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£T In millions of OH In vercent of Totat in Dercent of (MP 1988 1989 1990 1988 1989 1990 1988 1989 1990 TOTAL REVENIJES 2,657 2,991 3,825 100.0% 100.0% 100.0% 1.5% 1.6% 1.8% LG Revenues 1,957 2,085 2,672 T3.7% 69.7% 69.9% 1.1% 1.1% 1.3% Fiscal Revenues 1,194 1,272 1,630 44.9% 42.5% 42.6% 0.7% 0.7% 0.8% Services Rendered 411 438 561 15.5% 14.6% 14.7% 0.2% 0*2% 0.3% Property Income 117 125 160 4.4% 4.2% 4.2% 0.1% 0.1% 0.1% Other Revenues 235 250 321 8.8% 8.4% 8.4% 0.1% 0.1% 0.2% Current Transfers (GC) 700 906 1,153 26.3% 30.3% 30.1% 0.4% 0.5% 0.6% TOTAL EXPENDITURES 4,158 5,040 6,138 100.0% 100.0% 100.0% 2.3% 2.6% 3.0% Current Expenditures 1,992 2,162 2,586 47.9% 42.9% 42.1Y 1.1% 1.1% 1.2% Wages and Salaries 1,069 1,214 1,577 25.7% 24.1% 25.7% 0.6% 0.6% 0.8% Materials and SuppLies 755 745 768 18.2% 14.8% 12.5% 0.4% 0.4% 0.4% Interest 120 151 186 2.9% 3.0% 3.0% 0.1% 0.1% 0.1% Subsidies 31 33 40 0.7% 0.7% 0.7% 0.0% 0.0% 0.0% Other 18 19 15 0.4% 0.4% 0.2% 0.0% 0.0Y 0.0% Current Balance 665 829 1,239 0.4% 0.4% 0.6% Capital Expenditures 2,166 2,878 3,552 1.2% 1.5% 1.7% OVERALL BALANCE before Trans. -1,501 -2,049 -2,313 -0.8% -1.1% -1.1% CAPITAL TRANSFERS 1/ 2,171 3,065 2,296 1.2% 1.6% 1.1% OVERALL BALANCE after Trans. 670 1,016 -17 0.4% 0.5% -0.0% FINANCING -670 -1,016 17 -0.4% -0.5% 0.0% Net Borrowing 521 560 275 0.3% 0.3% 0.1% Drawings 604 738 490 0.3% 0.4% 0.2% FEC 280 405 490 other 2/ 324 333 0 Amortizations 83 178 215 0.0% 0.1% 0.1% Accumulation of Surplus [-I -1,191 -1,576 -258 -0.7% -0.8% -0.1% Memo Item: GDP 181,583 191,576 207,876 Total VAT Transfers 2,871 3,971 3,449 Notes: 1/: In 1989 it includes DH 958 million which was carried over from the previous year. 2/: It includes DH 320 million from CDG and DH 4 million from abroad in 1988; It incLudes DH 324 million from the Treasury and DH 9 milLion from abroad in 1989. (see para. 89 for details). Source: Ministry of the interior; Ministry of Finance; and World Bank estimates. M:\Alberto\ps\bud2.wk1(lg) 30 May 92 Government ownership, 69% of equity is held by the Government, 14% by Specialized Financial Institutions (SFIs), and 17% by the private sector. In addition, public ownership is exercised through a complex system of holding companies. There are 18 such holding companies, 9 of which have 25 or more subsidiaries. - 15 - The largest holding is the Caisse de d6p6ts et de gestion (CDG), followed by thL-e industrial development companies, each with over 40 subsidiaries. Because of widespread fragmented holdings, more than a quarter of the firms owned by the large groups are represented in more than one portfolio, with some firms being owned by as many as six PEs. 27. PEs were established during the French protectorate period to control natural resources and other key sectors of the economy. The largest Moroccan PE, ocP (Office ch6rifien des phosphates), was founded in 1920 to mine and process phosphates, of which Morocco is the world's largest exporter and third largest producer; the mining holding company BRPM (Bureau de recherches et de participations minidres) was formed in 1928. After World War II, several PEs were set up as agricultural marketing boards, industrial ventures and a wide range of support firms in the service sector. After Independence in 1956, their number increased significantly with the objective of spearheading economic development, creating employment opportunities and promoting regional development. Growth in terms of the number of PEs in the portfolio has also derived from the creation of subsidiaries by PE8 and from publicly owned investment or finance companies providing seed capital to private ventures. The current portfolio thus consists of a variety of firms operating in many sectors, as shown in Table I.4 below. 28. Of the 642 firms in the portfolio, 25% are regulatory (quasi- governmental) institutions, 8% are public service monopolies and the remaining 67% are industrial and commercial concerns. The PE sector overall accounts for over 20% of total gross fixed capital formation, about 15% of domestic value added, and around 7% of total urban employment. In specific sectors, however, PE participation is considerably greater. PEs account for 90% of value added in mining, energy and water supply, and for over 50% in the financial, transportation and communications sectors. Conversely, PEs generate less than 10% of the value added in agriculture, construction, and commerce. 29. Beyond its mere size, Morocco's PE sector has a considerable macroeconomic impact through a number of channels. First, on the supply side, PEs provide basic goods and services in several sectors essential to the growth and development. Second, on the external side, PEs import significant amounts of goods and services and absorb much of the external financial resources, thus contributing to the build-up of external debt, although they also generate large foreign exchange earnings. Much of the country's foreign capital inflows27 have accrued to the major PEs (over 15% on average in the last two years); the same PEs have imported almost 23% of the country's capital goods during the same period. on the other hand, the export activities of the OCP group alone account for over 30% of the country's merchandise exports. Finally, in public finance, PEs receive transfers from the CG amounting to 4% of CG expenditures, make contributions to the Budget in the form of taxes and dividends (around 6% of CG revenues), and are used by the Government as a tool to implement some of its distributional objectives through implicit transfers and taxes.28 27/ Public and Publicly-Guaranteed Debt. 28/ See Section III.C for details. 16 - TAbI I.3: STRUCTURE OF PUBLIC ENTERPRISE OWNERSHIP State Ownership er % of Total State Ownership Number % of Total 100% 144 22% 100% 144 22% 50% to 99% 144 22% 5 50% 288 45% 33% to 49% 62 10% S 33% 350 55% 20% to 32% 80 12% S 20% 430 67% 10% to 19% 53 8% S 10% 483 75% 1% to 9% 68 11% 5 1% 551 86% < 1% 91 14% < 0% 642 100% 642 100% Source: Lavalin International. o: \cem\mission\now\pe-own%.wk1 Table 1.4: PUBLIC ENTERPRISES BY SECTOR OF ACTIVITY Number % of % Share of Branch of Activity of PEs Total Value Added Agriculture, Fisheries 15 2.3 2.6 Mining, Extraction 28 4.4 89.6 Oil and Petroleum 3 0.9 93.6 Water and Electricity 19 3.0 97.0 Manufacturing 165 25.7 24.9 Construction 6 0.9 0.4 Transport & Communications 53 8.3 57.4 Financial Institutions 62 9.7 62.7 Insurance 7 1.1 n.a. Commerce and Trade 42 6.5 3.8 Other Non-Financial Services 197 7.0 3.6 Unclassified 45 - - 642 100.0 Source: Lavalin International. 17 - 30. The structural adjustment program launched by the Government of Morocco in the mid-eighties could not ignore the PE sector in light of its economic importance. A major restructuring program was launched in 1985-86, supported by the World Bank under the Public Enterprise Rationalization Loan (PERL). Under this program, some of the key public-sector monopolies and utilities were restructured. At the same time, a comprehensive assessment of payments arrears within the public sector was made leading to the implementation of a substantial program of cross-arrears reduction. Budgetary contributions to PEs were rationalized with the objective of reducing overall CG transfers to the ssctor, with some limited increases for specific enterprises. Preliminary steps were also taken towards establishing a management and performance control system for PEs aimed at ensuring consistency of PE and CG macroeconomic objectives, and enhancing efficiency, productivity and accountability through the establishment of contract-programs. Finally, the legislative and administrative foundations were laid for the development of a divestiture and privatization strategy for many PEs29. 31. Much, however, remains to be done to complete the sector's rationalization program and to ensure long-lasting results. First, the legal and institutional environment in which Moroccan PEs operate today restricts the freedom of their managers and poses a serious threat to the efficiency of their activities. Lack of autonomy, absence of clearly defined responsibilities, and poor management information systems result in an excessive reliance by the CG authorities on ex ante controls in PE managerial and administrative decisionse. This undermines the managers' incentives to respond efficiently to market developments. Second, public utility tariffs in Morocco remain in general too low, inadequately structured and difficult to revise. In particular, the present institutional arrangements for granting tariff increases result in a lengthy and highly politicized bargaining process in which a final decision is often taken with only marginal weight given to the financial needs of the public utility companies. Third, despite initial progress in reducing public sector arrears, the problem continues to plague the finances of many PEs. Though the CG has increased its budgetary allocations to pay for utility services (electricity, water, telecommunications), CG consumption in recent years has exceeded budgetary appropriations, resulting in the accumulation of new arrears vis-a-vis public utility companies. Finally, the preparation of the privatization program has been considerably delayed by the lenghty process of creating an administrative and legal framework which could satisfy all the interest groups involved. It is important that the program be quickly implemented given the large potential for attracting foreign direct investment, reducing the indebtness of the CG and promoting competition and efficiency in the economy. 29/ See "Public Enterprise Rationalization Loan," World Bank Loan No' 2820, April 1987. The President's Report of this loan provides background and details on the program. - 18 - II. SAVINGS AND INVESTMENT IN THE PUBLIC SECTOR 32. The achievement of the country's economic and social objectives during the nineties will require substantial increases in public savings, given the disappearance of the public sector's major source of finance--external debt rescheduling--at the end of 1992. The resource mobilization strategy should hinge on the formulation of an incentive framework capable of extending to the rest of the public sector the increase in savings achieved previously at the CG level. Although the need to maintain the momentum of policy reform at the CG level remains critical, only a more widespread improvement of public savings can ensure that the policy of decentralizing public investment to the LG and PEB will be consistent with internal and external equilibria. 33. The starting point of the new resource mobilization strategy is to recognize that the analysis of the public sector in Morocco cannot be identified with that of the CG alone30. The relative importance of the CG, the LG and the PE sectors has to be evaluated along with the economic and financial relations that link them to one another and to the rest of the economy in order to obtain a clearer picture of the Moroccan public sector today. This exercise is carried out in the next section (Section A). In Section B, we argue that an important feature of the Moroccan adjustment and stabilization experience during the eighties has been the declining role of CG capital spending in national investment, and in public investment in particular. While these developments reflect a greater involvement of the private sector in the process of capital for.nation, they are also indicative of a deliberate strategy by the authorities to rely increasingly on PE and LG to undertake investment projects of public interest. However, as argued in Section C, this decentralization of investment expenditure has not been accompanied by sufficient increases in LG and PE savings. As a result, their combined financing needs have not declined and they have actually increased as a share of the overall public sector borrowing requirement. A. The Flow of Funds in the Public Sector 34. The analysis of the flow of funds supports the view that the LG and PEs play important parts in the Moroccan public sector, although the CG maintains a dominant role. Moreover, financial flows among the three public sector entities appear to be important in terms of their total uses and sources of funda. This interdependence should be reflected in the design of policy reforms aimed at raising public savings in Morocco. Such an approach will minimize the 30/ So far, the public sector in Morocco has been a general concept more than a clearly defined economic entity. This has been largely due to a lack of easily accessible macroeconomic data on non-central government activities. Recent sectoral and structural adjustment work carried out by the Bank, as well as the stabilization and technical assistance programs of the Fund, have reduced this serious data problem. To date, however, no attempt has been made to consolidate the public sector accounts. - 19 - risk of simply shifting fiscal imbalances from one part of the public sector to another instead of reducing it for the whole public sector. 35. A measure of the relative importance of the various public sector actors in the economy is provided by Table II.1. The CG, LG and PE together account for 28% of total urban employment, with the CG responsible for over two- thirds of public sector employment and wages; the total putblic sector wage bill is equivalent to almost 16% of GDP. In terms of investment, the responsibility for expenditures appears to be quite decentralized in the public sector: the CG is directly accountable for only 40% of total public sector investment, while the PE sector actually contributes more to public sector investment than the CG. The table also indicates that the greatest savings effort is also made by the PE sector. Finally, Table II.1 illustrates the relative importance of public sector entities in the country's capital transactions with the rest of the world. More than half of total inflows of foreign capital in 1989 accrued to the CG. As much as one-fifth of the DH 18 billion of public foreign capital inflows financed PE activities directly. On the other hand, LG appear to be largely insulated from external capital transactions. 36. The flow of funds affecting the public sector is also depicted by Diagrams l(a) and l(b) for 1989. The diagrams illustrate the relative importance of the three branches of the public sector in terms of current and capital transactions, describe the sources and uses of funds for the public sector, and highlight the financial relationship among public sector agents3l. 31/ The economy-wide consistency of the flows, and their relationships to the national accounts is ensured through the constructions of a complete flow of funds (see the Appendix to this section--paras. 48-52). The matrices separate the flow of funds of the major public sector entities into those of the CG, LGs and the PEs. The matrices also separate out the activities of the financial system into three entities, namely tu.e Central Bank (CB), the Commercial Deposit Banks (Banks), and the Specialized Financial Institutions (SFI). The residual category of domestic agents is the Private Sector which consolidates households and non-financial firms. Finally, the external sector is represented by the Rest of the World category (RW). The flow of funds tables integrate the national income, financial, fiscal and balance of payments accounts for the eight categories of agents holding physical and financial assets. - 20 - Table II.1: PUBLIC SECTOR INDICATORS, 1989 Central Local Public TOTAL Government Governments Enterprises PUBLIC SECTOR Employment Thousands 638 60 190 888 In % of Total PS 71.8% 6.8% 21.4% 100.0% In % of Urban Empl. 19.9% 1.9% 6.0% 27.8% Wage Bill DH Millions 19,683 1,214 8,728 29,625 In % of Total PS 66.4% 4.1% 29.5% 100.0% In % of GDP 10.3% 0.6% 4.6% 15.5% Investment DH Millions 8,861 2,878 10,052 21,791 In % of Total PS 40.7% 13.2% 46.1% 100.0% In % of GDP 4.6% 1.5% 5.2% 11.4% In % of Total Invst. 19.2% 6.3% 21.8% 47.3% Savings DH Millions 1,347 829 6,407 8,583 In % of Total PS 15.7% 9.7% 74.6% 100.0% In % of GDP 0.7% 0.4% 3.3% 4.5% In % of Total Savings 2.9% 1.8% 13.9% 18.6% Foreign Debt DH Millions 122,464 31 18,715 141,21C In % of Total PS 86.7% 0.0% 13.3% 100.0% In % of GDP 63.9% 0.0% 9.8% 73.7% In % of Total For. Debt 72.3% 0.0% 11.1% 83.4% Foreign Capital Inflows DH Millions 14,002 9 3,881 17,892 In % of Total PS 78.3% 0.1% 21.7% 100.0% In % of GDP 7.3% 0.0% 2.0% 9.3% In % of Total F Cap Inf53.7% 0.0% 14.9% 68.6% Note: 1989 data, except employment which is 1988 for LG and CG, 1986 for PE. Source: Ministry of Finance; Ministry of Plan; Ministry of the Interior; and World 3ank estimates. o:\cem\mission\now\psdata2.wkl(a) - 27 May 92 21 - 37. Current transactions are broken down in taxes, dividends, interest payments, transfers (including subsidies) and final consumption on goods and services. For the PE sector, the category value-added is added, representing the major source of funds. For each sector, the excess of resources over uses corresponds to savings. The diagram highlights several important points. - First, the PE sector is a major source of funds for the CG and the LG, contributing over DH 5 billion to their total resources in the form of direct taxes and dividends. This amount represents almost one-fifth of the PE total uses of funds. These flows constitute 10% and 18%, respectively of the CG and the LG overall sources of funds. On the other hand, current flows from the CG to the PE sector-- interest income on CG debt and operating transfers--are considerably less important. The net contribution of the sector to the CG finances is therefore very important.32 - Second, the central bank contributes significantly more to the CG curre.it resources in the form of dividends and taxes than either domestic money banks or the specialized financial institutions (SFI). The banks in particular receive back interest payments from the CG equivalent to four times their tax payments to the CG. - Third, the CG and the PE transfer abroad over 26% and 11%, respectively, of their total resources. In particular, their interest payments to foreign creditors (over DH 10 billion) are considerably greater than domestic interest payments. - Fourth, another important link between public sector entities is the CG current transfers to the LG. The DH 1 billion transfer in 1989 represented almost 30% of total LG resources and exceeded its entire savings (DH 0.8 billion) in that year. 38. Capital transactions illustrate how investment by each public sector agent is financed through savings, capital transfers, and borrowing (Diagram l(b)). The most important points that emerge from the flow chart are the following. - First, arrears appear to have a pervasive presence in the financing of the public sector33. Changes in the stock of arrears can be regarded as forced lending by one agent to another. For example, the CG raised almost DH 1.5 billion by running arrears vis-&-vis the private sector and PEs. This indicates that over a quarter of total lending by private agents to the CG was involuntary. Similarly, the forced lending by the PEs to the CG (DH 0.6 billion) almost entirely 32/ This is true even if capital transfers are included (see below). These points are elaborated in more detail in Part III, Section C (see para. 90- 105). 33/ Although 1989 was undoubtedly a slippage year in terms of public finance, the problem of arrears remains very current. According to preliminary data, the stock of arrears owed by PEs and to PEs both rose by around 50% in 1990 compared to a year earlier. - 22 - DIAGRAM 1(a): PUBLIC SECTOR CURRENT TRANSACTIONS 1989 (IN BILLIONS OF DH) I VALUE ADDED - 28.7 9045%) 0.8 0MG 0.2 INTER 0.~~~~~~~a2 INTE 0.0 DIVIDI ETA PUBUC R 7 .7TAXES COVERNUENT ENTERPRISES._ ENTRPRSES 4.8 (10.4%) j I 0.r (1.8e) 0.7 (2.4%) 4.8 (16.0%)! BANKS BANKS DOMESTIC 2 INTER 0NE INTER DOMESTIC DAMESTIC BANKS 1ANKS 2i 2. (.2%) 0.J 12 .%) |. | 5A.7%iI j.1 oT 0.4 INTE 00 1 IVT i IFI ~0.3 TAXES 0.3 TRANIF I l I3ITER-F 0.3 (0.6%)Tl | 0.7 (1 5%) ENT|ERPRISES .3 (4.9) 27.1 1.7 INTER (100.0%) 0.1 DMI PRIVATE PRIVATE 7.2TAXES 2.0TRANSF PRIVATE SECTOR SECTOR _ a CENTRAL S 0O1 (0.2%) 7.2 (16.8%) OOVtRJMENT I3.7 (8.4%) 43.8 |0,1 DIVID REST OF 0.3 DM0I (100.0%) .2IER.0NTR THE WORLD CENTRAL. 0.3 TA) C'ENTRAL RANK BANK j0.6 (1.4%) L 0.2 (0.6%) [2.STRANSF 7.4 INTER REST O f 4.1 TRANSF REST OF THE WORLD THE WORLD a. (23 7 11.06 2..2%)T , ( 0 AXESTA.XS 2 I 1.OTRANSF i OTRAN8 0.ITRANS PFRIVATE SECTOR 1.0 (2.3%) -1.0 (21.9%)00(.) PRIVATE SECTOR i i 1.6TAXES LOCAL 0.2 INTER _G | OOODS AND | 1 1-1 GOVERNMENTS SFI 1.6| (2.3%) (100.0%) 0.2(4.3%) 1.4 (.1%) 2s6.% SFI 0.0 (0.3%) GOODS AND DOMEST1C 0.0 TA8 SAVINGS SERVICES BANKS 0.6 (23-|%) r6p7) NOTE: Each agent's total flows aro expressod In par Antheses 0 (.6 2.8 0 In % of total transactions of the CG, PE and LO. 23 DIAGRAM 1(b): PUBLIC SECTOR CAPITAL TRANSACTIONS - 1989 (IN BILLIONS OF DH) PUBLI C 0.0 AR. REAAR _ ARRREAAR 0.aAFVEP o.eARREAR CENTRAL ENTeRPRI9ES GOVE_NMENT BANKS .1 1. D 3%%1)O SI'I~~~~~~~~~~~~~~~~~~~~~~F ______ ~~~~~~~~~~~~~~~~~~~~~~~~~~~PUBLICI | 1.2 93%) | ENTERPRISES PRIVATE SECTOR 1 8.0 (I100.0%) 0.2 TRANS 2 _ CREorr CENTRAL 02 TFIA _ 1.1 ARREAR PRIVATE PRIVATE 0e ARER_AR GOVERNMENT ;J ARER SECTOR SECTOR 2. RESTr OF REST OF 1CEI REST OF 1 r THE WORLD THE WORLD REVTOF THE WORLD THEWORLD _ 10.7(42.0%) 1~~~~~~~~1 3D (21.%)| CENTRAL BANK |SAVINGS |INVESTMENT| 1 6.4(42.8%) 10. _671t 1 J CREDIr 1 0.3 CREDrT I. I| 0ARREAR| +~~~~~~, | 2%) | |23 (04.3%) |. (OA%)F I \ I 0~~~~~~~~ACEI |pr L OCAL | | 0CPREDIrr I r _ , |0J~~0.0AMEM RLGOVERNMENTS L |SAVINGS | INVESTMENT| |4 e112 1 i | 1000%) | E:40W 1.4 (&3| 8.9 (35.0%) | .0 CFiI I|| |0 EI | 0 CFREDIT THE WORLDI ALI 1 1~~~~~~~~~~~0.6(22.9%) 21 (79.4 ) 24 - offset the CG outflow in the form of amortization of its bonds held by PEs (DH 0.7 billion)34. Furthermore, for PEs, one-half of gross bank credit was apparently allocated to the repayment of arrears35. Second is the importance of external flows (except for the LG). Around one-third of net lending to the public sector (excluding changes in arrears) is from abroad. As discussed later in the report, net foreign lending has remained positive in the second half of the eighties solely because of extensive rescheduling arrangements36. Third, the extension of credit by the central bank to the CG is rather limited (DH 0.6 billion), though it is as important as dividend and tax payments (see Diagram l(a)), reflecting largely the reluctance by the authorities to rely on monetization of CG deficits. Fourth, the LG are much more dependent on capital flows from the CG than the PEs. Almost two-thirds of LG capital needs37 are met by the CG either in the form of capital transfers or lending, and only one-tenth by other borrowing. The PE sector, on the other hand, relies on the CG for less than 17% of its financing requirements, including DH 0.8 billion of involuntary lending by the CG in the form of arrears accumulation. 39. In summary, the flow of funds indicates (i) that important linkages among the CG, the LG and PE exist, and (ii) that the public sector appears to rely extensively on two forms of involuntary finance: external debt rescheduling and arrears build-up. The implications cf the first point is that policies designed to improve the financial conditions of one branch of the public sector may have important, possibly offsetting, consequences for the finances of another branch or for the public sector as a whole. For example, the discriminatory fiscal treatment of PEs in terms of investment codes and VAT legislation38, 34/ In 1989, the CG amortized DH 0.7 billion of outstanding PERL bonds. 35/ For the CG, only the change in net credit from banks and SFI is shown in the Diagram since no detail was available regarding new credit and repayments. 36/ In Part III of the report, it will be shown that the portion of foreign inflows corresponding to debt rescheduling accounts for the bulk of total net financing for the CG, given the large amortization payments due on foreign debt. 37/ Capital needs are defined here as total sources of funds. Strictly speaking, the capital needs should exclude the savings generated by the current transactions. The point made here, however, is not affected by the definition adopted. 38/ A public enterprise cannot in general benefit from the fiscal exonerations granted under the Moroccan investment codes, unless the enterprise is a wholly-owned subsidiary incorporated as SociRt6 anonyme (limited liability - 25 - designed to raise tax revenues, may reBult in lower dividend payments from PEa and in a greater need for transfers from the CG. Similarly, the dependence by the LG on CG transfers may reduce the incentive for the LG to improve resource mobilization and efficiency of their use (for example with respect to allocatiorn of consumption versus investment), given that the resource transfer appears to be in excess of the LG absorptive capacity39. 40. As for the second point, the objective of full convertibility of the dirham by 1993 sought by the Moroccan authorities requires a viable balance of payments being attained in the very near future. This requirement implies in turn that exceptional finance through rescheduling of external debt has to disappear by end-1992. Equally important, the occurrence of serious payment arrears is not compatible with the objective of project 'ng an international image for Morocco capable of attracting foreign investors. In order to foster such an image, the domestic financial environment must purge itself from the uncertainty arising from the insolvency, albeit temporary, of some of its major participants, namely the CG and PEs. Therefore, the eradication of public sector reliance on exceptional sources of finance should be a top priority for the authorities in their efforts to reach the important objectives they have set for the country. B. Public and Private Investment 41. Morocco's public sector has traditionally been responsible for much of the country's capital formation. Like many countries during a period of strong economic expansion, Morocco in the seventies provided a big push to industriali- zation through large public investment projects. The deterioration of public finances around the end of the seventies and beginning of the eighties, as discussed, did not immediately result in a decline in investment but led instead to a sharp rise in both domestic and external debt. The ensuing adjustment period witnessed important changes ir the composition of public sector investment and savings, reflecting the nature of the policy mneasurea and the direction of the new government strategy. 42. Figure 4 compares the composition of investment in 1982 (the year before Morocco's balance of payments crisis) with that of 1989. Public capital expenditures accounted for 54% of the total investment in the economy in 1982, while the private sector contributed 43% and foreign direct investment40 3%. company, as it is the case for OCP subsidiaries). In practice, however, the large Offices are usually prevented from creating such subsidiaries. In terms of VAT, the post and telecommunication office (ONIT) could not deduce the VAT paid on its inputs until very recently. 39/ These points are discussed in more detail in Part III, Section B (para. 74-89). AQ/ Foreign direct investment (FDI) from the balance of payments is subtracted from private investment and presented separately in the following discussion purely for illustrative reasons. From the point of view of the national accounts, FDI represents acquisition of existing assets by - 26 - Within the public sector, the CG accounted for 57%; and PEs and LG contributed 36% and 7% reBpectively. By 1989, private investment had overtaken public investment in terms of shares of total capital formation, with foreign investment riBing marginally as a percentage of the total. Moreover, while non-CG investment accounted for only 40% of total public investment in 1982, it was almost 60% in 1989. The share of investment of the PE sector exceeded that of the CG by 1989, reversing the situation prevailing prior to the country's financial crisis of 1983. Another important feature of the evolution of investment during the eighties was the considerable expansion of PE capital spending during 1982-84 while the economy underwent a major financial crisis, which reflected the lack of macroeconomic monitor4ng of the PE sector by the Government41. 