for example the level of investment, the type of financing, tariff increases) and at the national level (for example improvement of the current account, reduction of external debt, control of inflation). * In the social sectors, to improve health and education services in the country, especially in rural areas and among the poorest segments of its population, and to develop a poverty alleviation program. v. The multiplicity of these objectives imposes significant constraints on the way in which any one of them may be achieved. Price stability, for example, will be jeopardized if monetary expansion replaces foreign debt rescheduling as a major source of financing for the CG deficit. Similarly, the balance of payments objective cannot be reached simply by a sharp compression of absorption if per capita incomes have to rise, the vast social needs of the population must be effectively addressed, and human and physical capital must be adequately developed. vi. To achieve these objectives, substantial increases in public savings will be required, given that the major source of borrowing--foreign debt rescheduling--will disappear in 1993. The momentum of policy reforms at the level of the CG will have to be maintained to consolidate and reinforce the results attained so far. However, the public resource mobilization strategy will need greater attention to be paid to devising an incentives framework capable of extending the increase in savings achieved at the CG level to the rest of the public sector. The analysis leading to these conclusions is summarized below and developed in more detail in the main report. PUBLIC SECTOR ADJUSTMENT AND THE ROLE OF THE CENTRAL GOVERNMENT Whose Adiustment has it been? vii. The stabilization and adjustment efforts undertaken by the Moroccan CG in recent years have played a crucial role in reducing macroeconomic imbalances. A clear indication of the marked change in the fiscal stance of the CG is given by the turnaround of the primary balance.1 The primary deficit of 8.8% of GDP in 1982, the year preceding Morocco's balance of payments crisis, has /i Defined as the non-interest budget surplus or deficit.  - iii gradually been turned into a surplus reaching 2.9% of GDP in 1990.2 The accompanying decline in domestic absorption has also significantly contributed to the reduction in the current account deficit as a percent of GDP from two- digit levels before the crisis to 2.6% in 1990. The limited recouzre to monetary sources of financing has enabled inflation to fall from double digit levels in the first half of the eighties to less than 3% on average during 1987-89, though it rose to 7% during the two following years. viii. What is not clear in the analysis of the Moroccan stabilization experience, however, is whether these dramatic changes are representative of a public sector-wide strategy or whether they result from the single-handed efforts of the CG. In other words, has the stabilization program of the CG been reinforced or undermined by the policies undertaken in the other branches of the public sector? What has been the impact of the CG adjustment program on the rest of the public sector? For example, the sustainability of the entire macroeconomic reform program would be seriously jeopardized if the stabilization efforts of the CG merely resulted in the deficit being moved to other parts of the public sectc_. ix. The evidence in this report indicates that the stabilization experience of the CG is not synonymous with that of the public sector. In particular, the authorities adjustment strategy has largely failed to incorporate an incentive framework capable of eliciting the increase in public savings outside the CG necessary to support the decentralization of public investment. Today only 40% of public investment is undertaken at the CO lavel compared to around 60% in the early eighties; non-CG savings, on the other hand, halved during the same period as a share of total public savings and declined marginally as a share of GDP. As a result, the reduction of the CG financing requirements by over six percentage points of GDP between 1982 and 1989 was accompanied by an increase in local government (LG) deficit, from 0.6% of GDP in 1982 to 1.1% of GDP in 1989, and by virtually unchanged net borrowing requirements by PEe during the same period. x. Although maintaining the momentum of policy reform at the CG level remains important, only a widespread improvement of public savings can ensure that the policy of decentralizing public investment to the LG and PEs will be consistent with internal and external equilibria. Maintainina the momentum of Central Government Reforms xi. The maintenance of sustainable fiscal policies in Morocco has neither been easy nor fully accomplished. An analysis of Morocco's CG data suggests that the budgetary position at the central level has greatly improved 2/ On a commitment basis, before grants.  - iv - f'om the unsustainable situation of the early eighties3. The CO budget at the end of 1990 was closer to a sustainable positicn than it has been since the inception of the adjustment program. The analysis also indicates that the path toward sustainability is fraught with risks of slippage, as the expe .ence of 1985-86 and 1989 has demonstrated, delaying the achievement of a viab.e fiscal position. Today, however, the Kingdom's official aim of attaining full convertibility of the dirham by 1993 sets a concrete timetable for the policy reform agenda. Any delay in achieving the fiscal objective would ceriously undermine the credibility of the convertibility target. xii. A virtually balanced budget at the level of the Cr, remains the only realistic foundation for a viable balance of payments, given the enormous reliance of the CG budget on exceptional financial resources deriving from rescheduling external debt obligations. The elimination of the CG budget deficit wi!'2 have positive economic consequences that go beyond a viable balance of payments. In particular, a strong fiscal position will release financial resources for the private sector, help control of inflation, and allow CG arrears to be settled. Moreover, the improvement of the CG budget position should be accompanied by a more equitable sharing of the fiscal burden and a less distortionary framework of incentives. Fiscal discipline should not be achieved through across-the-board reductions of expenditures nor by relying on exceptional revenue sources if the vast needs of the country in terms of social and physical infrastructure are to be addressed over the medium and long term. Instead, fiscal discipline will require: * Reallocation of expenditures towards the priority sectors. The possible lessening of military tension in the Western Sahara after the referendum represents a unique opportunity to markedly reduce defense spending, which today absorbs almost one quarter of total CG expenditures. * Control of the rapidly rising wage bill which is making fiscal adjustment all the more difficult. * Adequate budgetary allocations to eliminate CG arrears and to prevent their recurrence. * Reinforcement of the fiscal reform, especially by broadening the tax base and improving tax administration. Both of these have lagged behind the sweeping changes to the fiscal system started in 1986. * A greater involvement of the private sector in offering services traditionally or even exclusively provided by the State in areas euch as road and port infrastructure, transport, higher education, and health. 