Country Brief

 

Context
 

In the wake of the Arab Spring, King Mohammed VI proposed a broad and comprehensive package of political reforms through constitutional amendments which garnered the over-whelming support of the population in the July 1st referendum.  The yes vote in favor of the proposed reforms was 98.5% with 73% participation in the referendum.  The heads of political parties, opinion leaders and civil society representatives reacted positively to the proposed reforms and there are high expectations amongst the population that these reforms will have to be implemented in a credible manner.  Legislative elections are planned for November 25 and the new Government formed thereafter will be responsible for implementing many of the reforms.

The new Constitution introduced important changes in Morocco's governance system both at central and regional level. Most notably it strengthens the following: (i) the role of parliament and the existence of a multi-party system (ensuring a fair representation of the opposition); (ii) the role of the Prime Minister who will now be appointed by the party winning the most seats in Parliament and will have the status of Government; (iii) the independence of the judiciary; and (iv) the functions of the regions, which will now have directly elected and empowered regional councils.  The new reforms need now to be translated more concretely into substantial revisions of the regulatory and administrative framework to reinforce accountability and to clarify roles of the Government, especially in the context of the proposed regionalization which encompasses the devolution of power to the 16 regions, strengthening the accountability of institutions, and establishing constitutional rights on access to information and to quality public services.  

Recent Economic Developments & Macro-Economic Outlook

The Moroccan economy continues to fare relatively well. Growth was estimated at 4.5 % in the first half of 2011, mostly driven by domestic demand, and is expected to keep its momentum for the rest of the year, with annual 2011 estimated at 4.5-5%. Inflation has been under check at less than 1% by end July (food inflation is higher at 1.4%).  However, the low inflation is mainly explained by the insulation of domestic prices from high world prices of food and fuels through the costly universal subsidy system. 

Unemployment, especially among the youth, remains a critical concern. Urban unemployment increased to 13.5% in the second quarter 2011 from 12.7% a year earlier.  In particular, youth joblessness in the urban areas deteriorated by almost 2.5 percentage points to reach 33.4% while that of the educated jobless increased by 1 percentage point to 18.2%.
 
High world prices of basic commodities are putting tremendous pressures on the subsidy system and hence on public finance.  The budget deficit is expected to increase to between 5.5% and 6% of GDP this year instead of the budgeted 3.6% of GDP.  The deficit may worsen further in case of higher world prices of fuels and food and the inability of the government to curtail other non-priority recurrent budgetary spending.  While Morocco’s indebtedness remains under control (the central government debt is projected to rise to around 52% of GDP in 2011 from 50.3% in 2010), the current universal subsidy system threatens the medium term fiscal sustainability. The budget deficit will need to converge to its medium term target of 3% of GDP to stabilize the debt-to-GDP ratio.

The slowing growth of Morocco’s main trading partners is exacerbating the weaknesses of the balance of payments.  The structural high trade deficit is expected to deteriorate further to 22% of GDP, from 19.5% in 2010.  Although tourism receipts and workers’ remittances are expected to evolve favorably over 2011 (up 9.3% and 7.4% by end June, respectively), the current account deficit is expected to worsen to around 6.7% of GDP (from 4.3% of GDP last year).  The external financing pressure has been exacerbated by a sharp decline in FDI (minus 16.2% by end June 2011). As a result, Morocco’s net international reserves have declined by US$786 million since the beginning of the year and stood at US$22.3 billion at the end of June 2011, the equivalent of 5.2 months of imports of goods and services.