43. As Figure 5 indicates, these changes in the relative contributions of different economic entities to investment were taking place during an overall declining gross fixed capital formation (GFCF). From a peak of over 27% of GDP in 198242, fixed investment declined steadily to 20% of GDP in 1987-88, recovering sharply to 23% of GDP in 1989 and almost 25% in 1990, but remaining well below the levels of the early eighties in terms of GDP shares. The figure also highlights the decline of the combined share of the CG and the LG during the decade, both as a share of the total and in terms of GDP (though recovering somewhat in the last two years). The decline in the ratio of public to private investment 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 can play to raise GDP growth well above the country's high rate of population increase. Indeed, as shown in Figure 5, private investment appears to be rising rapidly towards the end of the decade, even exceeding in 1990 the level of the early eighties. Such a marked response of the sector is a clear indication of the improved incentive environment which over half a decade of structural reform has tried to create. 44. However, the curtailment of development expenditures for macro- stabilization purposes since 1983 was so severe as to lead to the suspension or cancellation of many essential investments in key economic and social sectors, the postponerment of infrastructure rehabilitation and maintenance work, and the delay in completion of ongoing projects. As a result of accumulated delays in maintenance, most of the road network today needs extensive rehabilitation before it can receive regular maintenance43. Telecommunications and utilities have foreign residents as well as net increases in the capital stock. Thus, the FDI figure from the balance of payments represents en upper bound on the contribution by foreign investors to the capital accumulation of the domestic economy. 41/ These points are discussed in greater detail in Part III of the report. 42/ The difference between the GFCF of the economy and the total investment figures shown in Figure 2 is accounted for by changes in stocks, corresponding to about 1% of GDP in 1982 and 1989. 43/ Up to 60% of tertiary roads, more than 45% of the total road network, were deemed in bad condition in 1988, compared with 40% five years earlier. - 27 - Figure 4 Composition of Investment 1982 - 1989 1 9 8 2 ; 0 ~~~~~~..... . . . . . . 1982 nPE 36% (( 6% of GDP) LG 7% (1% of GDP) PrIVete 435t (12 2% lbl§n2 GO)P01 4 ; (12 2% ot GOP} ) 2% of GDP *s% ot GDP) Foreign 3% (00% of GOP) Total DH 26 bn (28% of GDP) Public DH 14 bn (15% of GDP) mA~ ~ ~ ~~8Z gibe t@gurs prprlnl ottl 1989 (6.2% of GOP) Private 49% LO 13% (11T7% of GOP) (1.b% of GDP) PuOIIC 47% (1183% of GOP) CO 41% (4.0% of GDP) Forolgn 4% (1% of GOP) Total :DH 46 bn (24% of GOP) Public O H 22 bnl (11% of GDP) Size of figures proportional to totals ~~rr'~aiber ~ (As percent of GDP). - 28 Figure 5 Gross Fixed Capital Formation In % of GDP 1 6% I 14% 10% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 | Private Sector MPublic Enterprises =Central & Local Gvt. I~~~~~~I: a __ be, FllI,at In % of Total 50% 26%- 0%- 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 | Private Sector M Public Enterprises m=Central & Local Gvt. M,.Ijb,Ito In aet I - 29 - also become increasingly deficient in critical areas44. Similarly, Morocco's welfare indicators are much lower than those of countries with Bimilar per capita incomes. Child and maternal mortality, nutritional status, accesa to safe water, illiteracy, urban employment, and child labor are critical poverty issues45 C. The Changing Structire of the Public Sector Deficit 45. An important feature of the Moroccan economy prior to the financial crisis was the g eat reliance on foreign savings to finance the public sector deficit. Figure 6(a) provides a snapshot of the economy's internal and external equilibria in 1982 and 1989 by breaking down private, public and foreign savings/investment balances46. In 1982, the public sector invested over 15% of GDP and generated savings of less than 3% of GDP. The private sector, on the other hand, invested almost 12% of GDP while saving barely reached above that level. As Figure 6(b) illustrates, about 90% of the public sector dissavings, therefore, had to be financed from abroad. As a result of the economic reform policies undertaken by the authorities, as well as of the drying up of international capital flows worldwide, the picture looked substantially different in 1989. The stabilization and adjustment measures led to a marked reduction of public investment, down almost four percentage points of GDP between the two years, and a more modest rise in public savings (about 2% of GDP). During the same period, the current account deficit contracted by more than the increase in net public savings47 requiring net private sector savings to rise. As a result, 44/ By the end of 1986, Morocco had less than one telephone line per 100 inhabitants, compared with 2 per 100 inhabitants in Algeria and Tunisia, and 5 in Turkey. Today, the existing network meets less than 60% of expressed demand (with waiting time for new connections averaging six years), and it is of poor quality. New services, such as cellular ems, paging, data transmission, and satellite connections, are virtually unavailable. 45/ See "Morocco - Reaching the Disadvantaged: Social Expenditure Priorities in the Nineties," World Bank Report 7903-MOR, September 1990 (Table 10). In particular, 55% of males and 78% of females are illiterate. Quite apart from equity considerations, illiteracy, through its effect on labor qualifications, is a big handicap for Morocco's expanding export sector. Both the volume and the "quality" of social expenditures are inadequate. For more detail, see "Morocco: President's Report on a Proposed Second Structural Adjustment Loan", World Bank Report 5637-MOR, December 1991 (green cover). 46/ For the purpose of the analysis of this section, the savings attributed to the financial system are consolidated with that of the private sector. 47/ i.e., net of investment. - 30 - Figure 6(a): Savings-investment Balance In Morocco 1982 1989 Private 8ow tPrivae 8otD Pubilo Setor Public 8ectI Foreign Sector - Foreign 8eotor 0% 3% 8% C% 12% 15% 18% 0% 3% 8% 9% 12% 16% 18% in Ieent of ODP In P@.o.nt of GODP &N M IEMEENT |SN/INGj INVESTMENT Figure 6(b): Public Sector Financing Sources 1982 1989 Foreign Sector 49% (11.4% of GDP) ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ .4 o GP Prlvate Soetor 10% (1.3% of GDP) Private Sector 61% (3.6% of GDP) Total Financing Sources: Total Financing Sources: DH 13 bn (7% of GDP) DH 12 bn (13% of GDP) Size of the pies proporlional to totals (As percent of GDP). 3j* *,t*,,. f _ - 31 - Fig. 6(c): Public Sector Savings-Investment 3Balance 1982 1989 Centrt GoArnm,nnt - C.ralw Oovin't - r Local GovernrmntO - Local GowvrtIfnfs - Pubilo Entorpri.s. - Pubilo Entarprlae - -2% 0% 2% 4% 6% 8% 10% -2% 0% 2% 4S a% 8% 10% In Percent et Go PIn Percent .9 OP WVINO* I.11r1s EN?1114, II V erUENT Fig. 6(d): Public Sector Financing Needs 1982 1989 OG 87% CG 80% ~~~~~~~~~~3.9% of GDP PE 16%L 128 2% of GDP 1.1% of GDP of GDP 0.6% of GDP Total Financing Needs: Total Financing Needs: DH 13 bn (7% of GDP) DH 12 bn (13% of GDP) Size of the pies proportional to totals (As percent of GDP). - 32 - the smaller public sector borrowing requirement (PSBR)48 in 1989 was financed for more than 50% by the private sector. 46. A closer look at the disaggregated data conveys a clearer picture of the public sector adjustment (Figure 6(c)). The CG investment was slashed in half in terms of GDP, while savings rose by over 2% of GDP between 1982 and 1989. The financing requirements of the CG were thus reduced by more than 6% of GDP (from 10.1% of GDP to 3.9% between 1982 and 1989) (Figure 6(d)). Thus, the reduction in the CG deficit that intervened between the two years was marginally greater than that of the entire public sector deficit (from 12.7% to 6.9% of GDP), reflecting the fact that the LG deficit actually increaeed between those years (from 0.6% to 1.1% of GDP), while the savings/investment balance of the PE sector remained virtually unchanged. 47. These changes reveal several features about Morocco's adjustment experience during the eighties. First, while it would have been reasonable to identify the PSBR with the financing needs of the CG in 1982, this was no longer true in the late eighties. The nature of the adjustment that had intervened since then had dramatically changed the structure of the public sector deficit and consequently of its borrowing requirements. The contribution to the PSBR of the CG declined from over 80% in 1982 to 57% '- 1989, with the share of the LG rising proportionately more than that of the PE sector (Figure 6(d)). Second, .he improvement in savings by the CG was apparently not supported by similar efforts in other parts of the public sector. The CG current balance improved by 2% of GDP between 1982 and 1989, turning the deficit of the early eighties into a surplus equivalent to 0.7% of GDP. The LG savings were unchanged between 1982 and 1989 (0.4% of GDP), while PE sector savings actually declined slightly from 3.6% of GDP in 1982 to 3.3% in 1989. Finally, despite an increase in both private and public savings (about 2% of GDP each), total savings49--and thus total investment--declined by more than 4% of GDP, reflecting the overall impact of the deflationary policies on the economy during the seven-year period. 48/ The PSBR is defined here net of capital transfers within the public sector. It therefore corresponds to the difference between public sector investment and savings, except for capital transfers to the private sector, which are negligible (less than 0.05% of GDP in 1982 and 1989). See Annex I for details. 49/ Gross National Savings, which includes foreign savings, declined from 28% of GDP in 1982 to 24% of GDP in 1989. - 33 - APPENDIX: The Complete Flow of Funds 48. In this appendix, we illustrate the complete flow of funds matrices that underlie the analysis of the public sector. The current flows are broken down into transfers, taxes, dividends, and interest for each sector. Capital accounts are broken down (where possible) into changes in credit, changes in arrears, transfers and, where applicable, changes in equity participation. In Tables A.l and A.2 only the sum of The flows is reported to simplify the presentation. Annex I provides a more detailed description of these accounts and their derivation. 49. The current accounts summarize the sources of funds for each sector in the economy and its allocation to different uses. The sources of funds for each sector are current transfers (and taxes for the CG and LG), dividends, and interest received from all the other sectors as well as the value-added generated by the production activities. These funds are in turn used by each sector to pay transfers, dividends, and interest to the other sectors, as well as to purchase goods and services; the excess of income over expenditures for each sector defines its savings. 50. The row "Central Government", for example, indicates that the CG receives direct taxes from the private sector, direct taxes and dividends from the financial institutions50 and PEs, and transfers from the RW. Finally, the valued-added category represents indirect taxes paid to the CG.51 In the column "CG", these funds are in turn allocated to the private sector in the form of interest payments on the CG debt and consumer subsidies; to financial institutions, the LG and the RW in the form of interest payments and transfers52; and to final consumption on goods and services. The excess of these current expenditures over total sources of funds represents the CG savings53. 50/ The term "financial institutions" refers to the banks, SFI, and CB. 5l/ In the national accounts, indirect taxes represent the difference between GDP at factor cost (i.e., the sum of value-added) and GDP at market prices. The classification of taxes between direct and indirect is presented in Annex I. 52/ The sum of DH 1,006 million for the LG refers entirely to the 30% of the VAT which is allocated to equilibrate the recurrent budgets of the LG, since that is the only current transaction between the LG and the CG. See Annex I for details. 53/ This amount is lower than the savings shown in the CG accounts (see Table 1.1). This results from the difference in classification of certain expenditure items. In particular, the 30% of the VAT allocated to the LG is classified as capital expenditures in the CG accounts, while much of this transfer is of a current nature (see previous footnote). Similarly, the CG contribution to cover part of the SFIs' foreign exchange losses is also classified as a capital expenditure by the CG, while it should be - 34 - TABLEA.I: FLOWOFFUNDS -CURREIVTACCOUNTS 1989 In Mfhoca of Cwwe DtDthmu Pr va t Banks -r lntrl Contl Zova2 P ubli R#gto - _ f4U s¢¢or~~~~~~~~" _ ov _ 0v , n _ ,Ir . d M0TAr, ADJR Q ________ ~~~~ ~~~~~~~~~~~~~~~~~(aJ (b) PrAvate $*etor -- 2240 769 0 3671 38 50 22575 19343 135891 Banks 3813 -- 584 2270 0 2367 0 9034 1276 , 2676 101 -- 0 653 151 1344 0 4925 463 C0i3tr42 aUk 76 1224 -- 214 0 0 263 1777 211 , C?enr.a Ctovrnawnt 7222 504 273 614 - 0 4549 2597 15759 2S065 > Zoc42 0ov0OXMont* 1835 8 10 0 1006 -- 618 0 3477 0 . PubIlc $nterpr1J& 0 745 0 0 664 0 -- 0 1409 25670 Rojt of ths ftd 591 0 732 69 11485 0 3016 -- 5893 49652 000d* sorvIces 114407 3449 870 986 22515 2459 8728 1,95185 __ 195185 meRar EXp. faJ 130620 8271 3238 1669 42478 2648 20672 57206 266,802 _ $A'4t#0S fbI 24614 2039 2150 319 1346 829 6407 8339 46043 4 46043 NOTES: GDP: Gross Domesteic Produet GNP: Gross National Product GNS: Gross Naional Savings GDS: Gross Domestic Savings M,X: Imports and Exports of Goods and Non-Factor Services CA: Current Account (bdr - before debt relief) FS: Foreign Savings RESC: Rescheduling Gains 191576 = GDP 7881 = FS = X - M 195185 = GDP+M-S = C + X 181735 = GNP -6840 =CA 153414 = C 37704 = GNS(bdr) -1499 = RESC (- = gain) 41 = X 38162 = GDS |-8339 |CA bdr 49652 =M 241228 = GDP+M GNS+ (- (CA+RESC)) = S = (GDS+#FS) In the VAL UE-ADDED column, the entry in Rest of the World row coresponds to Imports. In the Goods & Services row, the entry in Rest of the World column corresponds to Exports. (Soo Annex I for details) CC 2. wkl treated as a current transfer. The misclassification of these expenditures overstates the size of CG savings, or, alternatively, overstates its capital spending. One of the advantages of a consistent set of Flow of Funds accounts is to provide a more accurate picture of the savings-investment balances of the different agents in the economy. 35 - TARLE A.2: FLOW OF FUNDS - CAPITAL ACCOUNTS 1989 In MIlUomu of Cumat Dihihms .. $' p.rjlvato vank7 SFZ Central C'entr4l LcZc& Publ2c- Reat ot SUW- SAVINOS $:ictor Bank Govt Oovt Bnterpr. World ?t TAL Private Sector -- 5307 3436 1151 981 1283 2720 14878 24613 tJ$4fl blanks 5463 -- -198 4248 0 0 682 l0195 2039 2J"34. SF,r 3245 -107 -- 0 178 1033 3302 7651 2150 *S$Q. Centra2 Bonk 3739 1640 -37 -- 0 0 0 343 5685 319 `.O C#ntral Oovt 3010 4087 l802 605 -- 553 -68 14002 23990 1347 . J£0o1c Oovt 0 0 407 0 2329 -- 49 9 2794 829 1.0 Publ. Rnterpr. -389 1307 1244 2513 14 -- 3881 8570 6407 < Rest of World 2012 0 3148 10653 1946 -- 17759 8339 . SUP-TLOT ea) 17080 12234 9802 6004 l6476 745 4925 24257 I/E$V1STMEN lb) 22411 0 0 0 8862 2878 20052 1841 46043 r. Tota Investmrnt S: Total Savings 1= 46043 =S CK&2. wkl - 36 - 51. The capital accounts describe the savings-investment balance for each economic agent. These accounts state that savings plus changes in financial liabilities (sources of funds) are equal to investment plus changes in financial assets (uses of funds). For example, the row "Public Enterprises" in table A.2 indicates that PEB receive financial resources from54 the private sector through increases in equity participation55, the issue of domestic debt and increases in arrears; from financial institutions through extension of credit, increased equity participation and increases in arrears; from the CG through increased equity participation, capital transfers, and increases in arrears; from the LG through increases in arrears; and from the RW through disbursements of foreign loans. Savings are then added to these flows to obtain total capital resources. These resources are in turn allocated to reduce arrears vie-a-vis the other agents, increase equity participation in private sector companies, repay loans to the financial system and abroad, and accumulate real assets (investment). 52. The consistency of the flows of funds presented here with the national accounts can be verified by summing up the entries in the value-added column of the current Accounts table (Table A.1). This sum (DH 241,228 million) corresponds to GDP (DH 191,576 million) plus imports (DH 49,652 million), i.e., total available supply of goods and services in the economy. This amount equals total final consumption by all agents (DH 153,414 million), plus exports (DH 41,771 million) plus total savings (DH 46,043 million). 54/ i.e, increase their liabilities vis-a-vis the other agents. 55/ It should be recalled that the definition of the PE sector adopted in this study includes enterprises which have some private sector participation. - 37 - III. PUBLIC SECTOR STABILIZATION AND FINANCING IN THE EIGHTIES A. The Central Government 53. Although the improvements of the fiscal situation of the CG after the mniddle of the eighties are easily discernable from the CG budget figures, it remains difficult to separate the direct impact of policy measures from the consequences of exogenous developments. The important questions for the purpose of economic policy analysis are the following: what would the level of revenues, expenditures and the deficit have been, if no measures had been taken? Alternatively, of the changes in budget position, what part is due to exogenous changes in fiscal policy (discretionary changes) and what part is due to changes in the economic environment (induced changes)? What particular items of the budget have made the largest contributions to the reduction of the fiscal imbalance? This section first addresses these question by applying a simple method for decomposing budget changes into discretionary and induced components; it then proceeds to analyze how the resulting fiscal deficits were financed; and it finally examines what were the consequences on CG debt of the financing strategy adopted during the eighties. Discretionary versus Induced Fiscal Changes 54. The decomposition of budgetary changes into discretionary and induced changes highlights the fact that economic policy measures have beet, more important in reducing fiscal imbalances in Morocco than the favorable developments in the economic environment. The analysis also indicates that beginning in 1987, deficit reduction became increasingly more difficult due to discretionary increases in expenditures and exogenous developments outside the control of fiscal authorities. The slowdown of deficit reduction was taking place despite the introduction of fiscal measures aimed at raising government revenues. 55. The basic notion behind the decomposition of budgetary changes iB to identify for each item in the government budget a macroeconomic variable to which it is closely related. For example, revenues from taxes on imports should clearly be associated with imports of goods; similarly, revenues from personal income tax should be associated with households income, possibly with a lag. Although the choice of the relevant "driving" variable is not always clear or available, the method allows considerably greater insight than simply evaluating fiscal changes in terms of shares of GDP or shares of total revenues and expenditures56. A "norm" should also be defined for the growth of revenues and expenditures by assuming that, for a given fiscal policy, each budget item is related to the corresponding macroeconomic variable by a fixed formula. The decomposition of changes in the budget deficit into discretionary and induced changes is carried out by decomposing the change in each revenue and expenditure 56/ The analysis presented here is similar to balance of payments decomposition exercises often undertaken to separate the impact of exogenous developments from policy measures on the external accounts of a country. - 38 - item into these two components. A change is called discretionary, whenever fiscal policy causes the evolution of a budget item to deviate from its defined norm. In the case of a tax revenue for example, this includes not only changes in tax rates, but also improved buoyancy of the tax. A change i.B called induced if it is caused by variables that are outside the direct control of the government (e.g., interest rates, growth rate, inflation rate).57 56. The results of the decomposition exercise, illustrated in summary form in Table III.1, highlight some important characteristics of Morocco's adjustment experience58. First, economic policy measures appear to have been more important in reducing fiscal imbalances during 1982-90 than the favorable developments in the economic environment. A total deficit reduction of 9% of GDP can be decomposed in a 5.4% decline (60% of the total) due to discretionary measures compared to 3.6% for induced changes. 57. Second, the analysis shows that 1986 was a clear turning point in the stabilization period. By then, discretionary expenditure reductions had run their course, having lowered budgetary outlays by 9.5 percentage points of GDP since 1982. Revenues, however, had been declining following the reduction of import tariffs, the switch to the VAT system and a deteriorating economic environment. Therefore, discretionary (i.e., policy) changes in revenues (-2% of GDP), combined with induced changes (-1%), were in part offsetting the impact of the sharp expenditure cuts on the overall balance. 58. Third, during 1987-90, the continued improvement in the fiscal balance was the result of diverse changes in revenues and expenditures, both induced and discretionary. On the expenditure side, discretionary measures were reversing the decline in capital spending and wages, but further reducing all other non-interest current expenditures. On the revenue side, the initial negative impact of fiscal reforms was reversed. The 5.6% of GDP rise in revenues between 1987 and 1990 was mostly accoun4-ed for by discretionary changes, including higher PE dividends59, an increase in the uniform import surcharge (PFI), the introduction of the new corporate tax system, and the fiscal amnesty of 1990. Rising oil prices, however, in part offset the impact of revenue raising measures during 1989 and 1990. 57/ Of course some of these variables may be influenced indirectly by policy actions. For example, the decomposition methodology treats the real exchange rate as exogenous. However, policy mak:ers have some control over it to the extent that they can influence the nominal parities and domestic prices. Thus the classification of a variable as exogenous or endogenous is only a first approximation. 58/ The methodology and the results are described in greater detail in Annex II. 59/ Dividends are assumed to be entirely discretionary. Though perhaps somewhat extreme, the assumption reflects the pattern observed during the decade. See also Section C, para. 94. - 39 Table 1111: DECOMPOSITION OF CENTRAL GOVERNMENT BUDGET Annual change (share of GDP) 1982 1983 1984 1985 1986 1987 1988 1989 1990 .. >.. ...... , , ,, . .. .. .... .... . . . . . . . .. . . . . . . . .. . . . . . . . ......,..., Total Revenues Discretionary 0.19% -0.56% 1.23% 0.48% -0.75% 1.22% 2.27% -0.19% 2.06% Induced -0.71% -0.22% 0.86% -0.72% -1.07% 0.84% -0.52% 0.46% -0.47% TOTAL -0.52% -0.78% -0.38% -0.24% -1.81% 2.06% 1.71% 0.27% 1.59% Total Expenditures Discretionary 0.59% -3.00% -3.39% -0.27% -2.82% 4.24% 1.57% 1.75% -0.17% Induced -3.07% 1.92% 2.11% -1.54% -3.25% -1.67% -1.20% -0.07% -0.82% TOTAL -2.48% -1.09% -1.28% -1.81% -6.07% 2.56% 0.37% 1.68% -0.99% Overall Balance Discretionary -0.40% 2.45% 2.15% 0.75% 2.07% -3.01% 0.6o% -1.94% 2.22% Induced 2.36% -2.14% -1.25% 0.82% 2.19% 2.51% 0.68% 0.53% 0.35% TOTAL 1.96% 0.31% 0.90% 1.57% 4.26% -0.51% 1.34% -1.41% 2.58% Cumutative change (share of GDP) (BASE YEAR = 1982 ) 1982 1983 1984 1985 1986 1987 1988 1989 1990 ^*.......... ............................ ........................................................... ............................. Total Revenues Discretionary 0.00% -0.56% -1.79% -1.31% -2.05% -0.83% 1.39% 1,20% 3.26% Induced 0.00% -0.22% 0.63% -0.08% -1.15% -0.31% -0.83% -0.37% -0.84% TOTAL 0.00% -0.78% -1.16% -1.39X -3.21% -1.15% 0.56% 0.83% 2.42% Total Expenditures Discretionary 0.00% -3.00% -6.39% -6.66% -9.48% -5.25% -3.68% -1.93% -2.10% Induced 0.00% 1.92% 4.03% 2.49% -0.77% -2.44% -3.64% -3.71% -4.53% TOTAL 0.00% -1.09% -2.37% -4.18% -10.25% -7.69% -7.32% -5.64% -6.63% Overall Balance Discretionary 0.00% 2.45% 4.60% 5.35% 7.43% 4.41% 5.07% 3.13% 5.35% Induced 0.00% -2.14% -3.39% -2.57% -0.38% 2.13% 2.81% 3.34% 3.69% TOTAL 0.00% 0.31% 1.21% 2.78% 7,05% 6.54% 7.88% 6.47% 9.04% Source: World Bank calculations. m:\alberto\PRNTAB1 59. Fourth, the limited impact of induced revenue changes over 1987-90 (+0.5% of GDP) conceals two important developments. Although the increase in the PFI rate was an important element in raising import duties in the short run, the decomposition analysis shows that the rapid growth in the tax base (i.e., the increase in imports enr-ouraged by trade liberalization) was responsible for about half of the increase in total import revenues over the whole period (see also the more detailed tables in Annex II). Finally, with the introduc.tion of the exceptional levy on petroleum in 1986, an important component of budget revenues has become dependent on the highly volatile oil price. This vulnerability of - 40 i revenues is reflected by the large induced changes in revenues from the oil levy (almost 1% of GDP in 1990)60. Central Government Financing 60. The onset of the financial crisis of the mid-eighties and the resulting large government deficits prompted the authorities to take budgetary measures to cut spending and raise revenues. To the extent that the deficit could not be eliminated quickly, decisions concerning its financing soon become a crucial component of the economic policy strategy. The Government essentially finanres its deficit by borrowing domestically and abroad, and by increasing the stock of money outstanding61. Ths approach taken by the authorities has been based on: (a) a conservative monetary policy stance combined with a highly regulated financial system; (b) the recourse of forced domestic finance in the form of arrears build-up; and (c) extensive reliance on exceptional international financial resources in the form of official debt rescheduling and grants. The relative importance of these forms of financing is summarized in Table III.2. (a) Domestic financing 61. Monetary policy in Morocco has been conducted with the joint objectives of maintaining moderate inflation and financing the budget deficit at low interest rates. Relatively low monetary growth was accompanied by a compression of public wages, tight regulation of the financial sector, and the availability of external debt relief during the adjustment period. Government wages62 grew at an annual rate of 5.6% between 1982 and 1988, compared with a nominal GDP growth of almost 12% per year over the same period. The wide-ranging system of credit and monetary regulations has succeeded in channelling domestic funds toward the Treasury at relatively low interest rates in spite of restrictive monetary policy. The private sector was therefore largely crowded- 60/ This last observation could be easily generalized. A high variability in the induced changes observed for a revenue i-iem might indicate an important degree of vulnerability of that revenue source. However, for this idea to be applied properly, the precision of the decomposition method would have to be refined. 61/ A formal representation of these financing options, and their linkages to the behavior of the debt/GDP ratio, is provided by the dynamic budget constraint faced by the Government, as discussed in Annex III - The Sustainabilitv of Fiscal Policies in Morocco. Similarly to the decomposition of revenues and expenditures of para. 53-59, the analysis of the government budget constraint enables the role played by the discretionary variables (the primary deficit, the change in money stock, the change in arrears) to be separated from the "exogenous" variables (the real growth rate, the real interest rates, the real exchange rate, etc.), at least in a partial-equilibrium sense. These issues were also discussed in "Kingdom of Morocco: Sustained Investment and Growth in the Nineties," World Bank Report 8417-MOR," November 1990. 