2/ See Annex III for some recently developed indicators of public sector solvency and sustainability and their application to Morocco.  v xiii. Fiscal discipline at the level of the CG, however, will not be enough to ensure sustainable macroeconomic success. The Moroccan authorities must create an incentives framework to extend this discipline to the rest of the public sector. T Governments xiv. The role of the CG in the decentralization process has been characterized recently by an overriding need to improve the imnediate financial condition of the Treasury. The transfer of certain investment activities to LG since 1990 is consistent with the overall decentralization strategy which dates back to the mid-seventies. However, the modalities of execution of the transfere have obscured the respective roles of the central and local administration in the planning, implementation and financing of these projects. xv. Although the expenditures formally pass through thie LG budgets, decisions on the type of expenditures and the implementation of the works are the responsibility of the CG, with the local authorities' involvement strictly limited to providing the financial resources. The LG, therefore, regard this form of decentralization as simply a way for the CG to reappropriate some of the VAT proceeds that are transferred from the General Budget to that of the LG. The incentives for the LG to incorporate the transferred investment in their own fiscal plans, and to review these plans accordingly, have been largely undermined. xvi. The concern at the level of the CG technical ministries, on the other hand, has been that, given the low absorptive capacity of the LG budgets, a complete devolution of expenditure responsibilities would seriously hamper the smooth execution of the projects. Indeed, according to certain administration officials the LG suffer from a lack of technical and managerial skills which affect their day-to-day activities as well as their institutional relations with the central administration. It Thould also be noted, however, that the LG have traditionally played an important role in providing sanitary, health and education services as well as transport and other physical infrastructure. This tradition supports the case for promoting the LG involvement in these areas, given in particular the LG proximity to the population in need of these services. Another problem related to the financial relations between the CG and the LG is the present mechanism of allocation of the VAT proceeds. This mechanism lacks transparency and is likely to generate distortions in the financial management of individual LG budgets, especially by encouraging borrowing As opposed to increasing savings. xvii. In light of these problems, coordinating the efforts at the local and central level is all the more important. In order to motivate the LG to play a supporting role to attain the niational objectives, this coordination should be centered on the following themes:  v vI. * Clarification of the reeponsibilities in the design, planning, execution and monitorina of the expenditures that are financed by the LG. * Cooperation of central and local administrations in designing a joint strategy for the revitalization of the social and physical infrastructure given: (a) the high priority established at the national level in this respect; (b) the long-standing involvement by the LG in these areas; and (c) the needs of the more disadvantaged segments of the population are often best assessed at the local level, especially in rural areas. * Formulation of a technical assistance strategy for the local administration to improve: (a) the technical, managerial and financial skills of their staff, in particular in assessing the financing needs of the LG; and (b) the collection, management and analysis of statistics at the local level for a better assessment of the needs and constraints of the sector. * Reform of municipal financing in: (a) the VAT allocation mechanism, in order to eliminate the incentives to formulate budgets showing inflated current deficits and reflected in the rising share of total subsidies allocated to current budgets of LG; and (b) resource mobilization, in terms of both revenues and borrowing instruments for the LG in the recently liberalized financial sector. The Relations between the Central Government and the Public Enterprises xviii. This report highlights the strong linkages that exist between the PE sector and the macroeconomic objectives pursued at the level of the CG. In order to achieve these objectives, the Government is re-examining its role as regulator, owner and strategist of public enterprises. The formulation of the new role for the Government away from its involvement in day-to-day administrative matters on an ex-ante basis and toward that of a more strategic nature should focus on: Ensuring essential social and physical infrastructure, especially in rural areas both for equity reasons and to prevent an unbalanced concentration of the population in urban areas. Public intervention in these areas is likely to remain important in the future, especially through the activities of the Offices (the large utility and infrastructure PEs). * Reviewing the structure and the level of regulated tariffs on the goods and services produced by PEs for equitable cost-sharing and to provide isucentives for greater internal cash generation in the sector. This should release the pressure on the balance of payments caused by excessive foreign borrowing, and on the CG budget due to  vii - the need for capital subsidies (especially in the water and railway sectors). * Evaluating -he compatibility of the country's macroeconomic objectives - hoee at the level of each enterprise; this would involve, Inver alia: (a) restricting the PE sector's aTbitious investment program in the next four years in light of the count:'s objective of balance of payments viability by 1993; (b) systematically distributing dividends to the Treasury; and (c) eliminatina the requirement for Prs to borrow with the Government's guarantee, both donmestically and abroad. * Implementing the divestiture of PEs through liquidation and privatization. SIAMARY OF ISSUES AND RECOMMENDATION-e What Lre the Implications for the Public Sector of the Currency Convertibilitv Target for 1993? xix. This objevt!,ve sets a concrete timetable for balance of payments viability to be acLiaved. Morocco's public sector has been greatly dependent on external debt rescheduling since the balance of payments crisis of 1983. On average, debt reschec ling