The government has launched the preparation of the Budget Law 2012 while its implementation will be the responsibility of the next government. It has just issued the Note framing the preparation of the Budget Law 2012.  Rigor is the central theme set forth in the Note which emphasizes the necessary rationalization in public management, but insists on sustaining efforts of public investment.  Noteworthy is the objective to contain internal and external deficits at manageable levels with a clear decision to set a ceiling of 3 percent of GDP on food and fuel subsidies. There are four main priorities set out: (i) Institutional reforms and good governance. The proposed advanced regionalization as enshrined in the new constitution is seen as a strategic pillar for a model of economic and social development; (ii) Job creation by increasing the pace of investment in public and private sectors. In particular, new measures are proposed to improve the employability of young people and their integration into the labor markets. In addition, a new generation of PPP agreements respecting the economic specificities of the regions will emerge with the aim of widening employment opportunities in areas such as agribusiness, medical industry, services, automotive assembly, media, and filmmaking industry; (iii) Structural and sectoral reforms to improve the attractiveness of the national economy. To achieve this, the justice reform is one of the key reforms that have to be accelerated; and (iv) Enhance the efficiency of service delivery, especially in education, health, and social housing, in addition to promoting income-generating activities. At the same time, two Funds will be activated: The social-upgrading Fund and the Inter-regional Solidarity Fund, that would seek to enhance implementation efficiency of the second phase of INDH, which will double the number of targeted communities by extending its projects to 701 rural communities and 530 urban neighborhoods, while upgrading economic and social infrastructure of 22 provinces suffering from isolation.

Medium term prospects are globally good, provided the government moves forward with needed reforms to improve economic productivity and consolidate public finance. The Government’s objectives for 2012 include a growth rate of 5%, budget and current account deficits of less than 5 percent of GDP, with the ceiling on subsidies set at 3% of GDP.  Sound monetary and budget policies will help maintain inflation at relatively low levels around 2 percent, a little more than that expected for 2011 (1.6 percent). Meanwhile, the government has to better control recurrent expenditures to ensure macroeconomic stability and regain budget balance as required now by the new Constitution. 

Youth and educated joblessness will remain a serious issue, despite the recent active employment policies benefiting small and very small businesses, in addition to policy measures to help engage the private sector and large SOEs in employment promotion.  Current account deficits are expected to slowly improve over the medium term, based on the assumption that the government will scale up its reforms to enhance economic productivity and diversification, while progressively shifting to a more flexible exchange regime. The higher current account deficits would put pressure on external financing, but will remain manageable, as it is expected that FDIs would continue to flow, attracted by efforts to improve the business environment. In this regard, the confirmation of investment grade from major agencies will also encourage FDI and help the government access financing on favorable conditions.

Strategy

The World Bank Group has a broad engagement in Morocco that has expanded significantly since the Government came to power in October 2007.  Both the IBRD and the IFC programs have witnessed important expansion with new IBRD lending reaching record levels in FY10 ($730 million) and the IFC program accounting in FY11 for a committed portfolio of $172 million in 10 companies (up from just $3.2 million in FY06).  The Country Partnership Strategy was discussed at Board in January 2010 and laid out three pillars of engagement: (i) growth, employment and competitiveness; (ii) services to citizens; and (iii) development sustainability in a changing climate.  The CPS was designed to respond to the dynamics of reforms in sectors as they were being pursued by Government and has remained flexible to respond to changing circumstances.
  
With the advent of the Arab Spring, Morocco is undertaking a more ambitious reform path and is looking to the Bank and other donors to deepen the partnership to accompany these reforms.  In the context of the G8 Deauville Partnership, Morocco was invited as a potential partner country and has participated in G8 meetings since then.  The Bank has subsequently confirmed that its program in Morocco responds to Deauville’s four building blocks: we had already a strong engagement in many areas of reform captured by these blocks and the Bank’s program is now being enhanced further to respond to the greater momentum for reform offered by the Deauville process. 
 
The Bank has a set of mutually-reinforcing DPLs under preparation in FY12, all of which pursue governance and transparency reforms¸ greater economic inclusion especially as regards job creation and opening of greater opportunities to the population.  