62/ Estimated as the ratio of government appropriation for salaries divided by the number of budgetary staff positions authorized. The latter normally tracks actual staff positions with an error of plus or minus 1%. - 41 - out of financial markets through quantity constraints on bank credit, while debt relief provided most of the financial resources for the government deficit. Tiable 111.2: SOURCES OF FINANCING FOR THE CENTRAL GOVERNMENT DEFICIT -------------------------- In Percent of GDP ---------------------------- 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Primary Deficit [-=surplus] 7.5% 10.5% 8.8% 7.2% 5.1% 3.4% -0.5% -0.1% -1.6% -0.2% -2.9% Interest 2.5% 3.9% 3.6% 5.2% 6.1% 5.8% 5.9% 6.0% 6.1% 6.2% 6.2% On Domestic Debt 0.7% 0.9% 0.8% 1.0% 1.2% 1.5% 1.8% 1.9% 2.3% 2.3% 2.5% On Foreign Debt 1.8% 3.0% 2.8% 4.2% 4.9% 4.3% 4.1% 4.1% 3.8% 3.8% 3.8% OVERALL DEFICIT [accrual] 10.0% 14.4% 12.4% 12.4% 11.2% 9.2% 5.4% 5.9% 4.5% 5.9% 3.4% Increase in Arrears [+3 1.0% 0.7°% 3.2% 06% 3.1% 1.0% -0.4% -0.5% -1.2% 1.0% -1.2% Domestic Sources 4.5% 5.1% 2.2% 6.1% 1.9% 4.8% 4.9% 4.8% 3.2% 3.2% -0.0% Foreign Sources 4.5% 8.6% 7.0% 5.8% 6.2% 3.3% 0.8% 1.6% 2.6% 1.7% 4.6% Grants 0.5% 1.9% 0.2% 1.0% 0.1% 1.9% 0.0% 0.0% 0.6% 0.0% 3.0% Net Disbxursements 4.1% 6.7% 6.8% 1.0% -1.7% -4.2% -7.4% -4.7% -2.2% -2.1% -3.2% Debt Relief 0.0% 0.0% 0.0% 3.8% 7.7% 5.6% 8.2% 6.3% 4.2% 3.8% 4.8% ------------------ In percent of Overall Deficit ---------------------- 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Primary Deficit [-=surplus] 75% 73% 71% 58% 46% 37% -10% -2% -35% -4% -86% Irnterest 25% 27% 29% 42% 54% 63% 110% 102% 135% 104% 186% On Domestic Debt 7% 6% 7% 8% 11% 16% 33% 33% 51% 39% 74% On Foreign Debt 18% 21% 22% 34% 44% 47% 77X 69% 85% 65% 112% OVERALL DEFICIT [accrual] 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Increase in Arrears [+1 10% 5% 26% 5% 28% 11% -7% -8% -28% 17% -36% Domestic Sources 45% 35% 18% 49% 17% 52% 92% 81% 71% 53% -0% Foreign Sources 45% 60% 56% 46% 55% 36% 14% 27% 57% 29% 137% Grants 4% 13% 2%1 8% 1% 21% 0% 0% 13% 0% 90% Net Disbursements 40% 46% 54% 8% -15% -46% -138% -81% -49X -35% -96% Debt Relief 0% 0% 0% 30% 69% 61% 153% 108% 93% 64% 142% Source: Ministry of Finance. o:\cem\mission\now\cgdata.wkl(fin) 15-Oct-91 13:56 62. The strategy followed by Morocco was thus to extract resources from the economy through financial repression rather than relying heavily on direct monetization of the deficit. Direct recourse to the central bank has also been limited63 and seignorage64 income has been low by international standards. The 63j/ In a comparative study of six highly indebted EMENA countries over 1982- 89, income from monetization for Morocco was less than 0.7% of GDP per year on average, compared with 3.8% in Algeria and Portugal, 3.7% in - 42 - control over the financial structure, and over interest rates in particular, on the other hand, appears to have been a more important source of revenue65. On the basis of the differential between the foreign interest rate (adjusted for depreciation)66 and the domestic interest rate, it would appear that the control over the financial system was successful in reducing the Treasury deficit by as much as 2.5% of GDP in the early eighties67 by covering the cost of servicing the CG debt. Subsequently, as the dirham depreciated and domestic interest rates gradually rose, the positive wedge disappeared. However, "marginal" sources of finance for the Treasury in the last two years--bonds sold at auction and recourse to the Banque Marocaine pour le Commerce Ext6rieur (BMCE)--have been at rates between 12% and 14%, considerably higher than depreciation-adjusted average domestic interest rates. Therefore, mandatory placements of Government paper with the financial system have probably reduced the interest cost to the Treasury by as much as 1% of GDP in recent years 68. However, to the extent that mandatory placements squeeze bank profits, the financial regulations may cause tax revenues from the banking system to be lower than they otherwise would be in a liberalized environment. (b) The Problem of Arrears 63. Another characteristic of deficit financing in Morocco has been the extensive reliance on forced domestic borrowing by the Government in the form of accumulation of arrears vis-&-vis private contractors, PEs and financial institutions. The bulk of the arrears, build-up occurred between 1982 and 1985, Yugoslavia, 3.6% in Turkey, and 1.1% in Pakistan (A. Thorne and A. Dastaheib: "Public Sector Debt, Fiscal Deficit and Economic Adjustment: A Comparative Study of Six EMENA Countries," World Bank mimeo, July 1991). The same study also reports that Central Bank finance in Morocco was the lowest in the BiX countries. 64/ Seignorage refers to the resources the Government acquires through the issue of nominal money balances. The part of the increase which keeps the real value of money constant iB referred to as inflation tax. 65/ A precise estimate of the revenues from financial repression is difficult to obtain in practice since it would require the evaluation of the shadow interest rate faced by the Government in its financing activities, that is, the rate that the Treasury would be charged in a fully liberalized financial context. For a discussion of the importance of this implicit form of taxation, and the difficulties associated with their measure.ents, see C. Chamley: "Taxation of Financial Assets in Developing Countries", The World Bank Economic Review, '.5, September 1991. 66/ Actual depreciation is used as a proxy for expected depreciation. j7/ This approach to estimating the resource transfer from the private sector to the government through financial controls is discussed in A. Giovannini and M. De Melo: "Government Revenues from Financial Repression", World Bank mimeo, November 1989. §8/ See 0. Godron: "Le Financement du Tr6sor Ilarocain," World Bank mimeo, July 1990. - 43 - reducing the financing needs of the Treasury (cash deficit in Figure 3) by 2% of GDP on average, thereby releasing pressure on the authorities to increase monetary growth. The macroeconomic consequences of this strategy, however, have been quite severe. The creditors' own cash flow was squeezed, resulting in their own inability to meet financial obligations (including the payment of taxes) and leading eventually to the build-up of a complex matrix of cross arrears. Moreover, the expectation that the government would not settle its financial obligations in time was quickly taken into account by contractors and built into their bid prices, leading to an inevitable rise in costs. 64. Although arrears have gradually been reduced, the potential for slippage in this direction still exists. After declining for three consecutive years, the total stock of arrears of the CG sharply rose in 1989 (+1.0% of GDP) in response to a deterioration of budgetary conditions. Despite a significant overall reduction in CG arrears in 1990 (DH 2.5 billion, or 1.2% of GDP), the stock of arrears of the CG administration vis-&-vis utility companies continued to rise to DH 1.5 billion (0.7% of GDP), up from DH 1.2 billion a year earlier. (C) Foreicn Financing 65. Morocco's access to international financial resources has been characterized by three main features during the eighties. First, official lending has been significantly greater than syndicated commercial bank loans. This has resulted partly from the limited involvement in Morocco of US banks which tended to favor their Latin-American neighbors to African countries in their loan portfolios. The continuing interest of France for its former protectorate was also an important element explaining significant net flows from official sources. Second, Morocco has continued to depend on foreign sources of finance after the inception of the international debt crisis through extensive rescheduling agreements through the Paris and London Clubs. Repeated rounds of debt rescheduling have covered, on average, 84% of the financing needs of the Treasury since 1983, and as much as 92% in the past two years. 66. Finally, Morocco has been able to rely on considerable volumes of financial aid in the form of grants, especially from oil-rich Arab countries. Although a volatile source of financing, these grants have often constituted an important injection of foreign exchange for the Treasury. In 1985, 1988, and 1990 official grants to the budget amounted to 1.9%, 0.6%, and 3.0% of GDP, respectively. The recent large grants from Arab governments of around US$700 million in 1990 and an estimated US$600 million in 1991 are largely attributable by the pro-Kuwait stance adopted towards Morocco during the Gulf crisis. This inflow of foreign resources more than compensated for the fiBcal revenue loss caused by the upsurge in oil prices. Central Government Debt 67. Over time, the financing strategy of the Government is reflected, and in turn affected, by the structure of the accumulated debt. This is illustrated in Figure 7. The total CG debt/GDP ratio, an important indicator of the CG creditworthiness, increased considerably in the early eighties. Between 1981 and 1984, it grew on average by almost 10% of GDP a year. This resulted from very high primary deficits (7.9% of GDP on average), low GDP growth rates (2.7% on average), and a very high real depreciation of the dirham (14.6% annually on average), the latter effectively raising the burden of external debt service in - 44 - domestic currency terms69. The pressure generated by the high debt service led not only to i.creased domestic and external borrowing through normal channels, but also to an important accumulation of domestic arrears. This form of forced borrowing corresponded to 1.9% of GDP a year on average during 1981-84, despite the availability of domestic financing at negative real interest rates and a modest monetization of the deficit (0.8% annually). In 1985 and 1986, total debt decreased in terms of GDP, due to much lower primary deficits (1.5% of GDP on average), to high growth rates (7.3% a year), strongly negative domestic real interest rates, and a stable real value of the dirham. As a consequence, the stock of arrears started to decrease again in 1986. From 1987 to 1990, the budgetary adjustment continued and had to be adapted to higher real interest rates and the need to continue to repay arrears (0.5% of GDP a year on average). The Government switched therefore to primary surpluses (1.2% of GDP on average). The dirham began to depreciate again in real terms, though less rapidly than in the early eighties (3.3% a year), adding some pressure to external debt service. The combination of these factors was to raise moderately the debt/GDP ratio during the last three years (1.7% annually). The domestic and exiternal debt structure that resulted from these developments is reviewed briefly below. (a) Domestic Debt 68. In addition to extensive controls and segmentation of the Government securities market70, the domestic financing strategy has also led to: (i) rapidly rising domestic debt stock and interest rates; (ii) a high, though declining, concentration of debt holding by the banking system; and (iii) relatively long maturities without a deepening of the government security market (see Figure 8). 69. In 1985, the domestic debt of the Treasury stood at around 21% of GDP, compared with three times that amount for external debt (62% of GDP). By 1989, the year of the CG's largest deficit since 1985, the CG external debt had declined from 62% to 58% of GDP while domestic debt had climbed to :31% of GDP. Although the trend reversed itself the following year, by end-1990 domestic debt still constituted 30% of total Treasury debt, compared with 25% in 1985 and only 17% on average in the previous four years. At the same time, the cost of servicing this debt rose rapidly during the eighties. The negative real domestic interest rates during the first half of the eighties (-2.3% on average in 1981-85) turned markedly positive during the latter part of the decade (+3.4% in 1986-90). 70. At the end of 1990, deposit banks were holding over 56% of domestic CG debt, down from over 64% five years earlier. This retrenchment has allowed 69/ The impact of real exchange rate changes and of inflation on the debt/GDP ratio can be analyzed more precisely by defining appropriate measures of the deficit. These "operational deficits" are derived in Annex III and discussed in some detail. 20/ The nature of these controls is discussed extensively in several documents. See for example: "Morocco: Recent Economic Developments," IMF, March 1991; "Kingdom of Morocco: Financial Sector Development Project," World Bank Report P-5553 MOR; and 0. Godron: "Le Financement du Tr6sor Marocain," World Bank mimeo, July 1990. - 45 - Figure 7 Central Government Debt In % of GDP 1979 1980 1981 1982 1983 1984 1985 1988 1987 1988 1989 1990 | Foreign E Domestic ClCentral Bank | *.\8Ibhrtolo9-debt In %> of Total Debt 100%1 ..... /../g./.., . 80% 60%- 40% 20% 0% 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Foreign g Domestic [] Central Bank| \ sIboe I to'og-raobtS - 46 - Figure 8 Domestic Debt Structure Debt Holder Compositlon In % of Total 750% 76% - 50% i 0%. 1985 1986 1987 1988 1989 1990 i Banks M SFIls PE's M Inst. investors EZI Private M:, It* Ibe to %d do -too Maturity Composition In % of GDP 40% 30%-i 25%2 20% 1 10%1 1985 1986 1987 1988 1989 1990 | Up to 1 year 2 and 3 years | 5 years 10 and 15 years Note: The chart depicts the maturity of the Instruments at the tlme of Issue. h.r s$Ibel tOddE -betD - 47 greater participation of institutional investors, SFIs and individuals, despite the severely segmented structure of the domestic market for government securi- ties. The small and decreasing CG debt holdings of the PE sector originate from the conversion of a DH 3.6 billion of Co arrears vis-A-vis certain PEs into 5-year bonds. Apart from this exceptional operation, PEs do not normally hold large volumes of governrrent paper. 71. The average maturity of government debt at the time of issue dropped sharply in 1986, mostly due to the sudden decline in foreign financing for the deficit requiring a massive recourse to short-term bank finance by the Treasury7l. As a result, the average maturity dropped from 5.1 years in 1986 to 4.3 years in 1987, but the Treasury succeeded in extending it slightly to 5.2 years by end-1990. Though the average life of the Treasury's obligations appears reasonably long by international standards, several features of the debt instruments and of the institutional environment in which they are floated prevent a deepening of the government security market. Among these are: the segmentation of the market (i) in terms of clients (the great majority of government debt instruments are only accessible to only one type of lender -- banks, SFIs, non-residents, etc.); (ii) in terms of products (the instruments have almost as many reimbursement dates as there have been issues); and (iii) in terms of fiscal treatment of the proceeds of the lender. 72 (b) External Debt 72. The external debt structure of Morocco during the eighties has been characterized by a very large share held by bilateral creditors (two-thirds), a much smaller share of private creditors (between one-quarter and one fifth), with the remainder being accounted for by multilateral organizations (Figure 9). Although the share of bilateral creditors has remained more or less constant during the decade, its composition has changed quite dramatically in terms of the contri- butions of its two largest donors, Saudi Arabia and France. As the value of oil export revenues of Saudi Arabia started to decline towards the middle of the eighties, this country began to curtail financial aid to other developing countries. The Saudi's share of Morocco's CG debt declined from a peak of over 30% in 1984 to about 14% in 1990, its lowest level in the decade3. On the other hand, France's share has risen almost in parallel with the decline of that 71/~ Despite a marked decline in deficit, the drop in foreign finlancing was compounded by the need to finance a net reduction of arrears for the first time since 1980. As a result, the stock of 1-month and 1-year bank debt at end-86 rose by DH 7.2 billion (4.7% of GDP). 72/ These are discussed in some detail in 0. Godron: Le Financernent du Tr6sor Marocain, World Bank mimeo., July 1990. 23/ These numbers partly mask the effective contribution of Saudi financial aid to Morocco to the extent that large volumes of financial resources have continued to be made available to the CG in the form of occasional grants (see para. 66). Nevertheless, the decline in oil prices did have a strong dampening effect on the regular flow of financial capital from Arab oil-exporting countries to their oil-importing neighbors. - 48 - Figure 9 CG EXTERNAL DEBT STRUCTURE In % of GDP 70% 60% - 50% I 40% - 30% - 1 1 20% h 10% I; 0% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 France Saudi Arabia E Other Bilateral World Bank [Z Other Multilateral EZ Private |a I t.Ib t otOIfUdebt In % of Total ~ World Bank E Other Multilateral ClW Private m lb ltOrfOd.b I - 49 - of Saudi Arabia. From a low level of 4.8% in 1982, France's share rose in 1990 to its highest point in the eighties, reaching almost 20% of total CG external debt. 73. The share of private creditors in total CG external debt has declined from 25% during 1980-84 to 20% during 1985-90, considerably lower than most of the other highly-indebted countries74. The last category of creditors, multilateral organizations, has accounted for an increasingly larger portion of the CG debt. In particular, large net positive flows from the World Bank have raised its share in Morocco's external debt from 4.7% in 1982 to 12.3% in 1990.75 The share of the other multilateral institutions has also risen from 1.5% to 2.6% of total CG external debt. B. The Local Governments 74. The relations between the central and local government administrations are today at the forefront of the fiscal reform program. This development is rooted in the decision taken in 1987 by the Moroccan authorities to assign to the LG 30% of the revenues from the value-added tax (VAT), thereby replacing the CG budgetary transfers that accrued to the LG under the earlier system76. The fundamental feature of the new system is that the LG share of the VAT belonas to the LG and is not a discretionary subsidy to be approved every year by Parliament. Moreover, the 1987 law also states that the 30% share is a minimum and is susceptible to further increases through the annual Finance Bill. Therefore, the volume of resources accruing to the LG from the VAT not only tends to increase very rapidly, given the buoyancy of the VAT, but has the potential to increase as a proportion of the VAT revenues. Following the introduction of this measure, therefore, the fiscal debate in Morocco has centered on whether this large devolution of resources to the LG (almost 10% of CG tax revenues) iB compatible with the objective of deficit reduction at the central level, given the mounting budgetary pressures faced by the CG. 75. In recent years a key component of the authorities' fiscal program has been to establish a mechanism that would alleviate the negative budgetary impact at the CG level of the VAT revenue loss without jeopardizing the objective of emancipating local finance, as stated in the 1987 legislative framework. The search for such a compromise is one of the most difficult problems currently being debated among the Moroccan authorities. Its solution appears today to be the key to attaining a viable fiscal stance for the CG. Given the importance of 74/ The average for the major highly-indebted countries (especially in Latin America) has been well over 50% during the decade. 25/ Morocco is the tenth largest creditor of the World Bank, accounting for 3.2% of its total loan portfolio, and the largest in the MENA region. 7k/ The decision took place in the context of a broader fiscal reform at the local level and was accompanied by other changes resulting from the CG fiscal system reform started in 1986. For example, 90% of the Business License Tax (Patente) today accrues to the LG as well as some of the revenues from property taxes. - so - the key to attaining a viabla fiscal stance for the CG. Given the importance of these issues for the successful completion of almost a decade of reforms, this section will concentrate on two aspects related to the LG: their budgetary relations with the CG during the adjustment period and, relatedly, the need to improve LG finances. (a) Budgetary Relations with the CO in the Adiustment Process 76. From an institutional point of view, the financial relations between the LG and the Central Administration in Morocco have been traditionally rather limited. The CG transfers resources from its own budget to that of the LG to supplement its own revenues. The LG, on its part, is required to use the Treasury General as its exclusive financial intermediary, thereby providing captive financing for the CG. In practice, however, interactions betwqeen the central and the local administrations are considerably more complex, involving often the direct intervention of the Ministry of the Interior and the Ministry of Finance. The most important budgetary relations between the LG and the CG during the adjustment decade have been: (i) the budgetary transfers; and (ii) the transfer of investment responsibilities between the LG and the CG. 77. The Evolution of Budaetary Transfers. Although they are entirely accounted for as capital spending by the CG, transfers to the LG are eventually allocated in the following manner. First, funds are allocated to finance specific programs of "local interest" which are decided by the Ministry of Interior without passing through the local budgets (the so-called "shared expenditures"). Then, funds are allocated to cover projected operating deficits of LG, on the basis of the budgets presented by the LG ("current transfers"). Finally, the remaining funds are distributed to finance investment ("capital transfers"), a portion of which is also decided at the central level. The resulting allocation of the transfers is illustrated in Table III.3. The table indicates that the share of VAT allocated to equilibrate the current budget is growing rapidly, accounting for one-third of the total VAT transfer in 1990, and it iB expected to rise further in 1991 to almost 40% compared to less than 25% in 1988. In addition, a more detailed analysis of VAT transfers indicated that as much aB two-thirds of the DH 1.7 billion allocated to the capital budgets of the LG in 1989 was earmarked for projects decided at the central level. 77/ See "D6centralisation et services publics locaux au flaroc," World Bank Mimeo, August 1991. The authorities' decision to transfer some categories of investment from the CG budget to the LG starting in 1990 has limited further the volume of non-earmarked VAT resources (see below). - 51 - Table 111.3: ALLOCATION OF VAT TRANSFERS TO THE LG 1988 1989 1990 1991* - In millions of DH - Current Budget 700 906 1,153 1,600 Capital Budget 1,725 1,741 1,755 2,064 'G Investment/a 1,725 1,741 1,349 1,389 Investment Transfers 406 675 Shared Expenditures 446 366 541 486 TOTAL 2.871 3,013 3,449 4,150 -As % of Totals - Current Budget 24% 30% 33% 39% Capital Budget 60% 58% 51% 50% LG Investment/a 39% 33% Investment Transfers 12% 16% Shared Expenditures 16% 12% 16% 12% TOTAL 100% 100% 100% 100% - As % of GDP -- Current Budget 0.4% 0.5% 0.6% 0.7% Capital Budget 0.9% 0.9% 0.8% 0.9% LG Investment/a 0.6% 0.6% Investment Transfers 0.2% 0.3% Shared Expenditures 0.2% 0.2% 0.3% 0.2% TOTAL 1.6% 1.6% 1.7% 1.8% * Projected. /a Includes earmarked expenditures (see text). Source: Ministry of Interior; Ministry of Finance. o:\cem\mission\now\bud.wk1(tr) Oct-91-10:07 78. This allocation procedure seems to have played an important role in the relations between local and central governments during adjustment. Figure 10 illustrates some revealing points. First, the volume of transfers has been rapidly growing in terms of GDP, especially after being linked in 1987 to the VAT, a buoyant source of revenues. Second, and more importantly, transfers have been growing even more significantly throughout the period in proportion to total government outlays; given the general retrenchment of the General Budget, transfers as a share of CG expenditures have increased five-fold between 1976 and 1990. Third, the impact of the CG budget crisis on the LG finance appears to - 52 - have been sharp but short-lived. In 1983, the year in which capital expenditures by the CG dropped alrnost a full percentage point of GDP, more than half was due to the virtual vanishing of capital transfers to the LG. The following year, while the capital budget of the CG continued to contract sharply, transfers to the LG started to rise again, although it was not until the recovery of capital expenditures in 1986 that transfers rose above their pre-1983 level. 79. The allocation of investment responsibilities between the CG and the LG has been a critical element of the decentralization process in Morocco. F'rom the very beginning, the CG has had a major say in the way transferred resources are utilized by the LG. The Ministry of Interior in particular maintains firm administrative authority (Turelle) over the LG and has significant influence on the capital spending at the local level. This tendency appears to have been accentuated in recent years, most likely in response to the adjustment needs of the General Budget. The main channel of influence and control from the center of LG expenditure is the allocation of transferred resources among (i) earmarked expenditures (the so-called "national programs"), (ii) the "shared expenditure", and (iii) the investment transfers. 80. Earmarked expenditures include projects such as rural electrification, construction of small dams for irrigation and water supply and reforestation. Since they also include certain exceptional allocations (e.g., the contribution of the LG for the construction of the Mosque Hassan II in Casablanca), their absolute volume and relative importance in the overall VAT envelope varies considerably from year to year. 81. "Shared expenditures' ("Charges communes") have been a regular feature of Morocco's decentralization strategy since its inception in 1976. As shown in Figure 10, these "shared expenditures" appear to have been used to retain partial control of the increasingly greater volumes of resources transferred to the LG from the General Budget since the mid-eighties. The sharp drop in total flows from the CG to the LG in 1983 was in fact accompanied by a marked rise in common charges. As budgetary transfers resumed their growth the following year, from that moment onwards the common charges have represented on average a greater share of total transfers than prior to 1983. Thus, the fiscal tightening at the CG level, though not preventing transfers to the LG from rising, resulted in an increase in the share of transferred resources that are directly controlled by the Ministry of the Interior. 82. Finally, the investment transfers represent an important change in the decentralization strategy. The decision to transfer a significant portion of public investments from the General Budget to the LG's budget has further increased the control from the center of the resources that are transferred to the LG. In 1990, the transfer involved expenditure programs for primary education, health, and rural development. In 1991, this list was increased to include rural electrification, civil protection and a fund to finance projects - 53 Figure 10 Budgetary Transfers to Local Governments 1976-90 In % of GDP 2%+ 1.6%- 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 Current Transfers Capital Transfers LZShared Expedt. In % of CO Expenditures 6% 4% - I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 Current Transfers Capital Transfers =J Shared Expendit.s - 54 Table III.4: INVESTMENTS TRANSFERRED TO THE LG 1990 1991 1992 -- In Million DH --- Agriculture Transferred in 1990 53 50 70 Transferred in 1991 0 0 Health Transferred in 1990 99 134 212 Transferred in 1991 0 0 Education Transferred in 1990 435 502 850 Transferred in 1991 0 0 Interior Transferred in 1990 0 0 0 Transferred in 1991 472 473 Public Works Transferred in 1990 0 0 0 Transferred in 1991 50 50 Energy Transferred in 1990 0 0 0 Transferred in 1991 234 300 TOTAL Transferred in 1990 587 686 1,132 Transferred in 1991 756 823 GRAND TOTAL 587 1,442 1.955 As % of VAT Transfers 16% 36% 44% Note: New investment appropriations only. VAT Transfers are estimated. Source: Ministry of Finance. o:\ceqn\mission\now\cl-trans.wkl(tr) 24-Oct 11:10 - 55 - aimed at the reduction of urban unemployment78 (see Table III.4). Though consistent with the general objective of promoting decentralized spending responsibilities, the timing and the initial modalities of the transfers were determined by the need to reduce the fiscal deficit of the CG. The decision was taken in 1989 when the fiscal situation was sharply deteriorating. The transferred expenditures have not been genuine local investments in the sense that they continue to be prepared and implemented at the central level. The LG's role was initially strictly restricted to the financing of the investment programs that were transferred. However, the strategy of the Government in the direction of decentralization calls for progressively greater involvement by the LG officials in the design, planning and execution of the expenditure responsibilities that are transferred in order to ensure that the investment priorities at the local level are respected within the macroeconomic constraints of the country79. 