has covered over 84% of the financing needs of the Treasury in the last four years; a similar share is expected in 1992. For the major PEs, debt relief has financed about one-quarter of their investment in the last two years. Only the LG have not relied on international capital markets for their financing needs. xx. The disappearance of this source of finance will require: * the CG to run a virtually balanced budget by 1993; and * tht PE sector to bring its investment programs in line with the new external financial constraints imposed by the disap?earance of debt relief. Have the Increases in CO Savings During the Eighties been Sugported by Similar Results in Other Parts of the Public Sector? xxi. The stabilization measures undertaken by the Government at the central level succeeded in reducing the financing requirements of the CG by over 6% of GDP between 1982 and 1989. On the other hand, the incentives to elicit a similar increase in the savings of the non-CG public sector were apparently lacking during the adjustment period. xxii. If the stabilization and adjustment measures remain limited to the CG, the sustainability of the entire reform program can be jeopardized. The  - viii successful xationalization program of the CG budget should be maintained and extended to the rest of the public sector. This will require that the current incentive framewiork for the non-CG public sector be re-examined. In particular: * The LG should becoma more directly involved in the design and implementation of the investment activities that have been decentralized; the transfer mechanism of the VAT should be rationalized to encourage the LG' own resource mobilization effort; and the technical, managerial and financial skills of the local administration should be improved through specific technical assistance. * In the PE sector, the Government should reduce its involvement in daily administrative matters on an ex-ante basis and concentrate on the broad strategic decisions for the sector in a transparent fashion through, inter alia, the generalization of performance contracts. * The structure and level of utility tariffs in Morocco are in need of major revisions. The present institutional arrangements for tariff review are largely responsible for this situation. The report recommends that tariff changes requested by the utility companies be granted unless they are specifically vetoed by the Ministry of Economic Affairs within a reasonable delay (say, 60 days). This will prompt the administration to take timely action on the tariff request and it will encourage the utility company to submit a realistic proposition, since that would maximize the probability that it would not be rejected. Should Public Sector Investment Provide the Main Impetus to Growth in the Coming Years? xxiii. The share of the public sector in total investment has declined from a peak of 56% in 1981 to 41% in 1990. The share of the CG fell from more than 30% to less than 20% during the same period. The development is indicative of an economy less geared to promoting economic expansion through large public sector investment, and more aware of the role that the private sector is playing in raising GDP growth well above the country's high rate of population increase. However, the sharp drop of CG investment reflects also the drastic demands of macro-stabilization pt-ograms which have led to the curtailment of essential investment in key economic and social sectors. The need to maintain fiscal discipline today continues to impose significanc constraints on public expenditures. xxiv. The private sector can be the engine for economic growth while supporting the Government's efforts in the coming years. The Government, in turn, can support the private sector's role by: * limiting the volume of financial and economic resources absorbed by the CG budget;  - ix - * eliminating past arrears to the private sector by reducing the deficit below the financing resources available to the budget; preventing theix recurrence by bringing budgetary appropriatlons into line with available financial resources; * reducing the nominal tax rates while broadening the tax base and improving tax ad,rinistration in order not to jeopardize budgetary equilibrium and promoting fiscal equity; * identifying those activities now undertaken mainly by the public sector in which the private sector could play a bigger role (e.g., higher education, road and port infrastructure); The Government should concentrate public investment on activities with important externalities like education, health services and basic infrastructure. This will require expenditure priorities to be clearly stated in the upcoming Five- Year Plan (1993-97) and executed within the constraints imposed by the macroeconomic targets on inflation, deficit reduction and external viability. What Policies can SuPDort the Rationalization of the Public Sector? xxv. Past adjustment and stabilization experience has been characterized by eome inconsistencies in the public sector management. In particular, the authorities have aimed at reducing the financial dependence of PEs on the CG budget and external capital markets through improved PE internal cash generation and greater access to domestic borrowing. These efforts, however, were thwarted by the CG's reluctance to grant the necessary tariff increases, by the de facto monopsony of the CG on domestic financial resources, and by the CG's delay in settling its utility bills. Similarly, divestiture of PEs through liquidation and privatization has until recently been hampered by a lengthy legal and bureaucratic process and by the reluctance to face the realities associated with liquidation and streamlining, especially with regard to labor redundancies and price increases. With respect to the long-standing objective of decentralization, the important transfer of resources and investment programs from the CG to the LG has not been accompanied by an effective devolution of responsibilities from the central to the local authorities. xxvi. An effective rationalization strategy for the public sector should be both internally consistent and compatible with the macroeconomic constraints of the country. Such a strategy will require: * A clear statement of the authorities' objectives for the PEa and for the resulting financial requirements. These objectives should be examined for consistency with the broader macroeconomic goals (balance of payments stability, reduction of arrears). The periodic review of performance contracts would be an adequate vehicle for checking consistency. * The implementation of the recently prepared privatization program to encourage private sector development, CG debt reduction, and  increased foreign direct investment. The problems associated with PE liquidation should be addressed, as delays in their resolution only exacerbate the difficult measures to be taken. * The establishment of mechanisms to allow more efficient planning and implementation of local expenditures. This involves, inter alia, the