Morocco - Recent performance and development

RESTRI CTED Report No. MA- 5 This report was prepared for use within the Bank and its affiliated orgonizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION RECENT PERFORMANCE AND DEVELOPMENT IN MOROCCO October 15, 1968 Middle East and North Africa Department  CURRENCY EQUIVALENTS 1 Dirham (DH) $ 0.1974 1 Million DH $197,400 $1.00 = DH 5.o6 $1 Million = DH 5,060,000  This report was prepared by a Mission which visited Morocco from February 12 through March 15. The Mission consisted of Richard Westebbe, Chief; Giovanni Torelli, Chief Economist; James Hendry, Agri- cultural Economist; Claude Brochu, Agriculturalist; Walter Missorten, Fiscal expert. The Education Division of the Bank assisted the Mission in preparing the parts cf the report dealing with education.   TABLE OF CONTENTS Page~ No. BASIC DATA. SUMMARY AND CONCLUSIONS ................................. i ii I. GENERAL ECONOMIC PERFORMANCE ...........t....... Economic Growth .................1 Population and Labor Force ..... ............. 2 Savings ............................... . 3 Investments ............................... . 5 Prices and the Balance of Payments ................. 5 Fiscal and Monetary Developments ................ 7 II. MAJOR SECTORIAL DEVELOPMENTS ....................... 12 Agriculture ...................... 12 Industry and Mining ................ ................ 16 Tourism . . 18 Education ..19..... 1 III. THE DEVELOPMENT PLAN AND PROSPECTS .... ............. 20 The Five-Year Plan (1968-72) .......... .. ........... 20 Agriculture .................... .................... 22 Manufacturing '.....''''... 27 Mining ............................................. 29 Tourism ....................... ..................... 30 Education ....................... .................... 30 Population and Labor Force ........... .. ............ 31 Fiscal Outlook and Measures .......... .. ............ 33 Financing the Government Investment Program ... ..... 35 Balance of Payments Prospects ........ .. ........... 36 External Borrowing Needs ........ ................... 38 External Debt Service and Creditworthiness .... ..... 39   TABLES 1. External Medium and Long-TErm Public Debt Outstanding Including Undisbursed as of December 31, 1967 2. Estimated Contractual Service Payments due in Future on External Medium and Long-Ternm Public Debt Outstanding Including Undisbur- sed as of December 31, 1967 3. Population 4. Gross Domestic Product by Principal Sector at 1960 Market Prices 1963-1967 and Forecast for 1968 5. Gross Product at Market Prices 1964-1967 6. Crop Production, 1959/60 - 1966/67 7. Cultivated Area - Cereals and Pulses 1959/60 - 1966/67 8. Cereal Yields - Modern Sector, Traditional Sector, and National Average 9. Planned Expenditure in Agriculture 10. Estimates of Area Inmroved During the Plan Period 11. Estimates of Growth in Agricultural Production 1968-1972 12. Land Tenure - Estimated Cultivated Area, by Category of Holding 13. Index of Industrial Production by Sector and Branch 1963-1966 14. Production of Minerals - 1963-1967 15. Central Government Current Revenue (1964-1967) 16. Central Government Current Expenditure (1965-1967) 17. Budgetary Investment Expenditure, 1965-1967 18. Monetary Survey 19. Merchandise Exports, Valuation at Customs, 1963-1967 20. Merchandise Imports, Valuation at Customs, 1963-1967 21. Balance of Payments 22. Cost of Living Index - Casablanca   BASIC DATA Area 172,000 sq. miles Population (1967) 14 million Rate of growth (1960-67) 3.2% per annum Political Status Independent Kingdom since 1956 Gross Domestic Product at market prices (1967) DH 13.6 million Rate of growth, real terms 1963-67 1.9% 1964--67 2.2% Per capita (1967) DH 970 or $195 Structure of GDP 1967 1963 Agriculture 28 29 Energy 3 2 Mining 5 5 Industry and handicraft 13 12 Construction, public works 5 4 Commerce 19 21 Transport and other services 27 27 Total 100 100 Financing of Gross Capital Formation 1967 1965 Million DH % of GDP Million DH % of GDP Gross domestic savings 1,680 12 1,700 13 Deficit (+) or surplus (-) in goods and non-factor services + 190 2 - 260 - 2 Gross capital formation 1,870 14 1,440 11 Resource Gap as % of investment 10 (1967)  -2- Central Government Budget (Cash basis) (in millions of DH) 1965 1966 1967 Total current revenues 1,900 1,980 2,215 Total current expenditure 1,970 2,010 2,100 Surplus (+) or deficit (-) - 70 - 30 115 Government development expenditure and debt repayment - 6go - 595 - 940 Total deficit - 760 - 625 - 825 financed from: foreign sources 527 320 284 Central Bank 8 14 293 other domestic sources 225 291 248 Money and Credit Money supply (end of period, million DH) 1965 1966 1967-/ Total money supply 4,130 4,lo8 4,468 of vhich: Credit to the Government 1,543 1,541 1,868 Credit to the private sector 1,978 1,976 2,118 Prices (1965-67) Cost of living index : No change Balance of Payments Conversion $1 = 5.o6 DH Relationship to large customs areas . Preferential tariff and market- ing e.rrangements with France. Application pending for associa- tion with EEC. Million Dirhams 1265 1966 1967 Exports 2,207 2,170 2,146 Imports 2,000 2 250 2,437 Trade Balance 207 - 80 - 291 Tourism (net) 257 318 312 Other Services - 201 - 153 - 214 Interests, Dividends and Transfers - 142 - 147 - 28 Current Account Balance 121 2 - 221 Concentration of exports (% of total); Phosphates 25 25 26 Citrus i4 15 12  - 3 - External Public Debt (in U.S.