83. Preliminary evidpnce on the execution of the 1990 LG budgets indicates that initial impact of the transfers has been an almost complete crowding out of the traditional investment of the LG. In this sense, the stabilization objective sought at the macroeconomic level was fostered by the expenditure transfers. Whether the development objectives in terms of improvements in the physical and social infrastructure of the country have been compromised will depend on whether the projects that were transferred from the center were more important than those squeezed out at the local level. This will remain an open question until more information becomes available on the investment programs of the LG. (b) Local Government Financinq 84. The most important features of the LG's finances are: (i) the need to augment resource mobilization at the local level; (ii) an inefficient budgetary process combined wIth a limited capacity for the sector to absorb the large volume of transferred resources; (iii) the importance of the surplus that results from this absorotion problem; and (iv) the limited options available to the LG to finance its budget. These features emerge from the preliminary analysis of LG data recently collected by the Moroccan authorities for 1988 and 1989. These data should facilitate the analysis of the LG's finances which has been hampered so far by the lack of information regarding the consolidated operations of the sector as a whole. 85. Resource mobilization at the local level remains extremely limited. The urban tax, certain property taxes, and the business license tax--amounting to about half of the LG revenues (excluding VAT transfers)--are all collected by the CG administration. Combined with the large volumes of resources that are transferred through the VAT, the CG effectively ensures the collection and administration of the bulk of the LG resources. This arrangement reduces the 28/ Promotion Nationale. 79/ In 1991, for example, the Prefectures and Provinces can sign their procurement contracts directly, within the limits established at the central level through a inarch6- cadre. 56 - incentive for the local authorities to undertake additional resource mobilization efforts. Local taxes ter,d to be numerous, costly to collect, and raise relatively little revenues. Cost recovery of services rendered by the LG also remains poor. 86. Improvinci the Budgetarv Process. The LG's inability to spend all its resources is a result of several factors. First, the level of the subsidies to be received is mostly unknown by local officials at the time of the preparation of their budget as a result of the present mechanism for distributing the VAT transfers (see para. 74). Second, the budget, once adopted by the local council, is presented to the authority in charge of local budgetary control. This procedure often results in a situation where the budget is approved after the beginning of the year. In this case, the LG proceeds on the basis of the previous budget and new expenditures are hence postponed. As a result, most of the new expenditures can only be committed in the last few months of the year. This serious bunching problem leaves much of the investment credits uncommittec., given the difficulties associated with processing large volumes of investment credits in a short period. Third, equipment subsidies are transferred to the LG with delays. An estimated 45% of equipment subsidies for 1988, for example, were not transferred in time (i.e., before the end of the year), according to officia2s of the Ministry of the Interior. Fourth, delays in spending resources are also a resUlt of the a priori approval that must be obtained for every decision frorn the CG agencies. Fifth, LG, and particularly rural communes, lack the technical abilities and skills to evaluate, prepare and adequately carry out investment projects. 87, The Problem of the Surplus. An important characteristic of the LG budget is the treatment of the difference between (a) the resources available to finance capital expenditures (current savings, capital transfers, borrowing)80 and (b) realized capital expenditures. This surplus (Excddent de recettes) is carried over from year to year, and it is treated as an additional resource for the capital budget in any given year. Given the limited absorption capabilities of the LG, as described above, realized capital expenditures in the aggregate fall normally quite short of the capital resources (current savings, capital transfers, borrowing). Therefore, the surplus grows from year to year. This stock rose by about DH 1.5 billion (or 0.75% of GDP) in 1988 and 1989, the two years for which detailed data are available (see Table I.=) and has attained a level of over DH 3 billion (over 1.5% of GDP) at end-198981. 88. This stock has a determining influence on the volume of investment appropriations established in the LG budgets every year. Since this accumulated surplus effectively represents budgetary authority over financial resources for BO/ Current savings are the excess of revenue over current expenditures (see Table 1.2). Al/ These funds are apparently deposited at the Treasury General (TG), as indicated in the public sector flow of funds diagram in Part II of the report (Diagram l(b)). Whether these funds are effectively available to the LG to use at any moment or to the TG to finance the CG deficit, for example, represent issues that need to be investigated further. - 57 investment, large volumes of investment credits are open every year in the individual budgets. Although there are no precise data showing which LG generate this surplus, some conclusions might be drawn from the available figureso. First, some LG receiving a current subsidy show eventually a surplus at the end of the year. Second, it seems that much of this surplus is unexpected, i.e., its level is known too late in the year to be taken into account in the investment planning. Third, the sharp increase in equipment subsidies from VAT resources since 1987 may have contributed to the increase in this surplus, partly because of the allocation mechanism which encourages individual LG to present a budget with a current deficit. 89. Limited Alternative Sources of Finance. To the extent that local authorities foresee a shortfall in their resources (own revenues and transfers) compared with their planned spending, they rely on lines of credits from the Fonds d'6quipement commntnal (FEC), a specialized financial institution. The volume of lending remains limited from this source (DH 253 million in 1988 and DH 395 million in 1989), and mostly benefits the large municipal centers. The resources of the FEC are occasionally complemented from other sources. In 1988, the Caisse de d6p6t et de gestion disbursed DH 320 million to the municipality of Casablanca, while in 1939 the Treasury made available DH 324 million to the LG sector as a whole to finance the reduction of LG arrears vis-a-vis utility companies82 as part of the .-RL program. External borrowing remains extremely limited: net drawings amounted to DH 4 million in 1988 and DH 9 million in 1989, and occurs in the context of aid protocols with Arab countries (Fonds des villes arabes). Outside these sources, the LG have no other means, besides running arrears,83 of mobilizing financial resources. The traditional source of bond f'nance for local authorities in many countries appears in practice not to be available to the LG in Morocco. Finally, LG are required to hold their funds at the Treasury General and cannot use the services of commercial banks. C. The Puiblic Enterprises 90. The relatione between the CG axnd the PE sector have evolved considerably since the country's balance of payments crisis of 1983. Given the importance of the PE sector in the economy, a large-scale review of it was undertaken in the early eighties giving rise to a sector-wide reform program. Three related aspects of this program are particularly important for the design of a public sector strategy that can support the attainment of internal (fiscal) and external (balance of payments) equilibria. The first is the budgetary flow of resources between the CG and the PE sector; the second iB the role of the 82/ Presumably the beneficiaries of the loan were not the local governments that have a financing surplus. 8.3/ Arrears do not appear to have been used as a systematic source of financing by the LG. Most of the arrears are with public utility companies (around DH 400 million at end-89) with whom there continues to exist considerable disagreement over the legitimacy of the bills submitted for payment. - 58 - State as regulator, owner and strategist of PE9; and the third is the PE investment and financing strategy. 91. Past experience indicates that the PE sector was affected by the economy-wide need to reestablish internal and external equilibria: resource transfer from the CG to PEs declined markedly, as did the flow in the opposite direction. The sector's incentive, managerial and institutional structure, however, appears to have been the main obstacle to generating a swift response to the deteriorating macroeconomic conditions of the country in the mid-eighties. In particular, investment plans remained often above the financing capacity of the balance of payments, public utility pricing policies did not support the country's adjustment efforts, and the extremely tentative approach to privatization did not provide the boost needed by the private sector. CG Stabilization and Budgetarv Flows 92. During 1979-82, budgetary contributions from the CG to the PEs averaged 2.4% of GDP. The immediate impact on the PE sector of the CG stabilization program was to reduce these contributions significantly during the remaining decade. Total CG contributions declined to less than 2% of GDP during 1983-86 and dropped even more sharply to only 1% of GDP over 1987-90. As a share of CG expenditures, budgetary contributions were halved between 1979-82 and 1987-90. The reduction of contributions from the CG budget reflects the fiscal adjustment undertaken during the eighties at the level of the CG. Although budgetary contributions are expected to fall further during 1991-94 as a uhare of GDP (Table III.5), the decline will probably not be as marked as in the previous periods. This will result mainly from the need to allocate CG budgetary resources to the PE sector for restructuring purposes (classified under "Capital GrantsB" in Table III.5).84 93. The analysis of financial flows between the CG and the PE sector illustrates another dimension of the public sector adjustment in Morocco. Table III.6 describes these flows for the 11 major PEs between 1985 and 199085. Fiscal stabilization objectives have imposed a compression of tiansfers to the PE sector, as discussed previously. For the major enterprises, CG transfers were reduced by two-thirds between 1985 and 1990 (in percent of GDP). i{/ The DH 1.3 billion necessary for restructuring purposes during 1991-94 (DH 322 m. per year on average) would be allocated mainly to the mining sector (64%) and the sugar sector (16%). The remainder would be directed to the Tobacco Monopoly (R6gie des tabacs), a refinery (SAMIR), and the national airline company (RAM). A5/ The consolidation of the PE sector conceals the fact that the recipients of the transfers are often a different category of enterprises than those that pay taxes and dividends. The recipients of current transfers are generally public administrative establishments (EPA) such as hospitals, schools, and research institutes, while the tax and dividend payers are the industrial and commercial enterprises (EPIC). - 59 - Table 111.5: TOTAL BUDGETARY CONTRIBUTIONS TO ALL PE* Yearly Averages 19?9-82 1983-86 1 987-90 V91-94/a -- (In millions of current dirhams) -- Capital Transfers 1,113 1,529 1,128 1,157 Current Transfers 310 477 665 958 Capital Grants/' 233 144 0 322 Loans and Advances _163 50 0 0 TOTAL 1,819 2,200 1,793 2,436 As % of GDP 2.4% 1.8% 1.0% 0.9% As % of CG Expenditures 7.0% 6.1% 3.5% 3.4% /A Projected. /b Includes equity contributions and irregular transfers. All PEs excluding ORMVAs. Source: Ministry of Finanice; World Bank estimates. o:\cefn\missioon\now\pe-trans.wkl(2) 94. Financial flows from the PE sector to the CG have also been declining in recent years6. The decline has been particularly marked in terms of corporate taxes: as a share of GDP they have halved between 1985-87 and 1988-90. Customs duties, on the other hand, have remained high, accounting in the last three years for almost half of the total PE contributions to the budget. This phenomenon can partly be explained by the rapid rise in investment over the period (+1.2% of GDP between 1986 and 1990), and the consequent surge in capital goods imports87. The investment increase may also tend to depress taxable profits, as capital goods are gradually amortized, but it cannot explain such a 86/ The table does not report VAT paid by the PEs, since exhaustive data for the sector are not available. It is, however, a significant source of revenues for the Treasury. In the particular case of ONPT (Post and Telecommunications), probably the largest single taxpayer in the country in 1990, VAT accounts for over one-third of its payments. This is largely due to a peculiarity in the Moroccan tax system which has not allowed the Offlce to credit the VAT it pays on its inputs. The draft Finance Law for 1992 proposes the elimination of this anomaly in the VAT legislation. 87/ Unlike private companies, or subsidiaries wholly owned by PEs, the Offices do not benefit from the fiscal exonerations granted by the investment codes. - 60 - Table 111.6: FINANCIAL FLOWS BETWEEN THE CG AND THE MAJOR PEs 1985 1986 1987 1988 1989 1990 ----- (In millions of current dirhams) ------------- Corporate Tax4 501 945 491 336 356 292 Salary Taxes4 203 237 332 366 412 447 Dividends 1,542 60 679 513 220 820 Phosphate Export Tax 218 198 164 157 163 140 Customs Duties 1,025 937 798 949 1,225 1 309 Total Flows from PEs 3,489 2,377 2,463 2,321 2,376 3,008 In X of GDP 2.7% 1.5%. 1.6% 1.3X 1.2% 1.4% In X of CG Revenues 13.0% 8.1% 7.5% 5.6% 5.4% 5.9% Capital Transfers 1,247 1,257 749 937 934 641 Current Transfers 0 0 0 0 0 0 TotaL FLows to PEs 1,247 1,257 749 937 934 641 In % of GOP 1.0% 0.8% 0.5% 0.5% 0.5% 0.3% In X of CG Expenditures 3.2% 3.4% 1.8% 1.9% 1.7% 1.1% MET FLOWS 2,242 1,120 1,714 1,384 1,442 2,367 In 2 of GDP 1.7% 0.7% 1.1% 0.8% 0.8% 1.1X Memo Item: CG Deficit (+)9.2% 5.4% 5.9% 4.5% 5.9% 3.4% /2 Includes ISP/IS (Imp6t sur Les b6n6fices professionnels/Imp6t sur les soci6t6s), Taxe urbaine, Taxe d'6diLit6 et Patente. /b Includes PTS (Pr6L6verent sur traitements et talaires) and related PSN (Participation b la solidarit6 nationale). Source: Ministry of Finance; World Bank estimates. o:\cem\mission\now\pe-flows.wkl(b)\04-Oct-12:39 marked decline in corporate taxes paid by PEs88. Dividend payments to the State are made by lees than 5% of PEs and tend to fluctuate considerably over time. Given the fact that an even smaller number of PEB account for the bulk of dividend payments,89 such fluctuations are partly due to enterprise-specific factors (for example, phosphate prices in the case of OCP). However, regression analysis shows a strong positive correlation between dividends and the level of budget deficits (before dividends). This would tend to indicate that, when necessary, the CG puts pressure on PEs to increase their dividend payments. 88/ The problem of low corporate tax revenues is not limited to the PE sector. A recent study by the IMF ("Maroc : Vers le renforcement et la consolidation de reformes fiscales," May 1991) indicates that in 1989 over 40% of companies in Morocco declared negative taxable income, while an additional 15% declared zero taxable income. 89/ Over 1988-90, about three-quarters of dividend payments by non-financial PEs were made by six enterprises. - 61 - The Role of the Central Government 95. Extremely competent and motivated managers continue to be the most valuable asset of the PE sector in Morocco. The role of the Government should be to exploit this wealth by: (i) clearly stating the macroeconomic and sectoral objectives and constraints for the enterprises; (ii) setting transparent "rules of the game" to ensure accountability and internal consistency of the multiple objectives to be pursued; (iii) accelerating its efforts in the direction of PE divestiture and privatization in particular; and (iv) limiting its interactions with the enterprises that remain in government hands to: (a) monitor broad strategic decisions; (b) evaluate performance; and (c) exercise its ownership rights, including a regular flow of dividends which is compatible with healthy financial conditions for the enterprises90. 96. The role of the State as regulator and fiscal authority, on the one hand, and as owner of PEs, on the other, has not been very clear in the past and has rendered the country's adjustment process more arduous. While administrative controls on the daily activity of the enterprises have abounded, there has been little awareness of the need to follow developments in the macroeconomic environment and adapt the sectoral strategy to changing circumstances. As a result, the fundamental strategy decisions concerning tariffs, investment plans, transfers and financing have been taken separately9'. 97. As part of the country's stabilization program, the CG has reduced its financial support to PEs and demanded more significant budgetary contributions. However, the Government has often been reluctant to fully utilize the PE sector as a vehicle to promote adjustment, thus threatening the long-term prospects for the sector and for the economy at large. This has been the case, for example, in the context of its tariff policies for public utilities. Water tariffs in Morocco, a country bordering the desert for most of its eastern side, are among the lowest in the world; the structure of electricity rates essentially subsidizes urban household consumers at the expense of industrial users;92 the public transport sector, especially in urban centers, has suffered from analogous problems. Similarly, the reticence of the authorities in tackling the labor redundancies in ailing enterprises has exacerbated the problem, as shown in the coal and sugar sectors. 98. The investment program of PEs also represents a challenge for the management of the sector. Most PE investment aims at improving the country's 90/ For a useful multi-country study of the factors affectino the performance of public enterprises, see M.A. Ayub and S.O. Hegstad, "Management of Public Industrial Enterprises," World Bank Research Observer, January 1987. 91/ Furthermore, the most important PE, OCP (the national phosphate company), has been virtually exempt from any review at the Ministry of Finance level concerning its investment plans and financing until very recently. 92/ See "Morocco - An Approach to Energy Price and Tax Reform," World Bank Report 7751-MOR, June 1989. 62 - physical infrastructure in several deficient areas (transport, power, telecommunication) and at increasing its foreign exchange earning capacity (phosphate extraction and processing). Thus, in general, PE investment projects can represent a high-priority use of public resourcee. However, imports of capital goods by PEs represent large outflows of foreign exchange that the balance of payments may not be able to sustain during critical periods. Similarly, the great reliance placed by PEs on foreign financing has resulted in increases in external debt with broader consequences for the economy in terms of creditworthiness vis-&-vis the international financial community. Thus the lack of macroeconomic monitoring can lead to the implementation of investment programs which are project grounds justified, but do not take into account the economy- wide consequences of their plans. Public Enterprise Investment and Financing 99. This lack of monitoring has characterized PE investment and financing during the eighties, and represents one of the major issues facing the authorities in their efforts to rationalize the PE sector. Fixed investment by PEs has been growing both as a share of public capital formatiorn and as a component of aggregate demand93. Therefore, the ability to adapt PE investment program to evolving macroeconomic circumstances is important for demand management policies, especially during the economy's critical transit-on toward balance of payments viability. Similarly, the financial environment in which the PE sector operates is largely shaped by the policies at the CC level. The recognition of this close interdependence is an essential step in the fo.mulation of a consistent public sector strategy in support of the country's economic objectives. 100. Past experience has indicated that the response of the sectcr to the macroeconomic difficulties of the mid-eighties was considerably delayed, compared to the rest of the economy. In particular, while private and governmertt gross fixed capital formation started to decline after 1982 in terms of GDP, that of PEs continued to rise unabated until 1985 (Figure 5 in Part II). The large volumes of imports associated with these i.vestments were an important factor in maintaining the current account deficit around 10% of GDP during that period. These developments represent an important lesson for the management of the PE sector in the future. Over 1991-94, the investment program of the 11 major PEs is expected to increase to 5.8% in terms of GDP compared to 3.9% in the preceding four-year period, and will account for 25% of total gross fixed capital formation compared to 17.5% over the previous four years (Table III.7). Even though historical evidence suggests that realized investment expenditures often fall short of projections, the financial impact of the current PE investment plans on public sector adjustment should nevertheless be significant. 101. On the balance of payments side, the imports generated by PE investment demand are expected to be DH 6.8 billion a year on average between 1991 and 1994 (DH 31.8 billion in total); imports of investment equipment would account for over one-quarter of the country's total capital goods imports, while technical assistance would account for a significant share of total service 93/ See Part II, Section B (paras. 41-44). - 63 - imports (over 13%). These large outflows of foreign exchange would occur at a time wyhen the capital account is being gradually weaned away from exceptional financing and will be under considerable pressure from a further round of tariff and QR reductions. Full convertibility of the dirham by 1993--an openly declared objective of the authorities--would thus require the reconciliation between the expansion plans of individual enterprises and the balance of payments viability target of the public authorities. 102. Central Government policies have also influenced financial decisions of PE in important ways by affecting the financing sources available to the sector, namely: (i) its internal cash generation (i.e., its savings); (ii) capital transfers from the CG; (iii) domestic borrowing; (iv! net increases in arrears; and (v) net foreign borrowing (including rescheduling). Table 111.7: BALAN1CE OF PAYMENTS IMPACT OF INVESTMENT PROGRAM OF THE MAJOR PEs (In millions of Dirhams) Actual ........... Projected --- TOTAL 1990 1991 1992 1993 1994 1991-94 Investment 8,724 15,085 16,686 15,897 15,725 72,117 As % of GDP 4.2% 6.5% 6.7% 5.8% 4.7% 5.8% As % of Total GFCF 17.0% 29.0% 28.7% 24.9% 19.8% 25.0% Foreign Exchange Requirements 3,922 7,033 6,649 5,571 4,620 27,795 As % of XGS 7.5% 12.8% 9.8% 7.2% 5.3% 8.2% Total Imports of PEs 4,470 8,056 7,587 6,395 5,269 31,777 of which: Capital goods 3,481 6,197 5,970 5,171 4,356 25,175 Services 989 1,859 1,617 1,224 913 6,602 Share of PE! in Same Category of Country Total: TotaL Imports 6.9% 11.3% 9.4% 7.2% 5.3% 7.8% Capita, Goods 22.8% 33.3% 28.5% 22.3% 16.7% 24.2% Services 12.7/ 20.0% 15.9% 11.2% 7.5% 13.1% Sources: Ministry of Finance; World Bank estimates. o:\cem\mission\now\pe-bop.wkl(3) 15:42 11/26 103. The reluctance of the authorities to grant tariff increases to some large public utility companies, the increase in CG arrears vis-A-viB PEs, and budget tightening by the CG were all important factors leading to a deterioration of the investment coverage ratio in terms of cash generation94. Beside the tariff problem discussed earlier, the process of cross-arrears reduction undertaken in the context of the PERL, regularized to an important extent the financial relations between the CG and the PEs. It did not, however, improve the liquidity position of the latter, since the bulk of the arrears were eliminated 24/ The ratio can be defiined as: the financial surplus (savings) of the enterprise (revenues minus all current expenditures) divided by investment. For example, an investment coverage ratio of 25% means that investment iB financed for 75% by borrowing. - 64 - either by cross cancellation or by issuing interest bearing debt instruments (PERL Bonds) to PEs.95 Furthermore, in 1989 and 1990 there had been a tendency for arrears to begin to accumulate again, indicating that the problem was far from eradicated. In particular, underbudgeting by the CG for its utility bills seems to remain a serious issue. The reluctance by the CG to increase budgetary allocations for water, electricity and telephone use was an attempt at providing an incentive for the individual ministerial departments to reduce consumption. However, since this strategy was not sufficiently supported by measures aimed at reducing utility consumption, it only resulted in a build-up of arrears. Table III.8 indicates that despite an improvement in the coverage ratio of consumption over budgetary allocations, the latter still covers only two-thirds of actual consumption. Finally, the fiscal crunch at the CG level also reduced capital transfers from the budget, while the substantial needs for financial resources by the Treasury virtually monopolized the domestic credit markets in the CG's favor96. Table 111.8: BUDGETARY ALLOCATIONS AND ACTUAL CONSUtPTION OF UTILITY SERVICES, 1986-90 (Millions of Dirhams) 1986 1987 1988 1989 1990 BUDGETARY ALLOCATIONS Water 52 68 82 86 94 Electricity 130 169 203 214 256 TelecomFunications 78 145 208 214 224 TOTAL 260 382 493 514 574 ACVJAL CtONSLIPTION Water 91 105 115 127 137 Electricity 232 269 281 305 311 TeLecomrinications 278 353 396 410 431 TOTAL 601 727 792 842 879 COVERAGE RATIO Water 57% 65% 71% 68% 69% ELectricity 56% 63% 72% 70% 82% Telecommunications 28% 41% 53% 52% 52X TOTAL 43% 53% 62% 61% 65% o:\cem\mission\now\pe-arr.wk1 95/ During 1987-88, the CG issued R total of about DH 3.6 billion of semi- annual bonds at an interest rate of 6% to PEs for this purpose and eliminated a further DH 1.4 billion through cross-cancellations of obligations with PEs. Though negotiable, it would appear that the bonds for the most part have not been liquidated by the original holders. 96/ Bond issue in the domestic market must be authorized by the Treasury. In practice, a Government guarantee is also needed since these issues are mainly subscribed by institutional investors which are required to invest their funds in safe assets. - 65 - 104. The deterioration of the liquidity posi-on of PEs led to some streamlining in their activities and eventually to a reduction in the rate of growth of capital formation in the sector: fixed investment after 1985 has remained well below the average for the first part of the eighties in terms of GDP (about 4.5% versus 6%). However, the remaining large financing needs of the PE sector were being increasingly satisfied with foreign borrowing. The Treasur granted Government guarantee of loans at no cost and often provided foreign exchange coverage, thereby rendering foreign finance particularly accessible to PEs. The CG strategy thus led to heavy foreign borrowing by PES while protecting the CG virtual monopsony on domestic financial markets (Table III.9). 