review of the procedures for the preparation, approval and execution of local budgets, including (a) the introduction of multi- year planning of capital expenditures, (b) an adequate assessment of the operating expenditures associated with new investment, (c) the development of computerized means of monitoring budgetary conmitments, expenditures and payments, and (c) the adoption of rational and transparent procurement regulations. * The cooperation of central and local administrations in clarifying their respective responsibilities, in designing a strategy for the revitalization of the social and physical infrastructure, and in reforrning the existing resource transfer mechanism which discourages resource mobilization at the local level. How can the Government Strengthen its Abilitv to Analyze Macroeconomic Developmen1ts in the Public Seictor in order to Facilitate the Conduct of Macroeconpmic Policy? xxvii. Policy makers lack a synthetic statistical tool to summarize the major economic and financial flows within the public sector, and between the public sector and the rest of the economy. Data are not always available for such a tool and data are not always synthesized by any one agency. This report demonstrates that an adequate flow-of-funds matrix can be prepared with a rasonable dectree of aDproximation quickcly if the existing information is brought together by one agency, and if the different government departments concerned provide the necessary feedback during the iterations leading to a consistent set of accounts. xxviii. It is recommended that a mechanism be put in place to create and update regularly (at least bi-annually) a set of accounts similar to those developed in this report. This exercise could take place within the context of the annual Budget Economique (in time for the preparation of the Finance Bill) or the National Accounts update. These matrices would prove useful to Government authorities in designing, monitoring and reviewing economic policy measures. The iterative process leading to the final product would also represent a fertile ground for (a) exchanging quantitative information within the administration, (b) reviewing the quality and consistency of statistical sources, and (c) identifying mechanisms for improving data collection, dissemination and analysis. m:\ ait berto\ps\execsum  THE KINGDOM OF MOROCCO ISSUES AND PROSP '"TS N THE PUBLIC SECTOR I. INTRODUCTION 1. Part I of the report describes briefly the most impc^tant macroeconomic developments leading to the balance of payments crisis of 1983 and summarizes the lay aspects of the ensuing structural adjustment and stabilization program undertalcen by the Moroccan authorities. A brief overview of the public sector concludes the first part of the report. The analysis of Part II provides a snapshot of the public sector's flow of funds as well as a synthesis of the major changes in the savings-investment balances that occurred as a result of the adjustment program undertaken by the country. A more detailed discussion of these changes and of the public sector policies which brought them about is the subject of Part III of the report. In there, we review how the stabilization efforts at the level of the CG have affected its own financing strttegy. We will also examine the impact on the finances of the LG and the PE sector of the evolution of the financial relations between the CG and the rest of the public sector. The analysis will provide the basis for the conclusions presented in the last part of the report (Part IV). A. Macroeconomic Backgrou:;d From Phosphate Boom to Financial Crisis: 1975-82 2. For nearly two decades after Independence in 1956, Morocco followed a relatively conservative approach to economic management. The real economy grew at a rate of 4% per annum. Primary products (essentially phosphates) accounted for over 90% of merchandise exports. A slow rise in investment was financed by periodic recourse to external borrowing. Capital expenditures of the Central Government (CG) averaged less than 5% of GDP between 1970 and 1974. 3. The phosphate boom of 1975-77 dramatically changed the economy. The large inflows of foreign exchange coincided with rising defense expenditures, due to Morocco's claim on the then Spanish Sahara, and an unprecedented expansion of the public investment program. Capital expenditures of the CG rose to almost 20% of GDP by 1976 (see Figure 1). 4. The sudden reversal in the terms of trade at the end of the seventies1 prompted Morocco to resort increasingly to external capital markets I/ The simultaneous decline in phosphate prices and rise in oil prices in 1975-78 was an unusual occurrence, since the prices of the two commodities have historically been highly positively correlated.  -2- Figure 1 Central Government Expenditures, 1973-90 In % of GDP 20% 1n 10% 8% 0% 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 | - Non-Interest&wage Interest -3 Wages Capital :~~~~~~~n' al ^baro@lo~o.1Wh In % of Total 80% 25% 0% 73 74 76 76 77 78 79 80 81 82 83 84 86 86 87 88 89 90 Non-Interest&wage = Interest Wages =1 Capital : in8aIbgfta'.ag-xah,  and larger government deficits to maintain high public investment. The rise in international interest rates, compounded by the declining productivity of public investment and the severe and prolonged drought of the early eighties had pushed the economy to the brink of a financial crisis. The CG deficit rose from an average of 4.3% of GDP in the first half of the seventies to 13% in the second half. The current account, which had been essentially balanced during the first part of the decade, went into double digit deficits on average as a percent of GDP during the second part. As a result Morocco's total external debt rose from US$1.8 billion in 1975 to US$13.9 billion by 1983, which represented nearly 120% of GDP and 355% of annual foreign exchange earnings. This situation clearly could have not been sustained. The First Phase of the Reform Proqram:_ 1983-86 5. The response of the authorities, though determined, took place during a difficult economic climate. During 1983-86, the macroeconomic programs concluded with the IMF emphasized that contractionary fiscal and monetary measures were needed, rather than the past restrictive trade policies, if the acute foreign exchange shortages were to be alleviated and sustainable growth ensured. On the supply side, etructural policy measures were initiated with the support of the World Bank to try to reverse the decline in productivity that had resulted from excesEive expansion of public investment during the late seventies2 coupled with t!ne absence of an adequate incentive framework in the economy . 6. On the f iral side, the initial impact of trade reforms was to reduce import revenues. At the same time, low phosphate prices were also limiting OCP contributions to the budget, while the aeneral slowdown of economic activity was depressing.dividand f,rom other Public Enterprises (PEs). The only sector which 2/ The incremental capital-output ratio for the whole economy rose from 3.9 in 1975 to 7.4 by 1983. 