$ end of 1967) Total debt outstanding including undisbursed 601 million Debt service in 1968 53 million Ratio of debt service to current foreign exchange earnings in 1967 9% (in millions of U.S.$) 1965 1966 1967 Gross Foreign Exchange Reserves 121 112 90 Equivalent at end of 1967 to slightly over 2 months commodity imports. IMP Position (end of 1967) Quota $79 million Drawings Outstanding $ 7 million   SUMMARY AND CONCLUSIONS 1. The growth of the Moroccan economy has been modest in recent years. The Gross Domestic Product increased by about 2 percent per annum in real terms between 1963 and 1967, that is by less than the annual rate of growth of the population (3.3 percent). In general, investment spending has been too low to initiate the desired structural transformation of the economy. The departure of the bulk of a large indigenuous European popu- lation since independence reduced modern sector demand for goods and serv- ices, caused investment to fall and led to the outflow of capital. A stabi- lization policy was introduced which limited Government spending and the growth of private credit; expan:3ion. More recently, in the last two years, the country has suffered from drought. 2. Economic growth is also held back by the shortage of qualified manpower in the exchange economy and the slow rate of change in agriculture. The majority of the population still practice traditional forms of agricul- ture under an archaic land tenure system. Finally, the high rate of growth of population presses hard on available resources and has placed more Govern- mental emphasis on welfare rather than productive objectives. A family plan- ning program has been started. 3. According to the available data, savings rose from 9.6 percent of GDP in 1962-64 to 12.2 percent in 1965-67, largely due to improvement in Government savings following the policy of fiscal restraint. Investment in recent years has averaged only between 11 and 12 percent of the GDP, but rose to more than 14 percent of the GDP in 1967, due to a major expansion of Government investment. This was not matched by the growth in Govf!rnment savings and availability of long-term loans from home and abroad. Accord- ingly, the Government borrowing from the Central Bank increased substantially. 4. Morocco has experienced a high degree of price stability in recent years as a result of restrictive financial policies and the declines in aggregate demand resulting from two crop failures. This was reflected in the modest current account balance of payments surplus in 1965 and a small deficit in 1966. In 1967 imports rose sharply due to increased grain re- quirements and higher imports of capital goods. As exports have slowly declined, the flight of capital and reduced capital inflow led to a fall in external reserves in 1967 to a level equivalent to some 2 months' imports. 5. Aside from weather, a few key factors would seem to largely explain the low rate of growth in agriculture output: a) Morocco has heavily em- phasized irrigation which has had until now, little impact on total output; b) the use of modern agricultural inputs has shown little tendency to increase in recent years. The critical role of incentives to adopt new inputs will require greater attention in the future; c) the system of land tenure inhi- bits growth; the uncertain status of modern sector land held by foreigners creates disincentives for investment, and the tenancy arrangements in impor- tant parts of the traditional sector discourages productivity. Land consol- idation, which has lagged, is critical to the introduction of more efficient farming methods and equipment in the traditional sector; d) finally, the implementation of projects and programs has been slow because of organisa- tional and personnel deficiencies. The Government has initiated a series of changes, but much remains to be done to place experienced and qualified  personnel in key positions, to structure organisations with clear lines of authority, and to improve a wide range of administrative arrangements. 