105. Since 1990, the financial condition of the CG has been affecting the liquidity position of the PE sector also through the allocation of debt relief. The Treasury's need to finance the CG deficit through non-monetary channels has prompted the authorities to appropriate some of the gains from the rescheduling of external debt service granted by foreign creditors to PEs. Under the new system, the PEs, following a rescheduling agreement on their external debt obligations, are requested by the Treasury to continue to service their external debt (in part or in total) according to the current schedule (i.e., pre- agreement). Their creditors, however, do not receive this debt service immediately since the Treasury appropriates it. Therefore, the PEs extinguish their obligations ViS-A-Vis foreign creditors by paying the Treasury. The latter, in turn, keeps the money for the duration of the rescheduling period. This justifies the accounting creatment of the rescheduling gains transferred from the PEs to the CG as domestic non-monetary financing for the Treasury (see Table I.1). In 1990, the rescheduling gains transferred to the Treasury were almost DH 1 billion (0.5% of GDP). Although this amount was only one-quarter of the debt relief granted to the PEs by foreign creditors, it enabled the Treasury to reduce its Bank debt for the first time in more than 20 years. Table 111.9: MEDILU- AND LONG-TERM DEBT OF THE MAJOR NON-FINANCIAL PEs Situation at end-1988 Banks & SFls Non-Bank Foreiyn TOTAL ------ (In miLlions of current dirhams) ------- OPNT 139 216 361 716 ONE 12 271 1,979 2,262 ONEP 402 402 ONDA ONCF 25 952 977 ODEP 213 213 ONAREP 17 1,141 1,158 BRPM 1 386 387 COMANAV 120 378 498 RAM 79 977 1,056 OCP 1 045 870 4778 6.693 TOTAL 1,438 1,357 11,568 14,362 In % of GDP 0.8% 0.7% 6.4% 7.9% Sources: Ministry of Finance; Bank At-Maghrib; IBRD (DRS); World Bank estimates. o:\cem\mission\now\pe-debt.wk1 - 66 - IV. THE OUTLOOK FOR THE NINETIES 106. Morocco is at a critical juncture in its adjustment and stabilization efforts. The objective of convertibility of the dirham by 1993 has given a concrete timetable to the authorities for the design and implementation of policy reforms to attain this target. Currency convertibility will signal to the international financial conmunity that Morocco will have successfully completed its adjustment and stabilization reforms and will be ready to become fully integrated in the world economy, and especially in the international capital markets. For convertibility to be possible, a viable balance of payments must be reached. This will in turn require increases in domestic savings given today's extensive reliance on "involuntary" domestic and external capital sources in the form of domestic arrears and debt rescheduling. Given the importance of the public sector in the economy, the responsibility for raising domestic savings falls largely on the CG, the PE and the LG. How can the Moroccan authorities foster an incentive environment conducive to the needed increase in public savings? A. The Central Government 107. The economic and financial environment in which the Government budget will be financed in the coming years is substantially different from that of the recent past, or even of today. These differences emanate from four sources: (i) the end of debt relief; (ii) the liberalization of the financial sector; (iii) the need to eliminate Government arrears and to replace temporary sources of revenues with more permanent ones; and (iv) the need to re-orient public expenditures towards social objectives and private sector development within the boundaries of tight fiscal discipline. 108. First, exceDtional financing through repeated rounds of Paris Club, London Club, and Arab governments' reschedulings has covered most of the financing needs of the Government since the inception of Morocco's adjustment program. To the extent that the authorities are committed to regaining access to voluntary lending by end-1992, this source of financing will soon vanish. The size of the fiscal effort necessary to face such a drastic change is quite formidable, probably requiring the government to run a virtually balanced budget in the early nineties. An important element in the strategy to be followed in the post-rescheduling era will be the inflow of capital in the form of foreign direct investment (FDI). The significant interest in Morocco recently demonstrated by US investment banks, as well as the gradual rise in the price of Morocco's external debt in the secondary market since the end of 1990 are promising signs for greater FDI in the future. The official announcement in September 1991 of the convertibility target by 1993 should further boost the confidence of foreign investors. A significant and sustained inflow of FDI would be one of the best indications to international financial markets that Morocco has regained its creditworthiness. 109. Second, the heavy direct controls of the finarcial system are being gradually phased out, setting the stage for the development of domestic financial markets. At the same time, monetary policy is gradually moving toward greater - 67 - reliance on indirect instruments (open market operation, diecount operations by the central bank, reserve requirements), requiring in tJrn smoothly functioning financial markets for these instruments to be effectively used. While these developments are essential in order to modernize the financial environment of the economy for private sector development, they will certainly entail more fierce competition for the financial resources available in the economy. The authorities will thus face the challenge of limiting the financing needs of the Government budget while developing the Treasury's ability to tap domestic savings in the new competitive environment. The optioni of monetizing the deficit remains an unattractive one, given the structure of money demand in Morocco97 and given also the general risks asoociated with ouch a strategy. 110. Third, the Government's ability to settle its financial obligations in an orderly and timely fashion will be an important element in building confidence in the economy and promoting private sector development. Moreover, the need to settle past arrears will impose further pressure on the budget in the coming years to generate the necessary resources for the Treasury in addition to its normal obligations in terms of debt service. Similarly, the fiscal effort would have to be increased to replace as much as possible the sizeable revenues which accrue to the budget from inherently volatile, temporary and distortionary sources98. The direction of the 1986-90 fiscal reform towards a reduction in nominal tax rates to promote private sector development will have to be maintained but accompanied by concrete efforts to broaden the tax base and improve tax administration in order not to jeopardize budgetary equilibrium and to promote fiscal equity.99 111. Finally, large volumes of budgetary resources in the late seventies and early eighties had been channeled to finance premature investment or projects of questionable economic priority. However, the curtailment of development expenditures for macro-stabilization purposes in the ensuing years had occurred more or less indiscriminately, and had resulted in rapidly deteriorating physical and social i:ifrastructure. A major challenge facing the authorities today is to 97/ Econometric estimates indicate that money demand in Morocco is extremely sensitive to inflation rates. This implies that an increase in money growth is very likely to lead to large reductions in cash balances, limiting the amount of real resources that can be mobilized through this means. 98/ The petroleum levy, for example, has contributed to the CG budget an average of DH 4.4 billion a year (2.2% of GDP) during 1989-90, though at high international crude prices these revenues would disappear. The acceleration of the corporate tax from a one-year-lag to a current-year payment system is expected to raise revenues by about DH 1 billion a year until 1993, while the DH 2.0 billion raised from the final amnesty of 1990 has already vanished. For a discussion of the distortions associated with the current system of energy taxation, see "An Approach to Energy Price and Tax Reform," World Bank Report 7751, May 1989. _99/ These issues are discussed in the IMF Report: "Vers le renforcement et la consolidation des r6formes fiscales," May 1991. - 68 - concentrate Government resources on activities with important externalities, like education, health services and basic infrastructure. Given the continuing need to mairntain fiscal discipline, 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. B. The Local Governments 112. Decentralization has been a major objective of the Gcverrment since 1976. Yet, the important transfer of resources and investment programs from the CC to the LG has not been accompanied by an effective devolution of responsibilities from the central to the local authorities. This approach has reduced incentives for the local authorities to play a development role which is integrated to the national strategy. In order to promote an incentive framework in this direction, the following aspects need to be addressed: (i) the budgetary process; (ii) the management of the transition from 'deconcentration" to decentralization; and (iii) the reform of municipal financinlg. 113. First, the budgetarv process lacks clear mechanisms for planning investment in line with tile available resources. The analysis made possible by recent data has further hiqhlighted the nature of the problem and has indicated its current magnitude (see para. 74-89). The incompatibility between public accounting at the local and central levels further impedes the proper assessment of the current strategy for decentralization of resource mobilization and uee.100 Until these aspects are openly addressed, the LG budget execution will remain overly difficult to plan, manage and evaluate. The resources transferred from the center cannot be used efficiently at the local level and the decentralization of public spending would remain a risky instrument for restoring equilibrium in the public finances.101 114. Second, the gradual move tow;rds a more decentralized system in Morocco has historically placed the Ministry of the Interior in a key position between the CG administration and the local authorities. This has largely resulted in a deconcentration of administrative and fiscal power away from the CG without fully decentralizing the decision making authority to the more peripheral layers of the public administration. While this has undoubtedly ensured a relatively smooth transition away from a complotely centralized system, 100/ For example, current expenditures include debt amortization payments, while the treatment of unutilized investment appropriations remains obscure (see paras. 22 and 87). 101/ The transfer of resources and/or expenditure responsibilities from one level of government to another should not in principle have any effect on the overall public sector balance or on the economy at large. The risks that are involved in the decentralization process, however, are real when the execution capabilities of public spending at the local level cannot adequately ensure the realization of the expenditures that are decentralized. See below. - 69 - it has also limited the direct involvem'nent of the LG in the planning and execution of the decentralization process. This has been largely justified by the limited technical, administrative and managerial resources at the disposal of the more peripheral public entities. Before their greater involvement can be effectively ensured, the CG, and especially the Ministry of the TiJterior, needB to play a major role in improving the human resourc¢= a..a administrative infrastructure, especially now that capital expenditures are increasingly transferred to the LG. 115. Finally, the strengthening of municipal financing should concentrate on three aspects. First, the present allocation system of VAT resources and the true financial needs of the LG should be reexamined. In the longer term, borrowing instruments should be developed for the LG to mobilize financial resources at the local level. As for the present system of VAT allocation, it essentially encourages the LG to inflate current deficits and has led to a decrease in the share of VAT transfers allocated to the equipment budgets of the LG. In 1990, for example, only 51% of VAT transfers were allocated to equipment budgets, down from 60% in 1988 and 58% in 1989. Moreover, the analysis of the administrative accounts recently consolidated for 1988 ard 1989 indicates that many of the LG receiving subsidies in support of their provisional current deficits end up showing a current surplus at the end of the fiscal year. AlsO, given the fact that debt amortization appears as a current expenditure in the administrative accounts, there may also be a built--n incentive to over-borrow, since the entire debt service is indirectly financed by current subsidies102: the greater the debt service appearing in the budget of a given LG, the greater the share of the VAT resources that will be allocated to that LG. Moreover, the large and growing surplus that emerges once the LG budgets are consolidated casts serious doubt on the adequacy of the current system to absorb the large volume of resources allocated to the LG. Finally, once the more pressing needs of improving the budgetary process, strengthening the human resources at the local level, and reforming tha system of VAT transfers have been addressed, the options available to the LG to finance its activities should be broadened. This will involve the gradual access to financial markets of the LG Loth in terms of funding and management of its liquidity in the context of the recently liberalized domestic financial environment. C. The Public Enterprises 116. The PE sector has the potential for supporting the present crucial phase of the economy's adjustment program and contribute to a stable and sustained growth thereafter. For the successful realization of this potential, the CG has to modify its approach toward PEs both as a strategist and as an owner. As a strateaist, the CG attention should be less focussed on ex-ante control of daily activities of PEs and more directed towards broader strategic issues. As owner. PE involvement in many productive activities should be re- examined and modified through divestiture. 102/ For details see also "Dec. ntralization et services publics locaux au Maroc," World Bank mimeo, August 1991. - 70 - The CO as a Strategist 117. Interference by the CG in routine decision-making responsibilities- such as procurement, recruitment and career development--in the individual PEe is currently widespread in Morocco, and it is often dictateid by law and administrative guidelines. In a climate where PEs are not allowed to operate autonomously, there can be little accountability. In the absence of accountability, there are few incentives to respond reoponsibly or develop systems of performance monitoring. Lack of autonomy and clearly defined rules result in an excessive raliance on ex-ante controls in PE routine management and administrative decisions. This control is currently a major impediment to improving PE performance. Greater autonomy, however, can only be granted if PE activities become more transparent. Transparency will help redirect the CG oversight function from being focussed on time-consuming supe.-vision of day-to- day PE operations to concentrating on achieving the economtc and financial objectives assigned to the PE sector. Two important and complez.entary elements to promote greater transparency are (i) standardized accounti.ig practices; and (ii) an adequate management information system. 118. PEs today do not generally follow standardized accounting practices. As a result, financial information on PE activities and performance is not always available in a readily accessible form. Annual reports are not produced routinely, and even when they do exist, they are not automatically made available to the authorities. Furthermore, few financial statements are regularly audited103. The Moroccan authorities have recently made some important steps towards establishing a uniform and well-defined modern accounting system nationwide104. The supporting legal framework has been extensively revised, and now regulates the profession of chartered accountants and establishes auditing requirements by recognized and independent auditors according to international standards. It is essential that this legislation, awaiting Parliamentary approval since early 1990, be adopted as soon as possible. 119. The introduction and maintenance of management information s_ytems (MIS) for PEs is also needed to improve their performance and enable the CG to play a useful arm-length oversight role. Today, financial and economic data on PEs are scarce, incomplete and difficult to update. Although some of the large PEs have developed an adequate MIS, many lack an organized form of information gathering for managerial and operational purposes. The development of an MIS in these enterprises would facilitate the identification of internal problems and 103/ The exceptions are some of the large PEB that benefit from external assistance. 104/ Despite a number of legislative changes introduced in recent years (especially those linked to the modification of corporate taxation), current accounting practices in Morocco are essentially based on the French Plan Comptable G6neral which dates back to the early fifties. Conscious of the shortcomings of the present system, a national accounting commission produced at the end of 1986 a draft for a new accounting plan (Code G6n6ral de la normalisation comptable). The implementation of the new plan requires the introduction of specific legislative measures. - 71 - inefficiencies. Moreover, the information at the level of the enterprise should be centralized by the oversight agency (the DEPP) and would allow the authorities to assess the quality of their portfolio as well as to evaluate the macroeconomic role of the PE sector. In particular, decisions regardii., budgetary transfers, dividend policies, investment plans and financing could then be based on a complete view of the sector based on extensive and updated quantitative information. The availability of this information would aiso ensure greater transparency and allow ex-post accountability of PE management on the basis of agreed targets established in performance contracts. The shift in focus of PE-CG relations, currently centered on routine managerial and operational decisions, would permit full autonomy to PE managers in their day-to-day activities and greatly facilitate the overnight role of the CG. 120. Greater autonomy at the level of individual PEs should be accompanied by the formulation of an integrated strategy for the fundamental decisions regarding tariffs, investment plans, transfers and financing to ensure that the micioeconomic objectives at the level of the enterprises are compatible with the macroeconomic constraints faced by the country. Utilitv tariffs in Morocco continue in general to be too low and not adequately structured. In the water sector, for example, unless tariffs are incre~ased substantially, the essential investments needed to maintain current service levels cannot be realized105. Similarly, the reduction of budgetary transfers to the national railway company (ONCF) would not be coneistent with an adequate maintenance and rehabilitation investment plan unless tariffs are raised106. Even in the power sector where electricity tariffs are on average above long-run marginal cost, the present tariff structure tends to penalize industry and subsidize urban households107. The institutional arrangements for tariff review are largely responsible for thia situation. The tariff changes proposed by the utility companies have to be approved by the Ministry of Economic Affairs (MEA), after consultation with a technical-level committee. If no agreement can be reached, an interministerial committee is convened to settle the matter. Experience shows that the whole procedure iB in general subject to a lengthy and highly politicized bargaining process and that the final decision is often taken with only marginal weight given to the financial needa of the enterprise. A possible alternative would be to allow the tariff change requested by the utility company to MAE unlesc it iB 105/ Internal cash generation will have to double from 15% in 1990 to 30% in 1992 and be maintained at that level, givers that foreign financial resources will be limited by the tight balance of payments constraint associated with the end of rescheduling. 106/ The on-going controversy between ONCF and OCP regarding the tariff for transport of phosphate is presently blocking the tariff review. An independent study is currently under examination by the authorities. 107/ Tariff rates for medium-voltage (MV) customers (mostly large industrial firms) are higher than for low-voltage (LV) costomers (essentially urban household users). Quite the opposite is trut, in most other countries since LV costs are higher than MV costs. For more details, see "Kingdom of Morocco: An Approach to Energy Price and Tax Re'orm", World Bank Report 7751-MOR, June 1989. - 72 rejected within a reasonable delay, say 60 days. This will encourage the administration to take timely action on the tariff request and it will encourage the utility company to submit a realistic proposition, since it would maximize the probability that it would not be rejected108. 121. In terms of the sector's investment proara.n, the balance of payments viability objective is likely to require the downsizing or at least the postponement of parts of this program until, and unless, the full implications of the disappearance of exceptional financing sources (i.e., rescheduling) are incorporated in the investment plans. Many PEs continue to rely on external debt rescheduling in their financing plans, either explicitly or implicitly, by showing significant financing gaps in their projections. Since invectment levels in specific critical areas (e.g., water supply, road rehabilitation) are fully justified, the reduction of the overall investment program of the sector should not be across the board, but reflect instead the priorities set out by the authorities, especially in the social sectors. 122. Financing may also be limited domestically since the Government's objective to control inflation is likely to entail formal or informal ceilings on the volume of bank credit to the PEs109. In order to prevent a npillover of their credit demand on foreign markets, the authorities can foster: (a) internal cash generation by PEs--thereby reducing the need for credit--via restructuring and increasingly more rational tariff policy; (b) the mobilization of domestic financial resources by giving PEs opportunities and ince-itives to contract domestic debt; and (c) the development of investment banking expertise which could introduce financial engineering techniques in the sector, like BOOT (Build-Own-Operate-Transfer) and other limited recourse financing strategiez which have proved quite successful in other highly-indebted developing countries. 123. The financial flows between the CG and PEs are likely to continue to have an important effect on the liquidity position of the IE sector. First, the Treasury is to appropriate the external debt rescheduling gains granted to PEs in 1991 and 1992 of about DH 3 billion. Second, the large investment programs of some PEB will entail significant payments of customs duties, as they cannot benefit from the exonerations under the Investment Codes; ONPT and ONE together are expected to contribute as much as 17% of total government tariff revenues in 1991-92. Third, capital transfers from the CG budget are expected to remain constant in nominal terms, except probably for restructuring credits, mostly in the mining sector (about half of the DH 1.2 billion needed over 1991 to 1994. Combined with increasing pressure to raise dividend payments, these factors are likely to strain the liquidity position of the whole sector. This situation may increase pressure on PEs to further streamline their activities, generating gains ir. efficiency, provided the institutional and political constraints on the PE managers are reduced while "hard budget constraints" are imposed for greater management incentive and accountability. I08/ Under the present system, the utility company has often the incentive to ask for a higher tariff increase than it would be satisfied with, given the inevitable arbitrage process to which any proposition is subjected. 102/ During the last IMF Stand-by, the growth rate of bank credit to PEs in 1990 was to be kept below an annual rate of 25%. - 73 - The CG as an Owner 124. The role of the CG as an owner of PEs should be re-examined based on the rationale for its involvement in production activities. The CG is involved in many of these activities essentially for historical reasons which can be retraced to the need for providing a big push to industrialization after independence while waiting for the private sector to develop. Today, this rationale has mainly run its course. The CG presence in many sectors may well hinder the development of the private sectors. The rationalization strategy for the sector should thus be based on the premise that a clear distinction must be made between two broad groups of PEs: those which by the nature of their activity operate in a monopolistic market environment or generate important externalities and those which operate in a competitive (or potentially competitive) market. The CG approach for the first group would be to retain ownership but introduce adequate regulation and transparency in control mechani½ms through the generalization of performance contracts with clearly delineated responsibilities and mutual obligations of the CG and the individual enterprise. 125. For the second group of enterprises, the CG approach should be essentially divestiture through privatization and liquidation. Privatization has the potential for making concrete and significant changes in the economic environment in Morocco, even though the process has been quite slow so far. With the abolition of the Moroccanization decree in 1989, the stage was set for greater foreign equity participation. It was not until 1990, however, that a prcper legislative framework was put in place and the administrative framework defined. The final steps of the privatization program are taking considerably longer than initially envisaged, making it difficult to formulate a precise view on the macro-economic impact of the program. On the balance of payments side, greater foreign direct investment (FDI), currently very low by international standards110, is expected to play a crucial role in financing the balance of payment, in the "post-rescheduling era." A more dynamic privatization prugram would play a crucial role in attracting the interest of foreign investors. On the fiscal side, the sale of PEs does not affect the net worth of the Government. However, it gives the Treasury the possibility of reducing its debt, with net gains in debt service and possibly in net flows from the PE sector. The risk that exists is that the proceeds from the sale of public assets could finance Government consumption. Given the strong political and social pressures to reduce unemployment in Morocco, any release of the budget constraint may be regarded as an ooportunity to increase civil service recruitment. 126. The most difficult macroeconomic problems which will accompany divestiture of PEs are expected to be on the employment side. As enterprises are closed down or restructured In preparation for sale, labor redundancies are expected to occur, especially in the mining, sugar, and possibly other sectors. The very success of the entire public sector rationalization program may well hinge on the ability to formulate a safety net strategy to alleviate the social impact of labor dislocation and to ensure a smooth transition from redundancy to retraining and redeployment of the labor currently employed in the PE sector. m:\slberto\ps\r_1.a June 2, 1992 210/ See "Morocco - Sustained Investment and Growth in the Nineties," World Bank, November 15, 1990. - 74 - ANX I Page 1 of 19 TLE KINGDOM OF MOROCCO ISSUES AND PROSPECTS IN THE PUBLIC SECTOR Derivation of the Flow of Funds 1. This annex describes the construction of a simple flow-of-funds matrix for Moroccol, the purpose of which is two-fold. First, the flow-of-funds accounts are used to evaluate within an internally consistent framework what the most important financial linka within the public sector, between the public sector and the rest of the economy, and their evolution since 1982 - the year preceding Morocco's balance of payments crisis. This analysis is carried out in the report. Second, the flow-of-funds exercise provides a map of public sector real and financial flows which can be used to facilitate the conduct of macroeconomic policy2. Such a synthetic statistical tool is frecriently available in other developing countries, and it is generally regarded as a useful instrument of financial planning at the macroeconomic level. 2. The methodology for estimating these flows relies heavily on the primary sources of data usually available within the Moroccan administration (see below for a list of the data sources used). However, often, a different breakdown from that available is needed for the flow-of-funds exercise, and in that case, we have relied on the ministerial departments (and the Central Bank) for their expertise. Furthermore, as is clear from the double-entry nature of the flow of funds, different sources may give different data and their reconciliation must be undertaken. 