3/ The events leading up to the balance-of-payments crisis of 1983 and the initial recovery are extensively documented in a number of World Bank reports. See, among others: "Morocco: Medium-Term Adjustment Policies and Prospects," World Bank Report 5785-MOR, August 1985. "Morocco: Issues for a Medium-Term Structural Adjustment Program," World Bank Report 6608-MOR, January 1987. "Morocco: The Impact of Liberalization on Trade and Industrial Adjustment," World Bank Report 6714-MOR, March 1988.  -4- Figure 2 Central Government Revenues, 1973-90 In % of GDP 10% -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 10%- 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 , - Direct Taxes ; Trade Taxes [ Oil Levy Phosphates 1 Other Revenues Expenditures Figure 3 Central Government Deficit, 1973-90 Evolution of Various Measures In % of GDP -2% -10%- 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 Current + Accrual * Primary 9 Cash m$ albe rtO 'd*f 1011i  - 5 - was growing rapidly, agriculture, was largely exempted from taxation4. The situation was further exacerbated in the early stages of the fiscal reform initiated in 1986 by the short-term negative impact of the switch to a value- added tax system5. Overall revenues declined from a peak of almost 23% of GDP in 1981 to less than 19% in 1986, the lowest level since 1973 (Figure 2). As for expenditures, interest payments on government debt, the legacy of the large deficite accumulated in the late seventies and early eighties, were rising rapidly. In this situation, the main short-term stabilization strategy was to slash expenditures. The cuts had to be particularly deep in order to reduce fiscal imbalances, given falling revenues and rising interest payments (see Figures 2 and 3). Capital expenditures, which had already declined to 10% of GDP at the end of the seventies, were cut even further, falling steadily to below 4% of GDP by 1986. The CG wage bill declined from over 11% of GDP in 1982 to 9% in 1986, while other non-interest expenditures fell from 8% to 5% during the same period. 7. The activa management of the real exchange rate was a major instrument used to reduce the pressure on the balance of payments generated by trade liberalization measures in the early years of the adjustment period. By reducing quantitative restriction on imports as well as tariff barriers to external trade, Moroccan policy makers succeeded in attenuating the bias against exports. Despite considerable concern about the potential disruption to the domestic economy, the trade liberalization strategy proved to be effective in promoting a smooth reorientation of resources towards export-oriented activities and in boosting tourism receipts and workers' remittances. Through nominal devaluations and restrictive monetary policies, the real effective exchange rate declined by 23% between 1982 and 19866. Spurred by this gain in competitiveness, exports earnings as a share of GDP rose from 20% in 1981-82 to almost 26% in 1985-867. Workers' rsmittances grew by over 13% a year in dollar terms during the same period. 8. Despite this re-orientation of industrial strategy supported by the reduction of domestic price controls and of the role of trade monopolies, the current account deficit did not narrow as rapidly as would have been required by 4/ Between 1982 and 1986 agricultural GDP grew at an average annual rate of almost 11%, compared to 2.3% for industry and 4.4% for services. Total GDP grew at a rate of 4.5% per annum. Over the previous five-year period, GDP had expanded at an annual rate of 5%, but agriculture had grown at only 1.9% a year. 5/ The VAT system was accompanied by generous tax credits on inputs purchased prior to the introduction of the tax. Combined with the structure of the VAT rates adopted, the new system resulted in a drop in consumption taxes alone of 1.2% of GDP. 6/ Trade-weighted (six major trading partners). 2/ Including tourism receipts.  -6- the evolution of the capital account. Even after debt relief, the current account deficit averaged almost 7% of GDP between 1983 and 1986, leading to rapid depletion of foreign exchange reserves. International reserves were still below one month of import coverage at the beginning of 1986. While expenditure- switching policies had succeeded in reorienting output towards export-oriented activities, domestic absorption - and thus imports - remained high, fuelled by budget deficits which, though declining, still remained around 10% of GDP on average during 1983-868. Maintaininr the Momentum of Reforms: 1986-90 9. The year 1986 reprenents a turning point in Morocco's adjustment experience. Fiscal reform, initiated with the introduction of the VAT in 1986 was extended with the creation of a corporate profits tax (IS) in 1987 and the introduction of a global income tax (IGR) in 1989 to replace the old schedular system. A petroleum levy was introduced in 1986 to capture the windfall gains deriving from falling international oil prices9, and fiscal exonerations under the various investment codes were considerably reduced in 1988. Prompted by fiscal considerations, the Government also replaced the Special Import Tax (SIT) and the relatively distortionary stamp duty by a 12.5% uniform import tax at the beginning of 1988. The overall impact of these measures was a rise in the average trade tax rate from around 34% to 36%, still well below the 58% rate prevailing at the onset of the adjustment program. The measures were also accompanied by a significant compression in the dispersion of effective rates of protection. 10. The fiscal performance improved as a result of these reforms, leading to a marked recovery of government revenues, rising from 18.8% of GDP in 1986 to 24.5% in 199010. Expenditures also started to rise again after 1986. Capital spending recovered to about 7% of GDP, remaining well below the level of the 8/ Before debt relief, commitment basis. After debt relief, the deficit averaged over 8% per year during the same period. Unless otherwise stated, figures are expressed on a before-debt-relief basis. 9/ The petroleum levy refers to a complex mechanism of taxation whereby the excess profits of the two domestic refineries are transferred to the Treasury. The "excess" profits are defined as the net income in excess of what corresponds to a "normal" rate of return on assets agreed upon by the refineries and the Government. When domestic prices of refined products were not reduced after the fall of international crude prices, the refineries' excess profits grew rapidly in the latter part of the eighties, and the introduction of the levy enabled the authorities to capture the windfall gains. 10/ Even excluding the exceptional revenue measures taken in 1990 (acceleration of corporate tax payments and fiscal amnesty), revenues would still have risen by 4.2% of GDP from i986 to 1990.  