6. Industrial output is largely concentrated in consumer goods and has been depressed by the decline in farm incomes. The shortage of managers and technicians caused by the departure of expatriates is gradually being made up, but industry has not yet fully adjusted to the loss of the market they provided. Phosphate mining, the largest enterprise in the country, suffered from declining demand, but new management has recently greatly improved its prospects. Inadequate facilities and some deficiencies in the organisation and promotion as well as unfavorable international events have brought down the growth of tourism. 7. Morocco's economic problem is not subject to solution in the short run. The labor force problem is simply too pressing and threatens to absorb resources for unproductive uses at the expense of future growth. Accord- ingly, consideration should be given to a greatly expanded program of emi- gration for a period of years in order to relieve the pressure while acquiring the benefits of large emigrant remittances and the training of manpower abroad. The Government now seems to favor in principle, an increase in emigration. 8. The new Five-Year Plan calls for an average annual level of Government investment expenditures 50 percent higher than was realised during the past three years, but the growth rate in output is expected to rise to an average of about 4 percent during 1968-72. Highest priority is given to agriculture, particularly irrigation; because of the long lag be- tween investment and output, additional agricultural production will not be very large during the Plan period. The scheduled increase in irrigation facilities projected for the Pl;Ln period seems optimistic, and would call for tremendous improvements over the implementation performance which Morocco has registered up to the presert time. 9. On the basis of potential, the greatest opportunities for increased production in the short run seem to lie with cereal and livestock, but the projected programs under the Plan are not likely to achieve major increases. To exploit some of this potential, however, may require an increase in cur- rent expenditures, rather than investment, to overcome undue restrictions on a range of important supporting activities. 10. Because of probable diffLculties in reaching Plan targets in irri- gation, and the relatively low return on some projects, it would be desir- able to concentrate on those projects which have a higher economic return. The employment and income distribution effects of the projects with a lower economi.c return could for example be achieved by expanded activities under the "Promotion Nationale" (work relief) programs. Finally, a concerted effort should be made to develop promising projects and programs for produc- tion in rainfed areas, to expand the range of profitable alternative invest- ments in the future. The Government is presently considering a so called "charte agricole" which is a series of measures and programs designed to reform the institutional structure of agriculture including land tenure and agricultural services.  - iii - 11. The Plan represents an important step forward in Moroccan attempts to promote development. The great stress placed on implementation and the important organisational and personnel reforms which have already been affected in order to ensure proper coordination and control are evidence of this. M4oreover, an economic budget will now be formulated every year, starting with 1969, which will also include the investment plan proposals for that year. 12. In order to finance the Plan, the Government has decidea to in- troduce comnpulsory purchases of bonds and to increase some taxes, but a greater tax effort to raise tax burden reven'te from 15.5 percent of GDP in 1967 to about 17.5 percent in 1972 seems bot'i desirable and feasible. In this and other ways, the Government's aggregate financing gap over the Plan period wouLd be reduced to between DH 2.5 and 3 billion instead of DH 3.5 billion projected by the Plan. 13. As a result of increased investment, imports are expected to rise faster than exports even though the prospects for phosphate and some agri- cultural exports are good. The need for foreign exchange will be larger than the deficit in goods and services of the balance of payments. This is because debt services will rise and capital outflow will probably continue, possibly at a reduced rate depending in part on confidence factors and the opportunit:Les which an expanding economy can offer. 14. Over the Plan period external capital will be required in larger amounts then the last several years (it could be in the order of DH 3.5 to 4 tillion). To keep the debt service burden within reasonable limits, a substant