3. The practical value of the flow-of-funds instrument, especially for policy makers, would be lost if it could not be updated in time every year. Therefore, some flows need to be estimated before the official data become available since a precise evaluation may not be obtained quickly, if at all. This is turn implies that a margin of error--possibly significant--has to be accepted to obtain an overall view quickly. 1/ This exercise does not attempt to provide a complete update of the extensive work carried out in 1982 by the Department of Statistics in the Ministry of Plan. The Plan's work provided a much more detailed and complete flow of funds for the Moroccan economy, following their previous exhaustive work leading to the construction of the Moroccan 1980 input- output tables. 2/ The regular national accounts updates of the Ministry of Plan provide information regarding the flow of funds in the economy. However, the data do not usually become available with the detail needed to generate intra- public sector flows and to consolidate the public sector accounts. - 75- AimLI- TABLEA.LI: FLOWOFFUNDS-CURREPJTACCOUNTS 989gPage 2 of 19 In MillOnS of Cuwrne Dibm P~iva~o Bank. ~fl CB co La P.A Rot PWord SIThiPAL VALADDF.O TOTM DIV 50 50 Plriv'a. 11V1 2,240 769 1.675 8 4,692 &aclor 2R 1.996 38 12.567 14,601 TAX 0 TOT 2,240 769 0 3.6,71 38 so 12.575 19,343 135.891 155,234 DIV0 INT 3.813 584 2,270 2.367 0 9,034 Bank, ~TRA 0 TAX 0 TOT 3.813 0 584 0 2.270 0 2.367 0 9,034 1,2~76 10.310 DIV 35 11 46 INT 2.641 101 353 151 1.333 0 4.579 SF) TRA 300 300 TAX 0 TOT 2.676 101 0 0 653 151 1,344 0 4,M2 463 5,388 DIV 0 INT 76 1,224 214 263 1,777 Ccnira TRZA0 Bank TAX0 TOT 76 1.224 0 0 214 0 0 263 1.777 211 1.988 DIV 105 350 891 1,346 INT 0 Govclmen 7R,4 2,597 2,597 TAX 7.222 504 168 264 3,658 11.816 TOT 7.222 504 273 614 0 0 4.549 2,597 15,759 28.065 43.824 DIV0 INT 00 Local ~TRA 1.006 1,006 Oovc,nm&M TAX 1.835 8 10 618 2.471 TOT 1.835 8 10 0 1,006 0 618 0 3,477 3.477 iNT 745 156 901 publi TRA 508 508 HoL q~h~a TAX 0 TOT 0 745 0 0 664 0 0 0 1,409 25.670 27,079 DIV 50 50" A INT 591 0 732 69 7.370 2.966 11,728 Root oFt& TRZA 4.115 4,115 Wodd TAX0 TT 591 0 732 69 11,485 0 3.016 0 15,893 49.652 65.545 DIll ~~35 0 105 350 0 1,002 0 SubOta INT 7,121 4.310 2,085 69 12.038 151 6.666 271 flLI 0 0 7,925 38 0 15,164 TAX 9,4057 512 178 264 0 4,276 0 Tor' 16,213 4,8'27 2,368 683 19,963 189 11.944 15,435 ScjvJc~~~'e 214,407 3,449 9 8096 22.515 2,45S9 8728 41.771 195, 185 CVR.RV (a) 30.520 8.271 3,238 1,669 42.478 2.648 20.672 57,206 S,4vLNGS (') -24.614 2,039 2.150 319 1.346 829 6.407 8,339 46,043 TOTAL (a4) 155,234 10.310 5,388 1.9M 43,824 3,477 27.079 65.545 241.228 29-Mfay MIaJbcntro IffT.cc. wkl 10I -76- ANNEX I Page 3 of 19 TABLEAL.2: FLOWOPFFUNDS - CAPITAL ACCOUNTS 1989 In MilUl cf C0res Dldma ~~~~-. . . . . . . . . . . ......... ._ . .................................. .<.PUet. .' Rita m CB CO ia P.E R ftWod TOTAL CAPiTAL. S4 v BAS aUlDJT 5,307 1.1 2.7205.307 9.s5 WaRANSPfS 100 230 330 Scr ARREAS 8S1 1,053 1,93 7WTAL 5.307 3.436 1.151 981 1.2t3 2.720 14,878 24.613 aDmI 5,463 (198) 4 248 665 10,178 Saab MANES O ARREARS 17 17 TOTAL 5,463 (198) 4.248 682 10,195 2.039 s' t2M cREiT 3,245 (107) 178 W3 3,302 7.421 SFP 7RANSFlS 230 230 ARRPARS 0 TOTAL 3,245 (107) 178 1.033 3,302 7,651 2.150 j.$ Sf: 4.' g s ,;zr-o-7> >.4 ' '4s> ;,,/''' ' ' C2ED17' 3,739 1.640 (37) 5,342 ct a T2ANSFRS 343 343 Ban* ARREARS 0 TOTAL 3,739 1.640 (37) 343 5,S 319 CREDIT 2.230 4.082 I.J01 605 540 (697) 14.002 22,563 Ganw-i TRANSFERS 0 ARREARS 780 5 13 629 1.4AZ TOTAL 3.010 4.087 1.801 605 553 (68) 14.002 23.99D 1.347 Oil gcC$$S~ ~ ~ ~ ~ ~ ~~~~~Uo .Yf,,Ij'"fff$' ffs M :f,,,'>'>. C 9 .- ;g CREDr 405 324 9 73 L4xI TRANSFERS 2.005 2.005 gCsU*SDes ARREARS 2 49 51 TOTAL 407 2.329 49 9 2,794 829 ,fC a 6 1'1 'f' '.'' CC-'m W '- < 4~ g'.4 F~ 4¾,f, {$jy CREDiT ~~~~2.621 1.090.9 PubIk TRANSFES 17 154 1.750 2,091 wfpdwa ARREARS (576) (1,314) 763 14 1113) TOTAL (3t9) 1.307 1.244 2.513 14 3.U1 5,570 6,407 CREDIT 2,012 3.140 10.653 1,746 17.551 PON ot'h TRANSo FW 200 200 Wodd ARREARS O TOTAL 2.032 3,148 10.653 1.946 17,7S9 8.339 CREDIT 1448l9 13,543 6.201 6,004 10.977 71$ 2.517 23914 2 SANUSI 187 0 154 0 3.855 O 660 343 2TAL CAPITAL ARREARS 204 (1.309) 2 0 1,644 21 1.743 0 OU7OWI(a) TOTAL 17.03 12.2M4 9.80t 6C004 16,476 745 4,925 24.257 DIVWIMEIT0) 22.411 0 0 0 8,t61 2.878 10,052 1,U41 ;/ o4.'.r1~~~ ~~~r 44.:/ ~ . . 31- Jan-9 -77- ANNEX I Page 4 of 19 4. Consistency in the accounts ie obtained by adjusting the categories for which information is least available (e.g., changes in arrears, dividends paid abroad) and by treating the private sector in general as the residual agent. This "manual" approach has been chosen instead of those b&ded on algorithms which distribute discrepancies among the different "cells" of the matrix according to a preselected set of weights reflecting the degree of confidence placed on the information of each "cell"3. The resulting matrices are presented in Tables A.I.1 and A.I.2 DATA SOURCES [and ACRONYMS] National Accounts (Ministare du Plan). INA-MP] Statistiques du tr6sor (Direction du trdsor). [ST] Income Statement and Profit & Loss Account of the Central Bank (Bank Al-Maghrib). [BA-IS] Balance Sheets of the Central Bank, Banks and SFIs (Bank Al-Maghrib Annual Report) [BA-AR] Consolidated income Statement and Profit & Loss Account of Commercial Banks (Bank Al-Maghrib). [DB-IS] Evolution of Domestic Debt of tne Central Goverment (Direction du trdsor). [DD] Income Statemznts and Balance Sheets of the SFls (CIH, CNCA, CDG, FEC, BNDE). [SFI-IS] and [SFI-BS] DEPP Database. IDEPP] Balance of Payments (Office de changes) [OC] Debt Reporting System of the World Bank [DRS]. 1. The Central Government A. Current Account: Sources of Funds (A.1) Breakdown of Taxes. The breakdown is undertaken in two stages. First, govarrment revenues are separated into direct taxes, indirect taxes and transfers (which include dividends and transfers from abroad accruing 3/ It could be argued that the approach followed in the report attaches weights of zero on the private aector entries and in some specific cells, while placing a weight of one on all others. -78- ANNEX I Page 5 of 19 directly to the CG budget as revenues)4. In the second stage, direct taxes are broken down by recipient (the CG and the LG) and by payer (the Private Sector, PE9, Banks, and SFI). This second stage is done as follows. * Corporate taxes (IS and PSN) paid by PEs, banks, SFIs and the Central Bank (CB) for 1989 are estimated on the basis of the provisions made in 1988 for these taxes in their respective P&L accounts. The balance is attributed to the private sector. * 25% of LG receipts are assumed to be obtained from the PE sector. * the above condition is sufficient to allocate to the CG and the LG the amounts of taxes in the P&L accounts for PEs appearing under the heading "Impdts et taxes" (i.e., all direct taxes except IS and PSN). The same shares of "Im6dt et taxes" going to CG and LG are assumed to hold for the Banks and SFI . (A.2) Dividends (DH 1,346 m.) are from (ST] (Evolution des monopoles et exploitations). (A.3) Transfers from abroad are from the current account and include fishing royalty fees for the use of Moroccan waters [oC]4. (A.4) Indirect Taxes (DH 28,065) appear under the column "value-added" for the CG. B. Current Account: Uses of Funds (B.1) Interest Payments. The interest payments on domestic CG debt in 1989 are calculated on the basis of the stock held by each agent at the end of 1988 by applying an estimate of the weighted average interest rates as fOllOWB: 4/ For the purpose of the flow of funds, direct taxes accruing to the CG comprise the following (see (ST]): IS & PSN, IBP, PTS, Taxe urbaine, Taxe de license, Contribution complementaire, Taxe sur produits des actions, Majorations de retards, Taxe sur le profits imnobiliers. The total for 1989 is DH 10,374 m. Transfers (DH 2,270 m.) comprise total dividendo and fishing royalties paid by the EEC (the latter are classified under Produits divers in (ST) and are treated as transfers from the rest of the world in the flow of funds). Indirect taxes are the rest of the government revenues. For the LG, all revenues are classfied as direct taxes (except CG transfers). 5/ The Central Bank in Morocco does not pay any taxes to the local governments. - 79- ANNEX Page 6 of 19 DEBT HOLDER RATE STOCK 1988 INTEREST PAYMENTS 1989 -- (In millions of dirhams) -- Public Enterprises 6% 2,604 156 SFI 11% 3,210 353 Private Sector 11% 15,225 1,675 Subtotal 21,039 2,184 The residual (Banks = DH 2,270 m.) is obtained as the difference between total interest payments on CG domestic debt (DH 4,454 m.) and the sub- total above. The implicit average interest rate for the banks would thus be 7.4%. This rate is very close to the weighted average rate which would emerge under the hypothesis that half of CG debt is in the form of mandatory placements at 4.25%, and the rest at 11%. The amount of interest paid by banks is also close to the amount that appears in (DB-ISJ (DH 2,525 m.). Interest paid by the CG to the CB is calculated from (BA-IS] and corresponds to the lines: Discount income on customs draft and surety bonds (DH 143 m.) + Interest payments (under "Gouvernement") (DH 2 m.) + Commissions (under "Gouvernement"). (DH 69 m.) Interest payments on foreign debt are from the balance of payments [OC] -- see (A.2) for the rest of the world below. (B.2) Transfers. * Transfers paid to the private sector (DE 1,996 m.) are the sum of consumer subsidies in (ST], plus the items under the headings 'interest rebates" and "THE" (subsidies to Moroccan workers abroad) appearing under the investment budget of the Ministry of finance ("Charges Communes"). * Transfers to the SFI (DH 300 mi.) are interest rebates under the foreign exchange coverage scheme financed in the "Charges Communes". * Transfers to PEs (DH 508 m.) refers to total current transfers effectively received by the sample of PEs in the DEPP database, excluding ORMVAs and Centres de Travaux, which are considered as part of the CG administration for the purpose of this report. This amount is very close to that appearing in the ST (DH 569 m.). * Transfers to the LG (DH 1,006 m.) are the portion of the VAT transfers which are eventually allocated to the recurrent budgets of the LG. * Transfers to the rest of the world are from the balance of payments [OC]. - 80- ANNEX I Page 7 of 19 (B.3) Goods and Services (DH 27,352) are the total current expenditures of the CG budget (ST) adjusted for the uses in (Bol) and (B.2) to avoid double counting. (B.4) Savin_qs is the current balance in the [ST) adjusted for the current expenditures identified above which appear in the investment budget of the Ministry of Finance6. C. Capital Account: Sources of Funds. (C.1) Credit. * credit from the private sector (DH 2,230 mr.), banks (DH 4,082 mi.), SFI (DH 1,801 m.), and PEs (- DH 697 m.) is derived from the increase in CG debt holdings for each agent between 1988 and 1989 as illustrated in the table below: Table A.1.3 EVOLUTION OF THE DOMESTIC DEBT OF THE CENTRAL GOVERNMENT (in M ilions of Dirhams) Debt Holder 1S188 1989 Increase 1988-89 ff chana Banks 30,532 34,614 4,082 13.4 SFI 3,210 5,011 1,80156.1 Public Enterprises 2,604 1,907 -697 -27.8 Private Sector 15225 17,455 2,230 14.6 TOTAL 51,571 58,987 7,416 14.4 Source: Ministry of Finance. * Credit from the CB (DH 605 m.) is the increase in CB claims on the Treasury [BA-BS]. 6/ This adjustment will reduce the amount of the CG savings compared to what appears in the CG budget (Table I.1 in the report). In fact, there are considerably more current expenditures classified under the capital budget in Morocco than those identified above. A more detailed adjustment is the work painstakingly undertaken in the context of the national accounts, and which is well beyond the scope of the present report. Neveztheless, the adjustment that is made for the construction of the Flow of Funds does provide a more realistic indication of the savings effort by the CG than what appears in the published Treasury's statistics. 81- MIiL Page 8 of 19 * Credit from the rest of the world (DH 14,002 m.) ie from the balance of payments (OC] and includes the rescheduling gains both in terms of interest and principal (since amortizations and interest payments appear on a "before debt relief" basis). * Credit from the LG (DH 451 m.) refers to the surplus generated by the LG sector assumed to be depnsited at the Treasury General, which is the exclusive deposit taker of the LG. The amount is somewhat different from that appearing in Table 1.2 (DH 320 m.). (C.2) Changes in Arrears by the CG are estimated on the basis of the increase in the total arrears appearing in the CG accounts (DH 1,982 m.--see table I.1 in the report). This amount is broken down among the different agunts and modified to take iznto account the data available from other sources (e.g., PEe). It is treated as a residual (balancing) for all sectors both as a source and a use of funds. (C.3) Savings is from (B.4) above. D. Capit Account: Uses of Funds. (D.1) Credit. * Credit to the LG (DH 324 m.) refers to an exceptional loan made by the Treasury to finance the reduction of arrears by LG. * Credit to the rest of the world represents amortisation payments on CG debt (before debt relief). (0.2) Capital Transfers. * Transfers to the private sector (DH 100 m.) is the capital subsidy to promote hotel construction appearing in the CG investment budget. * Transfers to the LG (DR 2,005 m.) is the total VAT transfers reduced by the amount allocated to the current budgets of the LG. * Trans' ,g to PEs (DH 1,750 m.) are the capital transfers to the sector (excluding the ORMVAs and the Centres de travaux) plus increases in CG equity participation in PEs. (D.3) Changes in Arrears. (see C.2 above.) 2. The Local GovernMents A. Current Account: Sources of Funds (A.1) Taxes (DH 2,471 m.) are derived from the administrative accounts of the LG and are allocated to the various agents in the economy following the approach described above for the CG. -82- Page 9 of 19 (A.2) fstjX.U See (B.2) for the CG. This amount (DH 1,006 m.) io somewhat different from that shown in Table I.2 due to the adjustment needed to equilibrate the overall flow-of-funds matrix. B. Current Account: Uses of Funds. (3.1) Interest pgvmerpa are derived from the In_ome Statement of the FEC (Fonds dl'qulpemcat communal). (B.2) Transfers to private sector (DH 38 m.) correspond to the item "subsidies" in the administrative accounts of the LG. (8.3) g.ood and services (DH 2,459 m.) total current expenditures adjusted for the interest payments and other transfers. (B.4) Sayings is the difference between total sourcen and uses of funds. C. Ca-"ai Account: Sources of Funds (C.1) Credit * Credit from the SFI (i.e., the FEC) for DH 405 m. is estimated from the FEC Annual Reports. * Credit from the Treasury is from (D.1) for the CG above. * Credit from abroad (DH 9 m.) is the disbursements under the "Fonds de villes arabes" (multilateral arab aid protocol for municipal finance). (C.2) Transfere (DH 2,005 m.) is the share of VAT transfers attributable to capital spending (see (D.2) for the CG above). (C.3) Changes in arrears (DH 49 m. with respect to PEs and DH 2 m. with respect to the SFIa) are ostimated on the basis of information provided by the Ministry of interior and are made compatible wish the information available for PEs and the FEC. D. Capital Account: Uses of Funds (D.1) Credit, * Credit to the SFI (DH 178 m.) represents an estimate ef the amortization payments made by the LG to the FEC. * Credit to the CG: See (C.1) for the CG above. (D.2) Changes in arrears. (DH 27 m.): See (C.3) above. -83- Page 10 of 19 (D.3) jDvS)2stMp_t (DH 2e878 m.) ia derived from the LG administrative accounts and information from the Ministry of the Interior and Ministry of Finance. 3. The Public Entriscs A. Curreni Account: Sources of Funds (A.1) Value added for the sector is estimated on the basis of DEPP data as follows (in millions of DH): VALUE ADDED = TURNOVER - INTEPREDIATE CONSUMPTION - INDIRECT TAXES. 25,670 = 85,930 - 52,500 - 7,760 (A.2) Transfers see (B.2) for the CG above. (A.3) Interest Income * Interest income from CG debt (DH 156 m.): See (B.1) for the CG above. Interest income from banks (DH 745 mi.) is estimated from the DEPP database. B. CurrentAccount: Uses ofFunds. (B.1) Dividends are obtained oy applying the following ratios of equity ownership for the dividend-payirg enterprises in the DEPP database: 89% CG, 5% private sector, 5% foreigin and 1% SFI. The total dividend payment is from (ST] (see (A.2) for the CG above). (B.2) Interest Payments are estimated on the basis of financial expenses (around DH 6.7 billion) and financial liabilities (around DH 90 billion, excluding equity and arrears) for the sector as reported by the DEPP database. The following ratios were used to allocate total liabilities: 27% banks, 27% SFI and 54% foreign. The following average interest rates were applied to estimate domestic interest payme:its: 6.5% for the SFI and 11.5% for banks. The interest paymente on foreign debt are from the balance of payments. tB.3) Taxes (DH 4,276 m.) arc from the DEPP database and are allocated between CG and LG according to the calculations indicated in (A.1) for the CG above. (8,4) Goods and services' expenditure (DHi 8,728 in.) corresponds to the wage bill for the sector. (s3.5) Savings (DH 6,407 m.) is obtained as a residual. A slightly higher eetiimate (DH 6,740 m.) would be obtained from the DEPP database by adding amortizations and other provisions to net income. The main conclusion. of the report would not be changed if the latter estimate were used. -84 - Page llof 19 C. Capital Account: Sources of Funds. (C.1) Credit. Net credit from SFI and banks is estimated based on the changes in domestic liabilities to the financial system for the PE sector as reported by the DEPP database (approximately DH 2.2 billion). New disbursements and repayments are then derived based on DEPP information regarding new credit to the major PEe and the constraints imposed by the flow of funds matrix. Credit from abroad is derived from the balance of payments. (C.2) Transfers. * Transfers from the CG (DH 1,750 m.): See (D.2) for the CG above. * Transfers from the private sector (DH 187 m.) and from the SFI (DH 154 m.) refers to the estimated increases in their respective equity participation in PEa. (C.3) 9hanaes in arrears are derived from information provided by the DEPP and the Treasury. D. Capital Account: Uses of funds. (D.1) Credit. See (C.1). (D.2) Transfers represent increases in PEs (net) equity participation in domestic private sector non-financial enterprisos (DH 230 m.), SFI (DH 230 m.) and foreign companies (DH 2C0 m.) based on information provided by the DEPP. (D.3) Changes in arrears are derived from information provided by the DEPP and the Treasury. (D.4) Investment (DH 10,052 m.) is based on the changes in the consolidated balance sheet )or the sample of PEs in the DEPP database. The balance sheet items that are considered to represent physical assets are Immobilisations brutes plus autres valeurs immobilis6es minus titres de participation. The volume of investment whica is derived appears reasonable in light of the gross fixed investment reported for the major 11 PEs the same year (DH 8,724 m., or 87% of the total). The ratio is approximately the same for the preceding year (1988). 4. The Central Bank A. Current Account: Sources of Funds (A.1) Value added (DH 211 m.) represents CB prcfits (after tax) reported in the income statement of the Bank Al-Maghrib [BA-IS]. - 85 - Page 12 of 19 (A.2) IYLgXQf3 * Interest income from the private sector (DH 76 m.) is from (BA-IS]. It io the sum of discount earnings and commissions under the category "Other". * Interest income from banks (DH 1,224 m.) is obtained from the [BA-IS]. It corresponds to the sum of rediscount earnings, interest and commissions. * Interest income from abroad (DH 263 m.) is derived from the balance of payments (see (B.1) for the rest of the world below) and is very close to the amount shown in [BA-IS] (DH 234 m.). * Interest income from the CG: See (B.1) of CG above. B. CurrentAccount: Uses ofFunds. (B.1) Dividends (DH 350 m.): See (A.2) of the CG above. (B.2) Taxes (DH 264 m.) are based on the tax provisions made in the P&L account of the CB for the preceding year, since taxes are paid with a lag of one year. (B.3) Interest (DH 69 m.) is based on the residual item in [BA-IS] (DH 84 m.) which is mostly in the form of commissions charges on the foreign exchange transactions of the CB. (B.4) Goods and services (DH 986 m.) is calculated residually by subtracting savings (see below) and uses (B.1) through (B.3) above from total sources of funds. (B.5) IESincw (DH 319 m.) is obtained from the increase in net worth (capital and reserves) of the CB between 1988 and 1989. C. The CapitalAccount: Sources oiFunds (C.1) Credit * Credit from banks (DH 1,640 m.) is the change in liquid CB reserves between 1988 and 1989 (BA-BS]. * Credit from SFI (- DH 37 m.) is the change in cash held in CB (encalsses et valeurs A recouvrir) (BA-BS). * Credit from the rest of the world (DH 343 m.) is the decrease in net foreign assets hed by the CB (BA-BS]. * Credit from the private sector is obtained residually from the difference in total liabilities (excluding net-worth) between 19a8 and 1989. - 86 - Page 13 of 19 1). Capital Accowit: Uses of funds (D.1) Credit * Credit to banks (DH 4,248 m.) is the difference in CB claims on deposit banks between 1988 and 1989 (3A-BS]. * Credit to the CG (DH 605 m.): See (C.1) for the CG above. * Credit to the private sector (DH 1,151 m.) is calculated residually. S. The 1Cmmercial Banks A. Current Account: Sources of Funds 'A.1) Value added (DH 1,276 m.) represents the profits of the banking system estimated on the basis of their consolidated P&L account [DB-IS]. (A.2) Interest Income * Interest income from PEs and the CG have been calculated above as their respective interest expenses. * Interest income from SFI (DH 584 m.) and private sector (DH 3,280 m.) is obtained from [DB-IS] and [SFI-IS]. B. Current Account: Uses of Funds (B.1) Taxes to the CG (DH 504 m.) and to the LG (DM 8 m.) are derived above under the current accounts for the CG and the LG. (B.2) Interest * Interest expenses paid to the CB (DH 1,224 m.): See (A.2) for the CB above. I * Interest expenses paid to the SFI (DH 101 m.) and private sector (DH 2,240 m.) are obtained from the [DB-IS] and [SFI-IS]. * Interest expenses paid to the PE (DH 745 m.): See (A.3) for the PE above. (B.3) Goods anl services (DH 3,449 m.) are calculated as the sum of all non- interest expenses in (DB-IS]. (B.4) fioxJn_U (DH 2,039 m.) is obtained residually as the difference of total sources of funds minus expenses (B.1) through (B.3). -87 - ANX I Page 14 of 19 C. Capital Account: Sources of Funds (C.1) predit * Credit from SFI (- D14 198 m.) is the change in SFI liabilities (Concours et d6p6ts des OPS) (BA-AR]. * Credit from the CB (DH 4,248 m.): See (D.1) for the CB above. * Credit from PEs (DH 665 m.) and the private sector (DH 5,463 m.) (i.e.; reimbursements): See (C.1) for PEs above. (C.2) Chanaes in arrears (DH 17 m.): See (D.3) for PEs above. D. Capital Account: Uses of funds. (D.1) Credit * Credit to the SFI (- DH 107 m.) is the change in loans to the SFI (Concours aux OFS) (BA-AR]. - Credit to the CB (DH 1,640 m.): See (C.1) for the CB above. * Credit to the CG (DH 4,082 m.): See (C.1) for the CG above. * Credit to the PE (DH 2,621 m.): See (C.1) for the PE above. * Credit to the private sector (DH 5,307 m.) is the residual. (D.2) Changes in arrears * Settlement of arrears with respect to the CG (DH 5 m.): See (C.2) for the CG above. * Increase in arrears by PE (DH 1,314 m.): See (C.3) for the PEs above. 6. The Specialized Financial Institutions A. Currert Account: Sources of Funds (A.1) Value added (DH 1,276 m.) represents the profits of the SFI estimated on the basis of their P&L accounts [SFI-IS]. (A.2) Interest income * Interest income from PEs, the CG, the LG and the banks have been calculated above as their respective interest expenses. - 88- ANNEX Page 15 of 19 * Interest income from the private sector (DH 2,641 m.) is obtained residually from [SFI-IS]. (A.3) Transfers from the CG (DH 300 m.): See (B.2) for the CG above. (A.3) Dividends from the private sector (DH 35 m.) and PEs (DH 11 m.) is based on information contained in [SFI-IS) and various annual reports of the SFI (see also (B.1) for the PEs above). B. Current Account: Uses of Funds (B.1) Taxes to the CG (DH 168 m.) and to the LG (DH 8 m.) are derived in (A.1) for the CG above. (B.2) Interest - Interest expenses paid to the rest of the world (DH 732 m.) are calculated on the basis of (SFI-IS], balance of payments data [OC] and DRS. - Interest expenses paid to banks (DH 584 m.): See (A.2) for the banks above. * Interest paid to the private sector (DH 769 m.) is the residual from total interest paid by SFI in [SFI--S). (B.3) Dividends to the CG (DH 105 m.) are from [ST). 1B.4) goods and Bervices (DH 870 m.) is calculated as the sum of all non- interest expenses after taxes and dividends in [SFI-IS]. (B.5) Savinas (DH 2,150 m.) is obtained residually as the difference of total sources of funds minus expenses (B.1) through (B.4). C. Capital Account: Sources of Funds (C.1) Credit * Credit from banks (- DH 107 m.): See (D.1) for the banks above. * Credit from the LG (DH 178 m.): See (D.1) for the LG above. * Credit from the PE (DH 803 m.): See (D.1) for the PE above. k Credit from the rest of the World (DH 3,302 m.) is from fOG] and it includes DH 1,789 m. of interest and principal rescheduling gains (oee also (C.1)) for the rest of the world, below. * Credit from the private sector (DH 3,245 m.) is the residual. - 89 -mi I Page 16 of 19 (C.2) TrAnsferSA from the PE (DH 230 m.): See (D.2) for the PE above. D. Capital Account- Uses of funds (D.1) Credit * Credit to the banks (- DH 198 m.): See (C.1) for the banhk above. * Credit to the CB (- DiH 37 m.): See (C.1) for the CB above. * Credit to the CG (DH 1,801 m.): See ('.1) for the CG above. * Credit to the LG (DH 405 m.): See (C.1) for the LG above. * Credit to the PE (DH 1,090 m.): See (Col) for the PE above. * Credit to the rest of the world (DH 3,148 m.) is from the balance of payment3 (OC] and (DRSJ. It represents an estimate of the amortization payments of the major SFIs. * Credit to the private sector (DH 3,436 m.) is the residual. (D.2) Transfers to PE (DH 154 m.): See (C.2) for the PE above. (D.3) Cbanges in_Ar_eaS with respect to the LG (DH 2 m.): See (C.3) for LG above. 7. The Rest of the World The accounts of the reut of tha world are derived from the balance of payments as reported by the Office des changes (OC]. The information p,.4ded by the [OC] does not always distinguish between PEB, the CG and SFIs (since they are all public entities). Therefore the information from the (OC] is complemented by DRS, Treasury, DEPP and CB data. The current account transactions are presented on a "before debt relief" basis. Rescheduling gains (both in terms of principal and interest) appear as capital inflows from the rest of the world to the different sector in the economy. The following break-down of rescheduling gains is estimated for 1989: - 90 ANNEX I Page 17 of 19 Tabl A.1.4 BREAKDOWN OF RESCHEDULING GAINS FOR 1989 (In Millions of DirhamS) CG PE SFI TOTAL Principal 6,427 1,776 1,511 9714 Ititerest 895 326 278 1.4i Total 7.322 2.102 1,789 1,12 Source: Ministry of Finance; DRS; World Bank estimate. A. Current Account: Sources of Funds (A.1) PU_LJnn1 from PE (DH 50 m.): See (B.1) for PE above. (A.2) Interest payments are reported in (OC] broken down between public (corresponding to CG) and publicly guaranteed (PE and SFI), all on an "after debt relief" basis. * Interest paid by the CG (DH 7,370 m.) is the amount that appears in [OC] (DH 6,544 m.) under Revenu des investissement (debit) for the government minus DHi 69 m. which is attributed to the CB (see (B.3) for the CB above), plus interest rescheduling gains (DH 895 m. -- see Table A.I.4). * Interest paid by the PE (DH 2,966 m.) is adjusted to include DH 326 m. of interest rescheduling gains. * Interest paid by the SFI (DH 732 m.) is adjusted to include DH 278 m. of interest rescheduling gains. * Interest paid by the CB (DH 69 m.): See (B.3) for the CB above. * Interest paid by the private sector (DH 591 m.) is derived residually and refers mostly to interest on non-publicly guaranteed debt. (A.3) Tranfgre from the CG (DH 4,115 m.) is the sum of DH 3,717 m. (Transactions gouvernementales - debit) and DH 398 m. (Transferts publics - debit) in (OC]. (A.4) !JalSe-Adde (DH 49,652 m.) represents the sum of imports of goods and non- factor services. - 91- ANNEX X Page 18 of 19 B. Current Account: Uses of Funds (B.1) Interest * Interest paid to the CB (DH 263 m.) is Revenu des investissements (public) (credit) in (OC]. * Interest paid to the private sector (DH 8 m.) is Revenu des investissements (priv6) (credit) in [OC]. (B.2) Transfers * Transfers to the CC (DH 2,597 m.) is the sum of DH 994 m. (Transactions gouvernementales -- credit) and DH 1,603 m. (Transferts publics -- credit) in [OC]. * Transfers to the private sector (DH 12,567 m.) corresponds to Transferts priv6s (credit) in (OC]. (B.3) Goods and Services (DH 41,771 m.) refers to exports of goods and non- factor services. (B.4) Savinge (DH 8,339 m.) is the sum of the (negative of the) current account balance before debt relief. C. Capital Account: Sources of Funds (C.1) Credit from and to the CG, PE, the LG, and SFI (i.e., repayment of principal and new disbursements) has been derived from [OC] with supplementary informatton specific to each sector as needed to obtain the breakdown required by the flow of funds. The principal repayments are on a "before debt relief" basis (see (D.1) for all the sectors above) and disbursements, therefore, incorporate total debt relief. The private sector is treated residually. (C.2) Transfers from the PE (DH 200 m.): See (C.2) for the PE above. D. CapitalAccount: lJses ofFunds (D.1) Credit: See (C.1) above and (C.1) for the CB above. (D.2) Investment (DH 1,841 m.) renresents foreign direct investment. 