early eightias. Government wages, after a period of successful containment below 10% of GDP, crept above that ceiling following significant rises in civil service pay and recruitment during 1987-90. The CG wage bill today accounts for over 3/4 of non-interest current expenditure, compared to 2/3 in 1987, and it is the fastest growing item in the budget. The rise in interest payments slowed as a result of lower deficits, stabilizing at around 6% of GDP. Other current expenditures, however, continued their downward slide after 1986, bringing them below 4% by 1990. While this reflected a decline in consumer subsidies, it was indicative of a continued compression of government spending on maintenance, social services as well as materials and supplies for the current budgets of many ministries. 11. The combination of rising revenues and expenditures resulted in a slowdown in the deficit reduction from 1986. However, some important changes had occurred in the structure of the deficit (see Figure 3). First the current balance (government savings) turned positive again after 1987, for the first time 4n the decade. Second, the primary balance reached the same level as the current balance in the second part of the eighties, reflecting that interest payments had become as high as total capital expenditure11. Finally, the deficit on an accrual (or commitment) basis started to fall below that on a cash basis12, indicating that CG arrears accumulated during 1980-85 were being reduced. 12. The pursuit of structural adjustment measures after 1986 accompanied the slow but relentless compression of absorption undertaken at the fiscal level. Elimination of trade monopolies, further reductions in tariff and non-tariff trade barriers, rationalization of the PE sector, and liberalization of the financial sector, all led to an economic incentive framework which was more responsive to market signals than in the past and which guaranteed a more efficient allocation of domestic resources. The improvement in key macroeconomic and creditworthiness indicators is a clear indicatioh of the results of the reform program undertaken so far. Beside the improvements on the fiscal side, the current account deficit also declined sharply, averaging less than 0.4% of GDP during 1987_9013. Inflation was brought down from double digit levels in the first half of the eighties to less than 3% on average during 1987-89, though it rose to 7% in the following two years. External debt declined from 106% of I1/ The decline of capital spending in response to rising interest payments on Government debt is a pattern found also among industrialized countries with deteriorating fiscal positions. See V. Tanzi and M.S. Lutz "Interest Rates and Government Debt", IMF Working Paper (WP/91/6). 12/ Alternatively, the overall balance on an accrual basis started to exceed that on a cash basis (see Figure 3). 13/ After debt relief, before grants. Before debt relief, the current account deficit has averaged less than 2% of GDP per year during the same period.  GDP in 1986 to 92% in 1990, while debt service declined from 37% of exports earnings to 23% during the same period14. The Road Ahead 13. Morocco has entered the nineties after almost a decade of pervasive structural, economic and financial changes. It has weathered the consequences of the severe demands of drastic stabilization measures and of political turmoil both at home and in the neighboring nations without the social and economic upheaval experienced by other countries. The process has been difficult, and it could be particularly arduous during its last major phase in the near term. The problems to be faced in the coming years concern not only the initial reforms that need to be completed--in trade liberalization, the financial area, the PE sector, basic education, and the fiscal and regulatory environment--but also the reversal of the negative consequences that the adjustment and stabilization programs have had on the quality and availability of physical and social infrastructure in the face of a rapidly expanding population and on the welfare condition of the most disadvantaged. The analysis of the public sector in Morocco is made against this background. B. A Brief Overview of the Public Sector The Central Government Sector 14. The operations of the CG are described in the General Budget and in many extra-budgetary accounts ("Annex Budgets" and "Special Accounts") that have been established to isolate epecific activities without creating a separate agency. There are four Annex Budgets: the Official Printing Office, the Radio and TV Broadcasting System, the Ports, and the Land Conservation Office. Each Budget receives revenue from fees charged to end-users, the accounts being balanced by subsidies from the General Budget. There are about 150 Special Accounts, classified under 8 categories.15 The annual Finance Bill may create new accounts or discontinue existing ones. The Special Accounts are financed through earmarked taxes and transfers from the General Budget. 15. Some transfers and subsidies go through the General Budget to the Local Governments (LG), PEe and other public entities. In the current operations of the General Budget, the most important transfers are: (i) current subsidies 14/ After debt relief. 15/ These categories are Aff ?C -ion sp6ciale, Op6rations bancaires et commerciales, Adhesion aux rganismes internationaux, Op6rations mon6taires, Investissements, Pr6ts, Avances et D6penses sur dotations.  ~~~~~~~~-9 Tabte 1.1: THE CONSOLIDATED CENTRAL GOVERNMENT BUDGET PiLj ions of OH Lnprcnt of Total InDrcent of GDP ..198,2 1989 1990 1982 _aq9 1990 1982 1989 1990 TOTAL REVENUtS 20,480 43,825 50,853 100,0% 100.0% 100.0% 22.0% 22.9% 24.5% Direct Taxes 4,120 10,375 11,811 20.1% 23.7% 23.2% 4.4% 5.4% 5.7% Customs Duties 4,943 8,496 9,993 24.1% 19.4% 19.7% 5.3% 4.4% 4.8% Indirect Taxes 7,376 14,424 16,450 36.0% 32.9X 32.3% 7.9% 7.5% 7.9% Registration & Staw Duty 1,702 2,018 2,478 8.3% 4.6% 4.9% 1.3% 1.1% 1.2% Property Income 55 103 154 0.3% 0.2% C.i% 0.1% 0.1% 0.1% Dividends (excl. OCP) 1,015 1,346 1,574 5.0% 3.1% 3.1% 1.1% 0.7% 0.8% Other Revenues 729 1,918 2,064 3.6% 4.4% 4.1% 0.8% 1.0% 10% Petroleun Levy *-. 5,145 3,640 -. 