• The Job and Competitiveness DPL includes three pillars: (i) business environment, (ii) trade policy, and (iii) economic governance, with policy actions targeting reforms to simplify the regulatory environment for companies, harmonize and reduce import tariffs, adopt trade facilitation measures, and increase the role of three key organs of the Moroccan institutional framework for competitiveness. 
  
• The Governance and Accountability DPL is supporting reform efforts aimed at key accountability and transparency reforms, e.g. a more open and performance based budget, greater access to information and consultation as well as a better access to quality basic public services. This program would also leverage EU and AfDB's support for these essential reforms. 
  
• The Financial Sector DPL focuses on a new wave of reforms designed to improve further access to finance for individuals and SMEs and includes new measures to improve financial stability.
  
• The Employment and Skills DPL that specifically targets labor market reforms, job creation programs, improvements to vocational and technical training .
  

The rest of the Bank’s program in FY12 is aligned with the Deauville building blocks and includes (i) a Judicial Performance Enhancement project for specific governance and service delivery reforms in the justice sector, including greater citizen participation through beneficiary and user surveys; (ii) the second phase of the INDH which is Morocco’s flagship economic and social inclusion program.  The focus of Bank support is on strengthening the design and implementation of the INDH to target better the inclusion of vulnerable groups, particularly women and youth unemployed; and (iii) the Ouarzazate Solar Energy project that will finance the development of the 500 MW Concentrated Solar Power plant through a PPP to increase power generation from concentrated solar power and mitigate GHG emissions: negotiations were concluded last week.

The current IBRD portfolio in Morocco encompasses 12 IBRD projects, 4 of which are DPLs, for a total commitment amount of $1,445 million, of which $581 million is undisbursed (two DPLs for $343.5 million were disbursed in early September).  The Morocco program also has four OBA pilots for the delivery of water and sanitation services in poor urban areas of Casablanca, Tangiers and Meknes that are showing good progress.  There is a broad program of Analytical and Advisory Activities and several trust funds are also mobilized, including from GEF, IDF and JSDF. 

IFC’s strategy for Morocco focuses on investments in the financial and infrastructure sectors and on select value-added investments in manufacturing and social sectors while retaining flexibility to adapt to opportunities and market changes. IFC will also continue to deliver its on-going advisory program, in support of business environment and PPPs.   IFC is committed to scale up its activities with specific focus on access to finance for MSMEs, renewable energy, social housing, education, IT and other growth sectors. In addition, IFC will continue its support to regional integration through investments in regional funds for SMEs and cross border investments from Morocco to Sub Saharan Africa. IFC has a solid pipeline for FY12 of $250-300 million (including mobilization) in 4 or 5 projects in multiple sectors including microfinance, insurance sector, commercial banks and private equity for SMEs.  

Partners
 

Financing for donor programs in Morocco have increased over the past few years.  This trend is attributed to the development efforts of the Moroccan leadership, support for national programs and a demonstrated track record of achievement.  Approximately 80% of donor financing in the last three years was disbursed utilizing national systems, either through budgetary support or other instruments.  Budgetary support is becoming an increasingly important instrument for bilateral donors such as the European Union (exceeding 90%), African Development Bank and the World Bank.  Donor collaboration has been strongest in areas with a longer donor engagement, such as public administration, education, transport and human development.  

The Government and its donor partners in Morocco participated in the 2011 OECD Survey on Monitoring the Paris Declaration on Aid Effectiveness.  A total of 14 donors participated in the survey and declared that approximately $1.5bn of aid had been delivered in 2010 to Morocco.  A few donors did not participate - China, Islamic Development Bank and the Arab Funds.  The Government has evaluated the aid from these donors to be a further $500m in 2010.  Therefore, a total of about $2bn of aid was received by Morocco in 2010.  This amount does not include financing to the private sector from the IFC or European Investment Bank.
     

All dollar figures are in US dollar equivalents. Updated November 2011

 

For more information, please contact:
In Washington: Tina Taheri, Ttaheri@worldbank.org