8. The Private Sector The flows of funds for the private sector are derived from (a) information regarding the other sectors (e.g., dividends paid by the PE to the private sector) or (b) residually using the totals for the economy (e.g., investment) obtained from the (NA-MP]. - 92 - Page l9 of 19 A. Current Account: Sourcs of Funids (A.1) Vajue added (DH 135,891 m.) is the difference between GDP (DB 191,576 m.) and the sum of the value added for the other sectors (excluding importo). (A.2) Interest Income (DH 4,692 m.) is the sum of interest paid by banks, SFI, the CG and the rest of the world. (A.3) Transfers (DH 14,601 m.) is the sum of transfers made by the CG and the reat of the world. (A.4) Oividends (OH 50 i.) are paid by the CG. B. Current Account: Uses of Funds (B.1) Taxes paid to the CG (DH 7,222 m.) and to the LG (DH 1,835 m.) are derived in (A.1) for the CG above. (B.2) Interest (DH 7,121 m.) is calculated as the sum of interest paid to banks, SFI, CB, and the rest of the world. (B.3) Dividends to the SFI (DH 35 m.): See the SFI accounts above. (B.4) Gooda and services (DH 114,407 m.) are calculated as the difference between total consumption in (NA-MP] (DH 153,414 m.) and the sum of consumption for all the other sectors (excluding exports). (B.5) Savincs (DH 24,614 m.) ib obtained as the difference between gross national savings (DH 37,704 m.) and the savings of all the other sectors (excluding foreign savings). C. Capital Account: Sources ofFunds (C.1) Credit (OH 9,178 i.) is the sum of credit from banks, CB and the rest of the world. (C.2) Transfers (DH 330 m.): See (D.2) for the CG and PE above. (C.3) Chanaes in arrears (DH 1,934 m.): See (D.3) above for CG and PE. D. Capital Account: Uses of Funds (D.1) Credit (DH 11,226 m.) is the sum of credit extended to the CG and repayments made to banks, SFI, CB and the rest of the world. (D.2) Iransfers to the PE (DH 187 m.): See (C.2) for the PE above. (D.3) Changes in Arrears (DH 204 m.): See (C.3) for the CG and the PE above. (D.4) Investment is the difference between total investment (DH 46,043 m.) from (NA-MP] and the investment made by the other sectors. 94 Page I of 25 pages THE KINGDOM OF MOROCCO ISSUES AND PROSPECTS IN THE PUBLIC SECTOR A Dkeomposition of the Central Governmeint B'idga 1. Indicators of discretionary changea in fiscal policy try to answer the following question:1 "of the changes in fiscal position, what part ia due to changes in policy (discretionary changes) and what part is due to changes in the economic environment (induced changes)?" 2. Many indicators have been suggested in order to measure the diecretionary and induced components of changes in the deficit. The primary deficit and the cyclically adjusted b':dget balance are two of them. Both measures can be criticized however, because their answers are incomplete.2 3. In this section, we will follow an alternative, more disaggregated approach that builds on Ziller (1989), Marshall and Schmidt-Hebbel (1989), and Blanchard (1990). 4. Ziller identifies for each item in the government budget a macroeconomic variable to which it is closely related, and a formula linking the two. By applying this formula to the historical data of the macroeconomic variables involved, he obtains a "theoretical" evolution of the budgetary items3 that can be compared to the actual evolution. 5. Marshall and Schmidt-Hebbel build on a detailed accounting framework for the public sector entities. By manipulating the budget constraint of the consolidated public sector, they decompose thJ determinants of the public sector deficit into three components: (i) foreign variable shocks, (ii) domestic variable shocks, and (iii) changes in public policy variables. 6. Blanchard suggests as an aggregate indicator of discretionary policy changes, the "value of the primary surplus which would have prevailed, were unemployment at the same value as in the previous year, minue the value of the primary surplus in the previous year, both in ratio to GNP in each year". 7. The method described in the next section is inspired by the Blanchard approach. However, it tries to identify variables other than unemployment that are I/ See Blanchard (1990). 2/ AS Blanchard points out, the cyclically adjusted budget balance is corrected for output and employment changes, but not for variations in inflation and real interest rates. 3/ The "theoretical" evolution corresponds to the cumulative induced changes in the budgetary iterns, starting in the year for which the formula is calibrated. 95 Page 2 of 25 pages important determinants of the budget in Morocco, building on the paper by Ziller and going into greater detail. Furtlhermore, interest payments are taken into account in the analysis. However, because of the lack of data in the Moroccan case, the analysis could not (i) be applied to the consolidated public sector (rather than the central government), and (ii) distinguish foreign and domeatic components i!l the induced changes of budgetary policy. xLi£Q°SQtjion Nethod 8. The decomposition of changes in the budget deficit into discretionary and Induced changes is carried out by decomposing the change in each revenue and expenditure item into these two components. A change is called discretionary, whenever fiscal policy in this particular field is modified. In the case of a tax revenue for example, this includes not only changes in tax ratos, but alBo improved buoyancy of the tax. A change is called induced if it is caused by variables that are outside the direct control of the government (e.g., interest rates, growth rate, inflation rate). 9. The change in each budgetary item from one year to the other is decomposed following a simple method. First, a macroeconomic variable that can be closely associated to the budgetary item has to be chosen. An equation linking the budgetary item to the macroeconomic variable is then specified, most often in a linear form. Finally, this equation i's calibrated for a given year.4 Using the data for the macroeconomic variable in the following year, one can determine how the budgetary item would have evolved, had its relationship to the macroeconomic variable remained stable (the Induced change). Very little econometric estimations are used, because they often fail, unless adequate p':,licy variables are employed, to distinguish between discretionary and induced cnanges.5 Therefore, the method is based mostly on the simple principle of calibration, which is easier to interpret. 10. Practically, the macroeconomic variable asaociated with a budget item is chosen in different ways. In the case of a tax revenue item, the variable chosen is simply the tax base, or a proxy for it. For other revenue items, it is a variable that has a causal relationship to it (e.g., for dividends of OCP, it might be phosphate sales). 11. For expenditure items, the choice is less obvious, because it is more difficult to draw the line between discretionary and induced changes. The macroeconomic variable associated with an expenditure item is often chosen indirectly, by determining first how the absence of policy change would be defined in this case. This choice often necessitates a normative viewpoint: what can be assumed to be a "neutral" fiscal stance? The analysis of expenditures is therefore necessarily more controversial than the decomposition of revenues. 12. The quality of the decomposition depends heavily on the degree of disaggregation of the budget items. There is a tradeoff between the better results that can be obtained with a *nore detailed breakdown, and the difficulty of collecting {/ It is actually recalibrated every year. 5~/ There is some circular reasoning behind the idea of using dummy variables for policy changes in econometric estimates of that kind. If our aimn is to determine when there are discretionary changes in budgetary policy (and how important they are), how can we decide what dummy variables to use? -96- Page 3 of 25 pages the dates for the tax bases in that breakdown. Sometimnes, a compromise can be founa by usincq a more aggregated breakdown and correcting the tax base for changes in its composition. This idea has been applied to import dutie3 (see below). Tht De. mvosition hethod: A Formula 13. Xn the following paragraphs, the decomposition method will be explained more formally. We take firqt the example of a tax revenue item because the method is more straightforward in that case. 14 We want to analyze the change in the ratio of a particular revenue item (k) to GDP (Y). As a first step, we identify the tax base (Z') to which the revenue refers. The simplest functional form for tax revenues is chosen: RI - t' * Z' where t' designates an implicit tax rate. This formula is also used to calibrate the implicit tax rate for every year. The change in the ratio R'/Y can then be written: Ri R'~ tJZ, tl 1 Zt' Z {j , yt Yt-l l = Zt-l 3 _1 Y I r -l The first term designates discretionary changes in t"e tax revenue, since they are produced by a (deliberate) modification of the implicit tax rate t'. The second term will be called the induced changes, because they are induced by a change in the ratio tax base/GDP. As the analysis is carried out in terms of shares of GDP, a change in the tax base is only called induced if it is different, in relative terms, from the change in GDP. 15. For non-tax revenue and expenditures the procedure is analogous. The following examples of domestic interest payments will show that this approach is actually quite flexible. In the case of domestic interest payments represented by the variable R, we have: R -i D where I is the implicit domestic interest rate, and D represents the domestic debt stock at the beginning of ths year. As the macroeconomic variable associated to interest payments, we choose Z - I * Y (this choice will become obvious below). Calibrating the variable t, we obtain: R R D =z =y Consequently, the change in the ratio of domestic interest payments to GDP is decomposed in the following way: 'I De _-IDt-l)= _Dt"t-4 (2) ANNE ~97 -Page 4 of 25 pages The discretionary change in domestic interest ?ayments is therefore defined as a change in the debt/GDP ratio, whereas any change in the nominal implicit interest rate is called induced. Other formulationa can be put in this framework. Towards a Prolection Module of the Budget 16. This method can also be used as a very simple projection and simulation module. By projecting the tax bases Z' (or their ratio to GDP) and by keeping the calibrated tax rates t' constant, projected values for tax revenues IV (or their ratio to GDP), for a given fiscal policy, can be obtained. By changing the implicit tax rates t', the impact of possible changes in fiacal policy on revenues can be simulated. The same procedures apply of course to expenditures. 17. The major advantage of such a budget projection module is its simplicity and transparency. It gives a complete picture of the budget and stresses its dependence on macroeconomic evolutions. For some budget items, independent and more detailed estimations6 may be available; these could be incorporated easily in the projection framework. 18. Such projections and simulations can only give rough estimates, if the budget is aggregated into large categories of revenues and expenditures. on the other hand, a more detailed disaggregation has the disadvantage of requiring projections of too many economic variables. The Imtirical implementation 19. The choice of the macroeconomic variables associated to the different revenue and expenditure categories is reported in the table next page. (i) Revenues 20. For direct tax revenues, the following tax bases have been chosen: (a) The tax on salaries and wages is paid mostly by public employees. The variable that comes closest to the real tax base is the government wage bill. (b) Revenues from the IS (corporate tax) and the IBP (unincorporated business tax) depends on firms' net profits of the previous year.7 As there is no time series available for profits, we use (the previous years') non- agricultural GDP as a proxy for profits (except OCP). Agricultural value added is excluded from this measure for two reazons: (i) the whole sector iB exempt from tax until the year 2000, and (ii) agricultural output fluctuates very heavily due to the strong influence of climatic conditions. (c) Corporate taxes paid by the phosphate company OCP to the government depend on the company's net profits of the previous year. The best proxy available is exports of phosphate rock and phosphoric acid observed in the previous 6/ For example, interest payments can usually be projected with much more precision. 2/ Until 1990, there has been a one-year collection lag which will be gradually abolished over 1990-93. 98 Page 5 of 25 pages Table A.II.1 TAX BASES FOR CENTRAL GOVERNMENT B'JDGET Central government Revenues VARIABLES TAX BASE 1. TOTAL Direct Taxes Tax on Salaries & Wages Central Government Wage Bill IBP & IS (excl. OCP) IBP (non-corporate taxes) Non-agricultural GDPIa (current prices) IS, excl. OCP (corporate taxes) Non-agricultural GDP (current prices) IS, OCP (corporate taxes) Exports of Phosphate Rock and Phosphoric Acid Urban Property Tax & Bus. Lic. Fee Urban Property Tax Non-agricultural GDP (current prices) Business License Fee Non-agricultural GDP (current prices) Participation in Nati. Solidarity Tax Revenues on IBP & IS and on salaries Other Direct Taxes Non-agricultural GDP (current prices) 2. TOTAL Indirect Taxes Value Added Tax Private consumption (current prices) Consumption Tax Private consumption (current prices) Import Customs Duties Estimated Import Duties from Sectoral Tax Rates/b Special Tax on Imports PFI Imports of goods (current prices) Stamp Duty Imports of goods (current prices) Export Duties and Taxes Exports of phosphate rock (curr. prices) 3. TOTAL Non-tax Revenue Registration Non-agricultural GDP (current prices) State Monopolies OCP Exports of phosphate rock and phosphoric acid Other N'on-agricultural GDP (current prices) Exceptional Levy on Oil DISCRETIONARY Other Income Non-agricultural GDP (current prices) /a of the previous year, since these taxes are collected with one year lag. /b See para. 21. 99 Page 6 of 25 pages year. However, for a few year OCP did not pay an; corporate tax at all. In this case, it is very difficult to determine whether such jumps are purely discretionary or not. The decomposition method is helpful in this particular question. Any change from or to a zero value is mechanically classified as discretionary. (d) The national solidarity tax (PSN) is levied over and above other direct taxes (IS, IBP, and tax on salaries and wages). Consequently, the revenues from these taxes are chosen as tax base. (e) The evolution of other direct taxes, including the urbar property tax (determined on the basis of property values) and the business license fee, are assumed to be related to the evolution of non-agricultural GDP. 21. For indirect tax revenues, the tax bases are the following: (a) The value added tax (VAT) has only been introduced in 1986, replacing a turnover tax. The tax bases for the two tax systems are not identical. Because exportB and investment are largely exempt in the VAT system, the macroeconomic variable that comes closest to the actual. tax base is private consumption.8 The tax base in the old turnover tax system is not as transparent as in the VAT system. Therefore, even before 1986, private consumption has been used as the tax base in the analysis. (b) The consumption tax is levied on several consumption goods, such as tobacco, and alcoholic beverages. In the absence of more detailed data, aggregate private consumption is the natural choice for a tax base. (c) The tax base for customs duties is imports of goods, corrected for shifts in import composition. As tariff rates are not uniform, the analysis should be carried out in a sufficiently detailed breakdown in order to have a different tax base for every tariff rate level. Since this informatiorn is not readily available, we have corrected the aggregate number for imports of goods for shifts in composition by using a simple econometric method. A regression of import duties on nominal imports of the main categories of goods over the period 1971-89 yields average tax rates for each category of goods: T - 0.351 MIBT + 0.191 IIRM + 0.082 MEO + 0.279 MCG (2.89) (2.02) (4.74) (3.67) + 0.011 Dl + 0.003 D2 (-3.51) (0.83) R2 + 0.93, D.W. = 1,88, t-values in parentheses where T represents import duties, and M the nominal imports of: - food, beverages and tobacco, excluding wheat and sugar, which are exempt from duties (FET), - raw materials (excluding sulfur and edible oil), (RM) - machinery and equipment, (EQ) - consumer goods, (CG). ~/ See Pujol and Ziller (1989) for more details. 100 Page 7 of 25 pages Two dummy variables are used to account for trade reforms in the eighties (DI for 1984-86, and D2 for 1987-90). The results show that the highest average tariffs are imposed on food, beverage and tobacco as well as on other consumer goods (35% and 28%), whereas machinery and equipment face relatively low average rates (8%), since most of the latter are tax exempt. The fitted series for import duties from this regression (excluding the dummy variables) is then used as the "tax base" for the decornposition. This procedure avoids that a shift in the (nominal) composition of imports is treated as a discretionary change. For example, the oil price slump in 1986 produced such a shift and decreased the global dirham value of goods imports. The corrected tax base, however, does not react to this change (Bee Graph 0.1). (d) The special imports tax (SIT) and the stamp duty Graph 0.1 on imports were Estimated Import Duties consolidated into the pr6l6vement fiscal A Billions DH (inmport Duties) Billions OH (Imports) 1'importation (PFI) in F _0 January 1988. With only 4 _ ......................................... few exceptions, this tax . 40 relies on a uniform tax 30 (e) Export duties are only imposed on exports of import OutlsoFltted - ImporttDutiesAetual phosphate rock. i s s f 22. The treatment of ter ,to\p\9r8p non-tax revenues is the followingr (a) Dividends paid by public enterprises depend theoretically on their profits. However, Pujol and Ziller (1989) mention the fact that dividends seem to behave countercyclically to the budget deficit. This might suggest that they are used by the government as a means of financing unexpectedly high budget deficits. In the present decomposition analysis, this phenomenon cannot be taken into account. For dividends paid by OCP, the macroeconomic variable chosen is, as for the company'sB corporate tax, exports of phosphate rock and phosphoric acid. For dividends paid by the other public enterprises, we have not wound any better variable than non-agricultural GDP as an indicator for general economic activity. (b) The exceptional levy on oil was introduced in 1986 in order to catch the windfall profits stemming frum the difference between the constant domestic reference price aond the lower international price of oil. In its present implementation, this revenue ic inverp ely related to the evolution of the international oil price, thus introducing an important Bource of uncertainty in revenues. We have therefore chosen to classify the initial decision to introduce this levy as discretionary, but any subsequent fluctuation in revenues as induced changes. - 101 - Page 8 of 25 pages () Enenditur 23. As shown above, the choice of the macroeconomic variables associated with expenditures must be based on a normative viewpoint, stating what a "1neutral" policy would be like. Our decisions on the choice of these variables are used here as a simple benchmark for the decomposition analysis, without being a statement on desirable fiacal policy. Consequently, some of them might seem arbitrary. (a) As Morocco has been in a phase of stabilization since 1984, any increase in the real wage bill, is assumed to be discretionary. This implies the choice of the consumer price index (CPI) as the macroeconomic variable associated with the wage bill. It is admittedly a restrictive criterion. Other possible choices would have been: the CPI times, an index of population (assuming that a fixed ratio of the number of government employees to the total population reflects a neutral employment policy), or simply trend GDP. An informal sensitivity analysis snuws that the first alternative does not lead to fundamentally different results. The second alternative is not very interesting in itself, as almost any change in the ratio of the wage bill to GDP would be t..eated as discretionary. (b) Expenditures on materials and supplies are assumed to follow a trend rather than to vary with the short-term fluctuations of economic activity. We took as a reference variable a (linear) trend of GDP, calculated over the years 1979 to 1990. (c) The base for interest payments has been determined so as to classify as discretionary changes any increase in the debt/GDP ratio. Sustainability of fiscal policy requires that the debt/GDP ratio remain constant (or decrease); hence this seems to be a sensible criterion of fiscal neutrality. We have shown above9 what this criterion implies for the choice of a macroeconomic variable. With respect to foreign debt, changes in the exchange rate are assumed to be induced. (d) Changes in consumer subsidies are assumed to be induced only if they correspond to a change in the gap between import prices of subsidized food and (administered) domestic prices.10 Any change in subsidies, for given prices, is assumed to be discretionary. The variable ("tax base") used in the decomposition analysis must be estimated econometrically, since the only prices available are indices and not levels. The tax base is obtained as the fitted series for subsidies from the followir.g equation, estimated over the period 1977-88 (the observations for 1989/90 were neglected because of a restructuring of the wheat subsidy system): SUBS - -586 + 34.34 PI -14.75 PD (-1.35) (8.83) (-3.21) 1?' - 0.89, D.W. - 2.24, t-values in parentheses. i/ See paras. 13-15 on the decomposition formula. J0/ This treatment is based on the simplifying assumptions that all subsidized food is imported and that consumption of subsidized food does not change from one year to the other. - 102 Page 9 of 25 pages where SUBS represents consumer subsidies, PI the unit value of imported subsidized food,11 and PD the domestic food price, approximated by the agricultural GDP deflator (see Graph 0.2). Graph 0.2 Consumer Subsidies (e) Capital expenditures consist of government fixed 9600 Millon. of DH investment and capital transfers to public sooo .................. ................ enterprises and local 2300 ..... . ................ governments. There is no 2000 ............. -/ obvious choice of a macroeconomic variable to which capital expenditures 1000 ..................................... would be related. In order o ................................................to highlight the long-term o 1 I I I I_, __ implications for growth of 1980 1981 1982 198S 1284 1986 1986 1987 1988 1989 1990 changes in capital expenditures, we chose the -Aetual Fitted estimated GDP trend as a base. t\olb;to*\p*\gr&phs\oa Results Global Evolution: 24. The decomposition of changes in the central government budget will be limited to the years 1982 to 1990, a period that followed a severe balance of payments crisis and that was characterized by the implementation of stabilization and adjustment measures by the Moroccan government. 25. The global adjustment effort undertaken by the central government is reflected by the decrease of the overall deficit (on a commitment basis) by 9.2% of GDP from 12.4% in 1982 to 3.4% in 1990. 26. The decomposition analysis shows, however, that discretionary measures account for more than half of this reduction (5.3% of GDP), the rest (3.7% of GDP) being induced by favorable changes in the economic environment (see Graph 1).12 11/ We assumed that subsidized food consisted of 25% sugar, 25% edible oil, and 50% wheat. 12/ See also Table A.II.1 at the end of this annex. When the macroeconomic variable associated with wages and salaries is changed so as to define as a neutral employment policy a constant ratio of government employees to population (see the discussion above), the results change quantitatively but not qualitatively. In that case, more than two-thirds of the reduction in the budget deficit are accounted for by discretionary changes, and less than one-third consists of induced changes. ANNEX II 103 - Page 10 of 25 pages 27. Furthermore, the years 1982-90 seem to fall clearly Graph 1: Government Overall Balance into two subperiods. Most of the Cumulative Changes reduction in the deficit (by 7% of GDP) happened during the first I0 8hare of GODP subperiod, from 1982 to 1986, and all of this reduction in the 8% ......... ..... deficit is due essentially to e% .......... ..... .. ...... discretionary changes. During the 4% .. ... . ........./...; second subperiod, from 1986 to 2% 1990, the deficit was further / %. reduced, by 2% of GDP; aven this 0% relatively small reduction was -2. ............. obtained through a favorable -4$ I evolution of the economnic 1982 1983 1984 1988 1988 1987 1988 1989 1990 environment: the discretionary h changes alone would have T C deteriorated the budget deficit by almost 2%, whereas induced changes mi\AIbsrto\pa\graphs\1 account for a reduction by 4% of GDP. 28. Where has the adjustment in the deficit come from? Until 1986, the reduction in the budget deficit was the result of a drastic decrease of expenditures by 10.3% of GDP, of which 9.5% was due to discretionary measures (see Graph 3). At the same time, revenues declined by 3.2% of GDP, 2% of which was discretionary, i.e., due to a number of liberalization and adjustment measures that resulted in a shortfall of revenues (see Graph 2). Graph 2: Government Revenues 29. Between 1986 and 1990, Cumulative Changes a major effort was undertaken to enhance revenues: 5.6% of GDP 8Sham of GDP could be gained, almost all of it due to discretionary measures. /% Half of this amount stems from the 2 .................................. initial introduction of the 1 ...............................exceptional levy on oil. 0s1 e=S ~ w_ Simultaneously, expenditures -1% ........... increased by 3.7% of GDP. -2% . .......... Discretionary measures aimed at - gs ....................................... stopping the erosion of real wages __4______I_______ l___ and improving the public investment 1982 1983 1984 1986 1988 1987 1988 1989 1990 program accounted even for an increase of 6.3% of GDP. The -ToIalChangSo -+ODorst.ChanQsg -&-InduoedChange4 difference (2.6%) comes from a favorable evolution of the economic u\lbo.Irto@p.\gra#hev2 environment variables. - 104 Page 11 of 25 pages Graph 2a: Direct Tax Revenues CumulatiMe Changes 8haro of GODP -0.8% 1982 1983 1984 1986 1988 1987 1988 1989 1990 Total Ch.one - OlgOret. C1an.9*6 nd.eed C,_a__ Graph 2b: Indirect Tax Revenues Cumulative Changes Share of GODP 1982 1983 1984 1986 1986 1087 1988 1s89 1990 m:naIbarIno\P\1aPhJ4S2b Graph 2c: Non-Tax Revenues Cumulative Changes Shora Of GDP 416 !~~~~~~~~~~~~~~~~~1 -.s~~~~~~~~~~~~~~~~1 4'~~~~~~~~~~~~~~~~~4 10982 198S 1984 1988 1988 1987 1988 1989 1990 a¢tt C umulative Change sd Sh~are of M G DAPhC ANZX LI - 105 Page 12 of 25 pages Decomoosition of cha ces in revenues: 30. Between 1982 and 1985, the cumulated decrease Jp aggregate revenues is almost entirely explained by discretionary changes; the induced changes cancel out over time.13 These discretionary changes are mainly explained by a gradual reduction of the special import tax rate from 15% before 1984 to 10% in 1984, and 7.5% in 1985, corresponding to a lose of revenues of over 1.5% of GDP. However, the impact of the trade liberalization program on revenues from customs duties seems to have been neutral during 1982-85. 