11.7% 7.2% -- 2.7% 1.8% Phosphate Company (OCP) 540 0 600 2.6% 0.0% 1.2% 0.6% 0.0% 0.3% Fiscal Amnesty -- - 2,089 4.1% -- 1.0% TOTAL EXPENDITURES 32,,92 55,194 57,835 100.0% 100.0% 100.0% 34.9% 28.8% 27.8% Current Expenditures 21,Z79 40,872 42,714 65.7% 74.1% 73.9% 22.9% 21.3% 20.5% Goods and services 15,931 27,352 28,722 49.2% 49.6% 49.7% 17.1% 14.3% 13.8% Wages and Salaries 10,420 19,638 21,600 32.2% 35.6% 37.3% 11.2% 10.3% 10.4% Materials and supplies 5511 7,714 7,122 17.0% 14.0% 12.3% 5.9% 4.0% 3.4% Current Subsidies to PE 590 845 1,042 1.8% 1.5% 1.8% 0.6% 0.4% 0.5% Subsidy to CMR 1,027 247 1.9% 0.4% 0.5% 0.1% Other 4,921 5,842 5,833 15.2% 10.6% 10.1% 5.3% 3.0% 2.8% Interest payments 3,348 11,824 12,971 10.3% 21.4% 22.4% 3.6% 6.2% 6.2% Domestic debt 7'64 4,454 5,155 2.4% 8.1% 8.9% 0.8% 2.3% 2.5% Foreign debt 2,584 7,370 7.816 8.0% 13.4% 13.5% 2.8% 3.8% 3.8% Consumer subsidies 2,000 1,696 1,021 6.2% 3.1% 1.8% 2.2% 0.9% 0.5% Current Balance *799 2,953 8,139 -2.5% 5.4% 14.1% -0.9% 1.5% 3.9% Capital Expenditures 11,113 14,322 15,121 34.3% 25.9% 26.1% 12.0% 7.5% 7.3% General Budget 12,048 11,781 21.8% 20.4% 6.3% 5.7% Transfers 3,860 3,578 7.0% 6.2% 2.0% 1.7% Financial 1181 1,053 972 0.6% 1.9% 1.7% 0.2% 0.5% 0.5% PEs (inc. ORMVAs) 2,336 1,933 1,821 7.2% 3.5% 3.1% 2.5% 1.0% 0.9% SpeciaL Accounts 874 785 1.6% 1.4% 0.5% 0.4% Other Capital Expenditures 8,188 8,203 14.8% 14.2% 4.3% 3.9% Adjustments 2,274 3,340 4.1% 5.8% 1.2% 1.6% VAT Transfer to LG -- 3,168 3,397 -- 5.7% 5.9% -- 1.7% 1.6% Mititary debt service -1,600 -1,200 -2.9% -2.1% -0.8% -0.6% Other Special Acc. (Net) 516 694 0.9% 1.2% 0.3% 0.3% Annex Budgets (Net) 342 239 0.6% 0.4% 0.2% 0.1% Other Adjustments -152 210 -0.3% 0.4% -0.1% 0.1% OVERALL BALANCE (Accrual) -11,912 -11,369 -6,982 -12.8% -5.9% -3.4% Change in arrears 2,061 1,982 -2,534 2.2% 1.0% -1.2% OVERALL BALANCE (Cash) -9,851 -9,387 -9,516 -10.6% -4.9% -4.6% TOTAL FINANCING 9,047 9,387 9,516 100.0% 100.0% 100.0% 9.7% 4.9% 4.6% Domestic Financing 2,S76 6,038 -22 28.5% 64.32 -0.2% 2.8% 3.2% -0.0% Banks 2,197 4,035 -3,284 24.3% 43.0% -34.5% 2.4% 2.1% -1.6% Non-Banks 379 2,003 2,286 4.2% 21.3% 24.0% 0.4% 1.0% 1.1% PE Debt Relief -- -- 976 -- -- 10.3% -0.5% Foreign Financing 6,471 3,349 9,538 71.5% 35.7% 100.2% 7.0% 1.7% 4.6% Net Borrowing 6,245 -3,973 -6,672 69.0% -42.3% -70.1% 6.7% -2.1% -3.2% Official Grants 226 0 6,265 2.5% 0.0% 65.8% 0.2% 0.0% 3.0% Debt Relief -- 7,322 9,945 -- 78.0% 104.5% -- 3.8% 4.8% Hemo Item: GOP 92,898 191,576 207,876 t - I = not applicable. l blank I = not available. Source: Ministry of Fincnce. o:\cem\mission\now\bud.wkl(cg) 24-Novr9l-20:36  - 10 to PEs; (ii) subsidies to agencies in charge of managing food and other subsidies to the private sector (the Cai.zse de compensation, ONICL16); and (iii) the pension syBtem for government employees (CIR17). Included in the investment expenditure of the General Budget are: (i) capital tranDfero to, and increases in equity participation in, PEs; (ii) transfers to the Special Accounts;18 and (iii) some current transfers to the private sector and the financial system.19 Table 1.1 summarizes the operations of the CG for 1982, 1989 and 1990. 16. Budgetary procedures were examined in detail by an IMF technical assistance mission in 1986 and in the context of the first Bank SAL and Public Administration Loans approved in 1988 and 1989, respectively20. At that time, several recommendations were discussed with the authorities and many have been implemented since then. Specifically, (') a new budget nomenclature was elaborated and implemented; (ii) the practice of carrying over budget appropriations from one year to another was partially discontinued: (iii) investment appropriations were brought into line with the resources effectively available to the budget and arrears were reduced; and (iv) the selection and monitoring capabilities of CG investment were improved while a program of computerization of treasury operations was initiated. 17. A follow-up mission by the IMF in the context of technical assistance on budgetary procedures found that several deficiencies remained to be addressed to ensure better monitoring and control of expenditures21. The greatest weakness of the present system is that the current nomenclature does not cover expenditures made through the Annex Budgets and Special Accounts. This implies that the consolidation of the CG activities and their monitoring requires auxiliary accounting operations. Also, the economic nature of expenditures is not often identified, making it extremely difficult to calculate the cost of some investment programs. Finally, wages and salaries are budgeted at the ministry l/ Office nat_onal interprofessionnel des c6reales et 16gumineuses (National Cereal Marketing Board). 17/ Caisse marocaine de retraite (Civile Service Pension Fund). I8/ Including Special Account 35-53 through which the transfer of 30% of the VAT collected by the Central Government is channeled to the Local Governments' budget (DH 3.6 billion in 1990). 19/ For example, interest rebates, transfers to the foreign exchange risk coverage fund for the Specialized Financial Institutions (SF15), etc. 20/ See "Royaume du Maroc: Proposition pour une reforme des syst&mes budg6taire et comptable", IMF (July 1987); "Report and Recommendation on a Structural Adjustment Loan", World Bank Report P-4867-MOR, December 1988; and "Memorandum and Recommendation on a Public Adminintration Support Project", World Bank Report P-4913-MOR, April 1989. 21/ An IMF mission from the Fiscal Affairs Department visited Morocco in November 1990. A detailed report is presently being finalized.  - 11 -. level, since the present nomenclature does not permit these expenditures to be allocated to the lower levels of a ministry'l organization. Xel caSl&Gyovenento 18. Local governments in Morocco are adminintrative entities with their own staff and budgeta providing services to their constituencies. The Kingdom is divided into 42 _rovinces and 18 prefecturns22 representing the first tier of decentralization. These 60 entities have locally elected deliberating assemblies which in turn elect their president. Executive power, however, belongs to the provincial or prefectoral governor, appointed by Royal decree. The second tier of LG is that of the communes, where the executive power belongs to the locally elected president of the council, thus representing the only truly decentralized form of government in the Kingdom. The 859 com unes are of three different types: (i) 59 municipalities, whose jurisdiction applies to important urban areas; (ii) 40 autonomous centers, whose jurisdiction applies to less important urban areas; and (iii) 760 rural communes. 19. In 1976, Morocco embarked upon a decentralization process aimed at providing the LG with increased responsibility in economic and social develop- ment. The traditional areas of responsibility included solid and liquid waste disposal, streets and certain tertiary roads, slaughter houses, wholesale markets, industrial zones, parks and green spaces. This policy of decentrali- zation has been reinforced in the last few years, with the implementation since 1987 of the decision to allocate 30% of VAT revenues to the LG and to phase out all other transfers. A major fiscal reform at the local level has also enabled the LG to increase domestic resources mobilized through taxation. Starting in 1990, additional investment responsibilities have been progressively transferred from the General Budget to the LG with the objectives of further promoting the decentralization process and reducing the fiscal imbalances at the CG level. 20. Limited Ouantitative Information. The LG have continued to be under the tutelage of the Ministry of the Interior. In spite of the decentralization efforts which began in 1976, certain types of quantitative information concerning the activities of the LG have been scarce until recently, limiting the scope for a detailed study of the evolution of their fiscal stance. Therefore, it remains difficult to establish, in any rigorous sense, the repercussions of the country's 22/ The term "prefecture" refers to the districts of the greater Rabat and Casablanca areas. The local sector is sometimes also defined to include the R6gies Autonomes. These are local autonomous public enterprises (distinct from the 40 autonomous centers which are part of the communes - see below) to which the LG delegate the provision of some services. Currently there are 25 r6gies, of which 10 are in charge of water and electricity distribution, 6 of water distribution, 8 of urban transport, and 1 of refrigeration services (in Casablanca). Due to lack of comprehensive data on their activities, the r6gies are not included in the LG sector as defined here.  - 12 - financial crisis of t..e mid-eighties on the LG, or their reactions and adjustment in the following years23. 21. In 1989, an important conference held in Morocco on the finances of the LG sparked off some preliminary analysis of their fiscal position24. Most of the quantitative information available, however, was confined to budgetary data (as opposed to realized revenues and expenditures), which made interpretation very difficult. Recently, this dearth of statistical information has been considerably attenuated due to a major joint effort by the Ministries of Finance and Interior in consolidating the administrative accounts of the 919 LG (859 communes plus 60 provinces and prefectures) for 1988 and 1989. For the first time, this exercise has given a consolidated picture of the fiscal structure of the LG sector. Table I.2 describes the consolidated budget for the sector for 1988 and 1989. 22. The Local Government Budgets. The structure of the administrative accounts of the LG differs in several important respects from the standard budgetary format. For example, the LG classifies the entire debt service as a current expenditure without distinguishing interest payments from amortizations which should normally be treated as a negative financing item. Also, the surplus resulting from unused budgetary appropriations which accumulate (and which is thus in the nature of a stock) iB classified as a "reso'zrce" for capital expenditures in a given year (which is in the nature of a flow). The administrative accounts, therefore, need to be rearranged and complemented by auxiliary information before they can be presented in a form comparable to the budgetary accounts of the CG25. 23. The Current Budget. The resources of the current budget derive mainly from fiscal revenues as well as fee and property Income; the remaining portion is made up by transfers from the CG. For 1988-90, total current resources were about DH 3.2 billion a year, or 1.6% of GDP, of which about one- 23/ Considerable data on the LG have been collected and widely disseminated, especially through periodic seminars (the "Colloques"), since the mid- eighties. However, these data concerned mostly information regarding budget plans as opposed to realized expenditures. In particular, the consolidation of the administrative accounts of the L.G., describing actual expenditures and receipts, only began to be undertaken two years ago and it is only available from 1988 onward. However, the Ministry of Interior and the Ministry of Finance have recently increased their efforts to generate accurate, timely and i.idely available quantitative information on the activities of the LG. 24/ See "Decentralization in Morocco - Local Government Expenditures and Management", World Bank Report 8782-MOR, August 1990. 25/ Such redesign of the administrative accounts has been recently proposed in a draft law aiming at rendering the expenditure and revenue classification compatible with that of the CG and of the budgetary operations in the context of the national accounts.  13 - quarter was from CG transfers. Over half of current expenditures were accounted for by wages and salaries (DH 1.3 billion, or 0.6% of GDP), compared to one-third for the CG. Interest payments, on the other hand, acccunted for less than 5% of current expenditures, compared with 30% for the CG. The resulting annual current balance (after current transfers) was around DH 1 billion and greater than the volume of current transfers. 24. The Capital Budget. The volume of capital expenditures undertaken by the LG is very significant, both in absolute terms and as a share of its budget. In 1988, LG investment amounted to DH 2.2 billion, which rose to DH 2.9 billion in 1989. Partly as a result of almost DH 0.5 billion of expenditures transferred to the LG from the CG budget the following year, preliminary evidence indicates that the LG investment may have risen to DH 3.5 billion in 1990. Overall, the LG investment accounts for more than half of its total expenditures, compared to about one-quarter in the CG budget. In terms of GDP, the share of the LG capital expenditures in 1989 was 1.5%, compared to 4.6% for the CG. 25. Two important features of the LG finance are: (i) the importance of the CG transfers as a proportion of total resources; and (ii) the existence of much unutilized investment appropriations whose budgetary nature is obscure and which is carried over from year to year. These aspects are discussed in detail later in the report (para. 74-89). Public Enterprises 26. A comprehensive survey of the sector undertaken in 1987 indicated that the Government has shareholdings in about 650 enterprises (see Table 1.3)26. Of the 144 wholly-owned PEs, around 80 are public administrative establishments (EPA). About 44% of PEs have majority Government ownership; in 55% of PEB, the Government holds at least one-third of the equity; and Government ownership is less than 20% for one-third of PEs. For those firms with majority 26/ Evaluation et rationalization du portefeuille de l'Etat, Lavalin International with the collaboration of FIDECOM (Maroc), April 1988. The public enterprise sector may be defined in different ways depending on the number and type of enterprises included. For the purpose of this report, two definitions will be used. The first, broader definition essentially covers around 200 non-financial EPICs (Entreprises publiques a caract6re industriel et commercial) included in the DEPP Database (Ministry of Finance); among these are virtually all the wholly owned enterprises and the most important of those with Government ownership of at least 33%. The second definition covers the 11 large enterprises which are part of the Government's rationalization program (PERL); these are OCP (phosphates), ONE (power), ONCF (railways), ONPT (telecommunications), ONEP (water), RAM (airline), COMANAV (shipping line), ODEP (ports), ONDA (airports), ONAREP (petroleum) and BRPM (mining). The latter group is referred to in the text as "the major PEs". Unless otherwise specified, the PE sector is defined according to the broader definition. The large irrigation parastatals (the ORMVAs) are considered part of the Central Government.  - 14 - .TjaL_ _.2; THE CONSOLIDATED LOCAL GOVERMNENT EWJG