31. The shortfall of revenues in 1986, compared to 1985, by 1.8% of GDP can be explained by a combination of several factors. The influence of induced changes seems to have been more important, the discretionary measures compensating each other. These factors are the following: (a) An unfavorable evolution of the economic variables (induced changes). Because of the oil price slump, the value of imports of goods decreased and consequently eroded the tax base of the special import tax and the stamp duty, leading to a loss of 0.7% of GDP. (b) The introduction of the value added tax in April 1986 resulted in a (discretionary) loss of 0.9% of GDP. (c) OCP did not pay any dividends that year, and dividends paid by other public enterprises also declined. In the present decomposition, this accounts for a discretionary decrease in revenues by 1.5% of GDP. (d) The loss in revenues caused by the two latter discretionary factors was compensated by the introduction of the exceptional levy on petroleum products, producing a supplementary revenue intake of 2.4% of GDP. 32. The period 1986 to 1990 shows a steady increase in government revenues by 5.6% of GDP, most of it being discretionary. This discretionary increase comes from the following sources: (a) A 1% improvement in direct tax revenues. Almost all of this is due to the enhanced buoyancy of the corporate tax IS, in spite of a reduction in its rate from 48% to 40%. (Is the Laffer curve at work here?) A large portion of the increase takes place in 1990, possibly reflecting the beginning of the gradual shift of the IS from a one-year lag to a current year basis. (b) A 2% increase in indirect tax revenues. Half of this amount comes from the improved administration and buoyancy of the value added tax, recovering thereby the initial loss in 1986. Revenues from the consumption tax increased by almost 0.5% of GDP.14 The discretionary improvement in revenues from customs duties amounts to almost 0.4% of GDP, due to an increase of import tariff rates by 2.5% in 1987. After a further reduction of the special import tax rate to 5% in 1987, leading to a discretionary 13/ See also Tables A.II.2 to A.II.4 at the end of this annex. 14/ Perhaps only because 1986 was a particularly bad year. - 106 - Page 13 of 25 pages revenue loss of 0.4% of GDP, the consolidation of the special import tax and the stamp duty into the PFI in 1988 reversed that lose. (C) A 2.4% increase in non-tax revenues, out of which 0.8% is due to a partial recovery of public enterprise dividends and 11 is due to the 1990 fiscal amnesty. The implementation in 1989/90 of an individual general income tax (IGR), which consolidates all previous income taxes, lead also to the abolishment of the national solidarity tax (PSN) for this type of revenues. In the decomposition analysie, this shows as a discretionary fall in PSN revenues by 0.15% of GDP in 1990. 33. What about the Graph 3: Government Expenditures influence of the economic envi- Cumulative Changes ronment on the evolution of revenues between 1986 and 1990? Share of GDP Even if its global influence over es 4% ............. , ......................the period remained relatively 2 .................................... limited (0.3% of GDP), the follow- 0% z \ ing points are worth mentioning: _2% . ............. ... -4S > . ,, ., , - -, - - z>v_n (a) In 1989 and 1990, revenues X6% \ _from customs duties and the .. . . . . . ................/.. ............... PFI increased by about 0.4% ......................... ......... . of GDP each year. The -12% ._._,_._._. _._decomposition analysis shows 1082 1000 19" 1985 1966 1987 t988 1989 t990 that the rapid growth of the tax base (imports) is res- - Total Chsnge* -4 DIoret. C^an*o -0Induced Changes ponsible for that improve- ment: the induced change is ^\aIb.rto"M"eraphs'* even larger (0.5% of GDP) than that actually observed. (b) With the introduction of the exceptional levy on petroleum in 1986, an important part of government revenues15 has become dependent on a highly volatile variable: the oil price. This vulnerability of revenues is reflected by large numbers for induced changes in revenues. In 1990, the loss induced by higher oil prices amounts to almost 1% of GDP. This last observation could easily be generalized. A high variability in the induced changes observed for a revenue iten. might indicate an important degree of vulnerability of that revenue source. However, for this idea to be applied properly, the precision of the decomposition method would have to be improved. Decomocsition of Chanqos in Expenditures: 34. Between 1982 and 1986, total expenditures decreased by 10.3% of GDP, of which 9.5% stemmed from discretionary changes in policy (see Graphs 3 through 3d).16 As for revenues, the crucial change took place for expenditures in 1986. j2/ The levy represents 10% to 15% of total revenues. 16/ See also Tables A.II.5 to A.II.7 at the end of this annex. - 107 Page 14 of 25 pages Expenditures grew again by 3.7% of GDP between 1986 and 1990; however, the diacretionary increase amounts to almost than the double, i.e., 7.3% of GDP. 35. The discretionary decrease in revenues between 1982 and 1986 is composed of the following changes by expenditure category. Current expenditures were reduced by 1.6% of GDP, of which: (a) the erosion of real wages in the public sector led to a discretionary reduc- tion of expenditures by 0.7% of CDP; (b) growing indebtedness increased the discre- Graph 3a: Expend. on Goods & Services tionary expenditures Cmltv hne on interest by 0.5% of Cumulative Changes GDP; 2S Share of GDP (c) consumer subsidies and 1%. current transfers were reduced on a discre- tionary basis by 1.4% -1%.................. of GDP.18 2% 36. capital expenditures -3% - .. ......................... .......... were cut to the bone; they were -4* I I_ _ I__ _ ._ _,__ reduced by 7.9% of GDP, despite the 1s82 1983 1984 1986 198e 1987 1988 1989 1990 possible negative effects on long- l term growth prospects. 37. After the turning I.rtC\p.phs point in 1986, the discretionary increase of expenditures by 7.3% of GDP until 1990 is composed for about half (3.8% of GDP) by current expenditures, and the rest by capital expenditures. (a) The erosion of government wages in the first half of the eighties was reversed after 1986, corresponding to a discretionary increase of wages by 2.7% of GDP. (b) After 1986, the government debt/GDP ratio started to climb again. This burden of the past accounted for a discretionary increase in interest payments by 1.6% of GDP. (c) Despite the restructuring of the wheat flour component in 1988, discretionary expenditures on consumer subsidies and current transfers grew by 0.2% of GDP. 17/ A reminder: a discretionary increase in interest payments means that the debt/GDP ratio (measured at the beginning of each year) has grown over the period. 18/ This might actually come from the choice of the base year 1982, for which the estimated equation on subsidies does not fit very well. - 108 - Page 15 of 25 pages 38. The influence of the economic environment variables on expenditures was limited to current expenditures, due to the highly unsophisticated treatment of capital expenditures in the decomposition analysis. 39. The most important induced changes in expenditures apply to wages and salaries: an induced reduction by 1.7% of GDP be'ween 1982 and 1986, and of 1.5% of GDP between 1986 and 1990. This strong effect is certainly due to the restrictive criterion used in the decomposition analysis.19 40. The second induced effect stemi from the falling differential between international and domestic food prices, leading to an induced steady reduction in consumer subsidies by 1.7% of GDP between 1982 and 1990. 41. Changes in implicit interest rates are the third induced effect. Between 1982 and 1986, the rise in implicit interest rates led to an induced increase of interest payments by 1.8% of GDP. After 1986, this evolution was more than compensated by a fall in interest rates corresponding to an induced gain of 1.3% of GDP. Graph 3b: Interest Payments Cumulative Changes 8hars ot GDP 2.5% ............ O.% .X. .......... 1982 1983 1984 1986 1986 1987 1988 1989 1990 Total Changes -- blooretl. Changes -*- Induvod Change, mwalberto%p*\gr&ph*\3b I. 19/ Any real increase in wage payments is classified as discretionary, implying that for every year in which nominal GDP growth exceeds CPI inflation, the induced change is negative. A!L U 109 - Page 16 of 25 pages Graph 3c: Subsidies & Current Transfers Cumulative Changes Shir of GDP - -4*....= ...... -2% ................. ................. 1982 1983 19U4 1985 t986 t987 1988 1989 1990 wTobl O4- OI0rsotIn. ChaOnngs Indu.o*d eOh.g. *A.IlbsrtoW.rg?phs\3 Graph 3d: Capital Expenditures Cumulative Changes m: \aLberto\ps\annex2 1.17.92 Share of GDP -2% . -tO S .. . . . . . . . . . ....** . . . _... . . . . . -4%. 1982 1983 1984 1985 1988 1987 1988 1989 1990 | Totnl Changno + Oleoretlon. Choange. -.. Indvo.d Chjngaj ms\aIbrto\pa\graph&\3d ,,_ - 110 - Page 17 of 25 pages Ta,ble A.II ANNUAL CHANGE (SHARE OF GDP) 1982 1983 1984 1985 1986 1987 19M 1989 1990 Total Revenues Discretionary 0.19% -0.56% -1.23% 0.48% *0.75% 1.22% 2.23% -0.19% 2.06% Induced -0.71% -0.22% 0.86% -0.72% -1.07% 0.84% *0.52% 0.46% -0.47% TOTAL -0.52X -0.78% -0.38% -0.24% -1.81% 2.06% 1.71% 0.27% 1.59% Total Expenditures Discretionary 0.59% -3.00% X3.39% -0.27% -2.82% 4.24% 1.57% 1.75% -0.17% Induced -3.07% 1.92% 2.11% -1.54% -3.25% -1.67% -1.20% -0.07% -0.82% TOTAL -2.48% -1.09% -1.28% -1.81% -6.07% 2.56% 0.37% 1.68% -0.99 Overall Balance Discretionary -0.40% 2.45% 2.15% 0.75% 2.07% -3.011 0.66% -1.94% 2.22% Induced 2.36% -2.14% -1.25% 0.82X 2.19% 2.51X 0.68% 0.53% 0.35% TOTAL 1.96% 0.31% 0.90% 1.57% 4.26% -0.51% 1.34% -1.41% 2.58% CUWJLATIVE CHANGE (SHARE OF GDP) (BASE YEAR = 1982 ) 1982 1983 1984 1985 1986 1987 1988 1989 1990 Total Revenues Discretionary 0.00% -0.56% -1.79% -1.31% -2.05% -0.83% 1.39% 1.20%3.26% Induced 0.00% -0.22% 0.63% -0.08% -1.15% -0.31% -0.83% -0.37% -0.84% TOTAL 0.00% -0.7E% -1.16% -1.39% -3.21% -1.15% 0.56% 0.83% 2.42% Total Expenditures Discretionary 0.00% -3.00% -6.39% -6.66%9.48%5.25%-3.68%-1.93%-2.10X induced 0.00% 1.92% 4.03% 2.49% -0.77% -2.44% -3.64% -3.71% -4.53% TOTAL 0.00% -1.09% -2.37% -4.18% -10.25% -7.69% -7.32% -5.6A% -6.63% Overall Balance Discretionary 0.00% 2.45% 4.60% 5.35% 7.43% 4.41% 5.07% 3.13% 5.35% Induced 0.00% -2.14% -3.39% -2.57% -0.38% 2.13% 2.81% 3.34% 3.69% TOTAL 0.00% 0.31% 1.21% 2.78% 7.05% 6.54% 7.88% 6.47% 9.04% 111 - Page 18 of 25 pages Table A.1I.2 CHANGES IN CENTRAL GOVERNMENT REVENUES (ANNUAL - SHARES OF GDP) 1982 1983 1984 1985 1986 1987 1988 1989 1990 TOTAL revenue -0.52% -0.78% -0.38% -0.24% -1.81% 2.06% 1.71% 0.27% 1.59% 1.TOTAL direct taxes -0.54% 0.20% 0.04% 0.20% -0.65% 0.63% 0.33% 0.23% 0.27% Tax on Salaries & Wages 0.03% 0.18% -0.06% 0.06% -0.13% 0.16% -0.03% 0.19% -0.01% ISP & IS (exci OCP) -0.24% 0.12% 0.11% -0.24% -0.04% 0.17% -0.00% 0.30% 0.52% IBP (Non-Corporate Taxes) 0.00% 0.00% 0.00% 1.67% -0.04% 0.17% -1.27% 0.04% -0.17% IS, excl OCP (Corporate Taxes) -0.24% 0.12% 0.11% -1.91% 0.00% 0.00% 1.27% 0.25% 0.69% IS, OCP (Corporate Taxes) -0.36% 0.00% 0.00% 0.24% -0.24% 0.00% 0.25% -0.25% 0.00% Urban Prop Tax & Bus Lic Fee 0.10% -0.05% -0.04% 0.06% -0.10% 0.16% 0.06% -0.07% -0.08% Urban Property Tax -0.00% 0.01% -0.02% 0.00% -0.01% 0.02% -0.01% 0.00% -0.02% Business License Fee 0.10% -0.05% -0.02% 0.06% -0.09% 0.14% 0.07% -0.08% -0.06% Particip in Natt Solidarity 0.00% 0.02% 0.01% 0.04% -0.07% 0.05% 0.03% 0.03% -0.13% Other Direct Taxes -0.07% -0.07% 0.02% 0.03% -0.07% 0.09% 0.02% 0.02% -0.04% 2.TOTAL indirect taxes 0.67% -0.50% -0.60% -0.65% -2.03% 0.45% 0.39% 0.73% 0.79% Value Added Tax 0.74% 0.20% -0.22% 0.14% -0.91% 0.16% 0.02% 0.26% 0.26% Consuifption Tax -0.12% 0.22% -0.08% -0.24% -0.28% 0.31% -0.07% 0.07% 0.12% Inport Customs Duties -0.07% -0.22% 0.07r. 0.06% -0.20% 0.42% -0.01% 0.12% 0.20% Special Tax on Imports 0.18% -0.66% -0.41% -0.60% -0.52% -0.41% 0.48% 0.28% 0.22% PFI 0.13% -0.57/ -0.40% -0.54% -0.40% -0.42% 1.09% 0.30% 0.19% Stamp Duty 0.05X -0.09% -0.01% -0.06% -0.12% 0.01% -0.61% -0.02% 0.03% Export Duties and Taxes -0.06% -0.04% 0.04% -0.01% -0.11% -0.03% -0.02% -0.00% -0.01% 3.TOTAL non-tax revenue -0.65% -0.48% 0.18% 0.21% 0.86% 0.97% 0.99% -0.69% 0.53% Registration 0.02% 0.03% 0.14% -0.10% -0.07% 0.14% -0.05% 0.03% 0.11% State monopolies -0.30% -0.34% 0.19% 0.16% -1.48% 0.39% 0.26% -0.15% 0.34% OCP -0.70% 0.18% 0.22% 0.12% -1.10% 0.29% -0.13% -0.16% 0.29% Other 0.40% -0.52% -0.03% 0.04% -0.38% 0.10% 0.39% 0.01% 0.05% Exceptional Levy on Oil 0.00% 0.00% 0.00% 0.00% 2.44% 0.37% 0.43X -0.56% -0.93% Other income -0.37% -0.17/. -0.15% 0.15% -0.03% 0.07% 0.34% -0.00% 0.01% Fiscal amnesty 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00X 1.00% ANNEX II - 112 - Page 19 of 25 pages Tabte A.1.2 (Cont.d) CHANGES IN CENTRAL GOVERNMENT REVENUES (CUPJLATIVE, BASE = 1982) 1982 1983 1984 1985 1986 1987 1988 1989 1990 TOTAL revenue 0.00% -0.78% -1.16% -1.39% -3.21% -1.15% 0.56% 0.83% 2.42% 1.TOTAL direct taxes 0.00% 0.20% 0.25% 0.44% -0.20% 0.43% 0.75% 0.98% 1.25% Tax on Salaries & Wages 0.00% 0.18% 0.12% 0.18% 0.06% 0.22% 0.19% 0.38% 0.37% ISP & IS (excl OCP) 0.00% 0.12% 0.23% -0.01% -0.05% 0.12% 0.12% 0.42% 0.94% IBP (Non-Corporate Taxes) 0.00% 0.00% 0.00% 1.67 X 1.63% 1.80% 0.53% 0.57% 0.40% IS, excl OCP (Corporate Taxes) 0.00% 0.12% 0.23% -1.68% -1.68% -1.68% -0.41% -0.15% 0.54% IS, OCP (Corporate Taxes) 0.00% 0.00% 0.00% 0.24% 0.00% 0.00% 0.25% 0.00% 0.00% Urban Prop Tax & Bus Lic Fee 0.00% -0.05% 0.08% -0.02% -0.13% 0.03% 0.09% 0.02% -0.06% Urban Property Tax 0.00% 0.01% -0.01% -0.01% -0.02% 0.00% -0.00% 0.00% -0.02% Business License Fee 0.00% -0.05% -0.07% -0.01% -0.11% 0.03% 0.10% 0.02% -0.04% Particip in Natt Solidarity 0.00% 0.02% 0.03% 0.06% -0.00% 0.05% 0.08% 0.11% -0.01% Other Direct Taxes 0.00% -0.07% -0.05% -0.02% -0.08% 0.01% 0.03% 0.05% 0.01% 2.TOTAL indirect taxes 0.00% -0.50% -1.10% -1.75% -3.78% -3.32% -2.93% -2.20% -1.41% Value Added Tax 0.00% 0.20% -0.02% 0.12% -0.79% -0.62% -0.60% -0.34% -0.08% Conswmption Tax 0.00% 0.22% ).14% -0.09% -0.38% -0.07% -0.14% -0.07% 0.05% Import Customs Duties 0.00% -0.22% ).16% -0.10% -0.30% 0.12% 0.11% 0.23% 0.43% Special Tax on Imports 0.00% -0.66% -1.07% -1.67/ -2.20% -2.61% -2.13% -1.85% -1.63% PFI 0.00% -0.57% -0.97o/% -1.51% -1.91% -2.33% -1.24% -0.95% -0.76% Stanm Duty 0.00% -0.09% -0.10% -0.16% -0.29% -0.28% -0.89% -0.90% -0.87% Export Duties and Taxes 0.00% -0.04% -0.00% -0.01% -0.12% -0.15% -0.17% -0.17% -0.19% 3.TOTAL non-tax revenue 0.00% -0.48% -0.5u?. -0.09% 0.78% 1.75% 2.74% 2.05% 2.58% Registration 0.00% C.03% 0.17% 0.07% 0.01% 0.15% 0.10% 0.12% 0.23% State monopolies 0.00% -0.34% -0.15% 0.01% -1.47% -1.08% -0.82% -0.97% -0.63% OCP 0.00% 0.18% 040% 0.52% -0.58% -0.29% -0.42% -0.58% -0.29% Other 0.00% -0.52% -0.55% -0.51% -0.89% -0.79% -0.40% -0.39% -0.34% Exceptional Levy on Oil 0.00% 0.00% 0.00% 0.00% 2.44% 2.81% 3.24% 2.69% 1.75% Other income 0.00% -0.17%/ -0.32% -0.17% -0.20% -0.13% 0.21% 0.21% 0.22% Fiscal amnesty 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1.00% ,EU - 113 - Page 20 of 25 pages Table A.I1.4 INDUCED CHANGES IN GOVERNMENT REVFNUES (ANNUAL - AS SHARES OF GDP) 1982 1983 1984 1985 1986 1987 1988 1989 1990 TOTAL revenue -0.71% -0.22% 0.86% -0.72% -1.07% 0.84% -0.52% 0.46% 0.47% 1.TOTAL direct taxes -0.23% 0.20% -0.24% -0.17% -0.27X 0.42% -0.27% 0.33% 0.01% Tax on Salaries & Wages -0.09% 0.05% -0.13% -0.19% -0.11% 0.13% -0.07% 0.15% 0.03% 18P & IS (exel OCP) -0.05% 0.12% -0.11% -0.03% -0.09% 0.23% -0.17% 0.14% -0.07% IBP (Non-Corporate Taxes) 0.00% 0.00% C.00% -0.03% -0.09X. 0.23% -0.05% 0.04% -0.01% IS, excL OCP (Corporate Taxes) -0.05% 0.12% -0.11% 0.00% 0.00% 0.00% -0.12% 0.10% -0.06% IS, OCP (Corporate Taxes) 0.00% 0.00% 0.00% 0.05% 0.00% 0.00% -0.04% 0.00% 0.00% Urban Prop Tax & Bus Lic Fee -0.01% 0.00% 0.00% -0.01% -0.01% 0.02% -0.01% 0.00% 0.00% Urban Property Tax -0.00% 0.00% 0.00% -0.00% -O.00% 0.00% -0.00% 0.00% 0.00% Business Licensz Fee -0.01% 0.00% 0.00% -0.01% -0.01% 0.01% -0.01% 0.00% 0.00% Particip in NatI Solidarity -0.06% 0.03% 0.01% 0.01% -0.05% 0.04% 0.03% 0.03% 0.04% Other Direct Taxes -0.01% 0.00% 0.00% -0.01% -0.01% 0.02% -0.01% 0.00% 0.01% 2.TOTAL indirect taxes -0.29% -0.47% 0.88% -0.31% -0.75% -0.04% -0.63% 0.68% 0.39% Value Added Tax -0.13% 0.01% 0.14% -0.15% 0.01% -0.04% -0.30% 0.14% -0.10% Consumption Tax -0.04% 0.00% 0.05% -0.05% 0.00% -0.02% -0.11% 0.05% -0.04% Import Customs Duties 0.03% -0.19% 0.18% -0.02% -0.03% 0.04% -0.15% 0.25% 0.26% Special Tax on Imports -0.07% -0.28% 0.47% -0.06% -0.55% 0.01% -0.03% 0.25% 0.28% PFI -0.05% -0.21% 0.35% -0.04% -0.44% 0.00% -0.08% 0.25% 0.28% Stamp Duty -0.01% -0.07% 0.13% -0.02% -0.21% 0.00% -0.00% 0.00% 0.00% Export Duties and Taxes -0.08% -0.01% 0.04% -0.03% -0.08% -0.03% 0.01% -0.01% -0.02% 3.TOTAL non-tax revenue -0.20% 0.04% 0.21% -0.24% -0.05% 0.46% 0.39% -0.55% -0.87% Registration -0.03% 0.00% 0.00% -0.02% -0.03% 0.05% -0.02% 0.00% 0.02% State monopolies -0.15% 0.04% 0.21% -0.21% -0.01% 0.00% 0.00% 0.00% 0.03% OCP -0.12% 0.04% 0.21% -0.20% 0.00% -0.01% 0.02% 0.00% 0.02% Other -0.03% 0.00% 0.00% -0.01% -0.01% 0.01% -0.02% 0.00% 0.01% Exceptional Levy on Oil 0.00% 0.00% 0.00% 0.00% 0.00% 0.37% 0.43% -0.56% -0.93% Other income -0.02% 0.00% 0.00% -0.01% -0.02% 0.03% -0.02% 0.00% 0.02% Fiscal amnesty 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% - 114 Page 21 of 25 pages Table A.11.4 (Cont.d) INDUCED CHANGES IN GOVERNMENT REVENUES (CUMULATIVE, BASE = 1982) 1982 1983 1984 1985 1986 1987 1988 1989 1990 TOTAL revenue 0.00% -0.22% 0.63% -0.08% -1.15% -0.31% -0.83% -0.37% -0.84% 1.TOTAL direct taxes 0.00% 0.20% -0.04% -0.20% -0.47% -0.05% -0.32% 0.01% 0.02% Tax on Salaries & Wages 0.00% 0.05% -0.08% -0.27% -0.38% -0.25% -0.32% -0.17% -0.14% ISP & IS Cexct OCP) 0.00% 0.12% 0.00% -0.02% -0.11% 0.12% -0.05% 0.09% 0.02% ISP (Non-Corporate Taxes) 0.00% 0.00% 0.00% -0.03% -0.12% 0.11% 0.06% 0.10% 0.09% IS, excl OCP (Corporate Taxes) 0.00% 0.12% 0.00% 0.00% 0.00% 0.00% -0.11% -0.01% -0.07% IS, OCP (Corporate Taxes) 0.00% 0.00% 0.00% 0.05% 0.05% 0.05% 0.00% 0.00% 0.00% Urban Prop Tax & Bus Lic Fee 0.00% 0.00% 0.00% -0.01% -0.01% 0.00% -0.01% -0.00% 0.00% Urban Property Tax 0.00% 0.00% 0.00% -0.00% -0.00% 0.00% -0.00% 0.00% 0.00% Business License Fee 0.00% 0.00% 0.00% -0.00% -0.01% 0.00% -0.01% -0.00% -0.00% Particip in Natl Solidarity 0.00% 0.03% 0.04% 0.05% 0.00% 0.04% 0.06% 0.09% 0.13% Other Direct Taxes 0.00% 0.00% 0.00% -0.01% -0.01% 0.00% -0.01% -0.01% 0.00% 2.TOTAL indirect taxes 0.00% -0.47% 0.41% 0.11% -0.64% -'0.68% -1.32% -0.63% -0.24% Value Added Tax 0.00% 0.01% 0.15% 0.01% 0.01% -0.03% -0.33% -0.19% -0.29% Consumption Tax 0.00% 0.00% 0.06% 0.01% 0.01% -0.01% -0.12% -0.07% -0.10% Import Customs Duties 0.00% -0.19% -0.02% -0.04% -0.07% -0.03% -0.18% 0.07% 0.32% Special Tax on Imports 0.00% -0.28% 0.19% 0.13% -0.52% -0.51% -0.60% -0.35% -0.07% PFI 0.00% -0.21% 0.13% 0.09% -0.35% -0.34% -0.43% -0.18% 0.10% Stanp Duty 0.00% -0.07% 0.06% 0.04% -0.17% -0.17% -0.17% -0.17% -0.16% Export Duties and Taxes 0.00% -0.01% 0.03% -0.00% -0.08% -0.11% -0.09% -0.10% -0.12% 3.TOTAL non-tax revenue 0.00% 0.04% 0.25% 0.01% -0.04% 0.42% 0.80% 0.25% -0.62% Registration 0.00% 0.00% 0.00% -0.02% -0.04% 0.00% -0.02% -0.02% 0.00% State monopolies 0.00% 0.04% 0.25% 0.04% 0.03% 0.04% 0.04% 0.04% 0.07% OCP 0.00% 0.04% 0.25% 0.05% 0,05% 0.04% 0.06% 0.06% 0.08% Other 0.00% 0.00% 0.00% -0.01% -0.02% -0.00% -0.02% -0.02% -0.00% Exceptional Levy on Oil 0.00% 0.00% 0.00% 0.00% 0.00% 0.37% 0.80% 0.25% -0.69% Other income 0.00% 0.00% 0.00% -0.01% -0.03% 0.00% -0.02% -0.02% -0.00% Fiscal amnesty 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% - 115 - Page 22 of 25 pages Tobte A.11.5 CHANGES IN CENTRAL GOVERNMENI EXPENDITURES (ANNUAL - S11ARES OF GDP) 1982 1983 1984 1985 1986 1987 1988 1989 1990 Total Expenditures -2.48% -1.09% -1.28% -1.81% -6.07% 2.56% 0.37% 1,68% -0.99% 1.Total Current Expenditures -1.69% 0.81% 0.28% -0.91% -2.52% 0.03% 0.11% 0.63% -0.79% Expenditure on Goods & Services 0.67% 0.30% -1.42% -1.00% -0.46% 0.61% -0.23% 0.42% -0.36% Wages and Salaries -0.59% 0.30% -0.77% -0.98% -0.59% 0.65% -0.34% 0.76% 0.15% Materials and Supplies -0.11% -0.01% -0.66% 0.00% 0.14% -0.06% 0.12% -0.34% -0.51% Other 0.03% 0.01% 0.01% -0.02% -0.01% 0.02% -0.01% 0.01% 0.00% interest Payments on Public Debt -0.27% 1.25% 1.22% 0.15% -0.33% 0.05% 0.17% 0.04% 0.07% Domes.ic Debt -0.05% 0.18% 0.18% 0.30% 0.28% 0.14% 0.39% 0.03% 0.15% Foreign Debt -0.22% 1.07% 1.04% -0.16% -0.61% -0.08% -0.22% 0.02% -0.09% Subsidies & Current Transfers -0.75% -0.74% 0.47% -0.06% -1.73% -0.63% 0.16% 0.17% -0.50% Consumer Subsidies -0.50% -0.45% 0.65% -0.11% -1.60% -0.59% 0.30% 0.12% -0.17% Other -0.24% -0.29% -0.18% 0.05% -0.14% -0.04% -0.14% 0.05% -0.33% 2.Total Capital Expenditures -0.79% -1.90% -1.55% -0.90% -3.55% 2.53% 0.27% 1.04% -0.20% CHANGES IN CENTRAI GOVERNMENT EXPENDITURES (CUMJLATIVE, BASE = 1982) 1982 1983 1984 1985 1986 1987 198B 1989 1990 Total Expenditures 0.00% -1.09% -2.37% -4.18% -10.25% -7.69% -7.32% -5.64% -6.63% 1.Total Current Expenditures 0.00% 0.81% 1.09% 0.18% -2.34% -2.31% -2.21% -1.57% -2.36% Expenditure on Goods & Services 0.00% 0.30% -1.12% -2.12% -2.58% -1.98% -2.20% -1.78% -2.14% wages and Salaries 0.00% 0.30% -0.47% -1.45% -2.04% -1.39% -1.74% -0.98% -0.83% Materials and Supplies 0.00% -0.01% -0.67% -0.67% -0.53% -0.59% '0.46% -0.81% -1.31% Other 0.00% 0.01% 0.02% -0.00% -0.01% 0.01% -0.00% 0.00% 0.01% Interest Payments on Public Debt 0.00% 1.25% 2.48% 2.62% 2.30% 2.35% 2.52% 2.57% 2.63% Domestic Debt 0.00% 0.18% 0.36% 0.66% 0.95% 1.08% 1.48% 1.50% 1.66% Foreign Debt 0.00% 1.07% 2.12% 1.96% 1.35% 1.27% 1.05% 1.07% 0.98% Subsidies & Current Transfers 0.00% -0.74% -0.26% -0.32% -2.06% -2.69% -2.53% -2.36% -2.86% Consumer Subsidies 0.00% -0.45% 0.20% 0.09% -1.51% -2.10% -1.80% -1.68% -1.85% Other 0.00% -0.29% -0.46% -0.41% -0.55% -0.59% -0.73% -0.68% -1.01% 2.Total Capital Expenditures 0.00% -1.90% -3.46% -4.36% -7.91% -5.37% -5.11% -4.07% -4.27% - 116 - Page 23 of 25 pages Table A.II.6 DISCRETIONARY CHIANGES IN GOVERNMENT EXPENDITURES (ANNUAL - AS SHARES OF GDP) 1982 1983 1984 1985 1986 1987 1988 1989 1990 Total Expenditures 0.59% -3.00% -3,39% -0.27% -2.82% 4.24% 1.57% 1.75% -0.17% 1.Total Current Expenditures 1.31% -0.46% -1.89% 0.36% 0.42% 2.15% 0.86% 0.86% -0.06% Expenditure on Goods & Services 0.06% 0.12% -1.32% -0.21% 0.70% 0.25% 1.25% 0.60% -0.16% Wages and Salaries 0.12% 0.36% -0.69% -0.30% 0.32% 0.50% 0.92% 0.99% 0.32% MateriaLs and Supplies -0.09% -0.24% -0.64% 0.11% 0.38% -0.26% 0.33% -0.39% -0.48% Other 0.03% -0.00% 0.01% -0.01% 0.00% 0.01% 0.00% 0.00% 0.00% Interest Payments on PubLic Debt 0.21% 0.28% -*.06% 0.13% 0.16% 1.18% -014% 0.46% 0.13% D.mestic Debt -0.03% 0.07% 0.12% -0.05% 0.27% 0.68% 0.12% 0.15% 0.13% Foreign Debt 0.24% 0.21% -0.18% 0.18% -0.11% 0.50% -0.25% 0.31% 0.00% Subsidies & Current Transfers 1.03% -0.86% -0.51% 0.44% -0.44% 0.72% -0.25% -0.21% -0.03% Consijner Subsidies 1.26% -0.45% -0.34% 0.33% -0.43% 0.87% -0.20% -0.23% 0.2r(% Other -0.23% -0.40% -0.16% 0.11% -0.01% -0.15% -0.05% 0.02% -0.31% 2.Total Capital Expenditures -0.71% -2.54% -1.50% -0.63% -3.24% 2.09% 0.71% 0.89% -0.11% DISCRETIONARY CHANGES IN GOVERNMENT EXPENDITURES (C1J.LATIVE, BASE = 1982) 1982 1983 1984 1985 1986 1987 1988 1989 19 Total Expenditures 0.00% -3.00% -6.39% -6.66% -9.48% -5.25% -3.68% -1.93% -2.10% 1.Total Current Expenditures 0.00% -0.46% -2.35% -1.98% -1.56% 0.58% 1.44% 2.30% 224% Expenditure on Goods & Services 0.00% 0.12% -1.20% -1.41% -0.71% -0.46% 0.79% 1.39% 1.24% Wages and Salaries 0.00% 0.36% -0.33% -0.63% -0.31% 0.19% 1.11% 2.10% 2.42% Materials and Supplies 0.00% -0.24% -0.88% -0.77% -0.39% -0.65% -0.32% -0.72% -1.20% Other 0.00% -0.00% 0.01% -0.01% -0.01% 0.00% 0.01% 0.01% 0.01% Interest Payments on Public Debt 0.00% 0.28% 0.22% 0.35% 0.51% 1.69% 1.55% 2.01% 2.14% Domestic Debt 0.00% 0.07% 0.19% 0.14% 0.41% 1.09% 1.21% 1.35% 1.48% Foreign Debt 0.00% 0.21% 0.03% 0.21% 0.10% 0.60% 0.34% 0.66% 0.66% Subsidies & Current Transfers 0.00% -0.86% -1.37% -0.92% -1.37% -0.65% -0.90% -1.10% -1.13% Consumer Subsidies 0.00% -0.45% -0.80% -0.47% -0.90% -0.04% -0.24% -0.46% -0.18% Other 0.00% -0.40% -0.57% -0.45% -0.46% -0.61% -0.66% -0.64% -0.95% 2.Total Capital Expenditures 0.00% -2.54% -4.05% -4.68% -7.9?% -5.83% -5.12% -4.23% -4.34% - 117 - Page 24 of 25 pages Table A.11.7 INDUCED CHANGES IN GOVERNMENT EXPENDITURES (ANNUAL - AS SHARES OF GOP) 1982 1983 1984 1985 1986 1987 1988 1989 1990 Total Expenditures -3.07% 1.92% 2.11% -1.54% -3.25% -1.67% -1,20% -0.07% -0.82% 1.Total Current Expenditures -3.00% 1,27% 2.17% -1.28% -2.94% -2.12% -0.75% -0.22% -0.73% Expenditure on Goods & Services -0.73% 0.18% -0.10% -0.79% -1.17% 0.36% -1.47% -0.18% -0.20% wages and Salaries *0.71% -0.06% -0.08% -0.68% -0.91% 0.14% -1.26% -0.23% -0.17% MateriaLs and Supplies -0.02% 0.23% -0.02% -0.10% -0.25% 0.20% -0.20% 0.05% -0.03% Other -0.00% 0.01% -0.00% -0.01% -0.01% 0.01% -0.01% 0.00% -0.00% Interest Payments an Public Debt -0.48% 0.97% 1.28% 0.02% -0.48% -1.12% 0.31% -0.42% -0.06% Domestic Debt -0.03% 0.11% 0.06% 0.36% 0.02% -0.55% 0.28% -0.12% 0.03% Foreign Debt -0.46% 0.86% 1.22% -0.34% -0.50% -0.58% 0.03% -0.29% -0.09% Subsidies & Current Transfers -1.78% 0.12% 0.98% -0.50% -1.29% -1.35% 0.41% 0.37% -0.47% Consumer Subsidies -1.77% 0.00% 0.99% -0.44% -1.16% -1.45% 0.50% 0.35% -0,45% Other -0.01% 0.12% -0.01% -0.06% -0.13% 0.11% -0.09% 0.03% -0.01% 2.Total Capital Expenditures -0.08% 0.64% -0.05% -0,27% -0.31% 0.44% -0.45% 0.15% -0.09% INDUCED CHANGES IN GOVERNMENT EXPENDITURES (CUMULATIVE, BASE = 1982) 1982 1983 1984 1985 1986 1987 1988 1989 1990 Total Expenditures 0.00% 1.92% 4.03% 2.49% -0.77% -2.44% -3.64% -3.71% -4.53X 1.Total Current Expenditures 0.00% 1.27% 3.44% 2.16% -0.78% -2.89% -3.65% -3.87% -4.60% Expenditure on Goods & Services 0.00% 0.18% 0.08% -0.71% -1.88% -1.52% -2.99% -3.17% -3.37% Wages and Salaries 0.00% -0.06% -0.14% -0.82% -1.73% -1.59% -2.85% -3.08% -3.25% Materials and Supplies 0.00% 0.23% 0.21% 0.11% -0.14% 0.06% -0.14% -009% -0.11% Other 0.00% 0.01% 0.01% 0.00% *0.01% 0.00% -0.01% -0.00% -0.01% Interest Payments on Public Debt 0.00% 0.97% 2.26% 2.27% 1.79% 0.66% 0.97% 0.56% 0.50% Domestic Debt 0.00% 0.11% 0.17% 0.52% 0.54% -0.01% 0.27% 0.15% 0.18% Foreign Debt 0.00% 0.86% 2.09% 1.75% 1.25% 0.67% 0.70% 0.41% 0.32% Subsidies & Current Transfers 0.00% 0.12% 1.11% 0.60% -0.69% -2.04% -1.63% -1.26% -1.72% Consumer Subsidies 0.00% 0.00% 1.00% 0.56% -0.61% -2.06% -1.56% -1.22% -1.67% Other 0.00% 0.12% 0.11% 0.05% -0.08% 0.02% -0.07% -0.04% -0.05% 2.Totat Capital Expenditures 0.00% 0.64% 0.59% 0.32% 0.01% 0.46% 0.01% 0.16% 0.07% ANNEX II - 118 - Page 25 of 25 pages BIBLIOGRAPHY 1. Blanchard, O.J. (1990). Suggestions for a New Set of Fiscal Indicators. OECD Working PaperB No. 79. 2. de Melo, M. (1989). Morocco: The Fiscal Deficit and its Financing. Mimeo, The World Bank. 3. Horne, J. (1991). Indicators of Fiscal Sustainability. IMF Working Papers 91/5. 4. Marshall, J. and Schmidt-Hebbel, K. (1989). Economic Policy and Determinants of Public Sector Deficits. PPR Working Papers 321, The World Bank. 5. Pujol, T. and Ziller, B. (1989). Un modeele de projection du budget de 1'Etat marocain. Mimeo, The World Bank. 6. Ziller, B. (1989). A Simple Method For Analyzing the Budget. Mimeo, The World Bank, EM2CO division. m:\aLberto\ps\annex2 -120 - ANNEX TIII Page 1 of 22 pages THE KINGDOM OF MOROCCO ISSUES AND PROSPECTS IN THE PUBLIC SECTOR The Sustainability of Fiscal Policies 1. The central government accumulated substantial debt stock during the eighties placing a heavy burden on current budgets. From 54% of GDP in 1981, it increased to over 85% of GDP in 1987 and remained at that level thereafter. An important question now is whether the Moroccan government is pursuing a sustainable fiscal policy--one that can be maintained over time without increasing the government's indebtedness indefinitely. This annex will try to answer the question by implementing some indicators of sustainability for Morocco that have been recently proposed by Blanchard (1990). A. Government Solvency and Sustainabilitv 2. Following Horne (1991), the concepts of government solvency and fiscal policy sustainability are distinguished as follows: (a) A government is said to be solvent if its discounted debt is zero in the limit. This definition implies that the sum of future primary surpluses must be equal in present value terms to the current debt stock. This condition is obviously always fulfilled ex post. The interesting question is whether the constraint holds ex ante, i.e., whether the government's planned policy respects the solvency constraint. (b) A given fiscal policy is sustainable if the government can continue to pursue it indefinitely. This notion is far wider than the previous one. It implies that the government must be solvent, but it also includes the private sector's feedback and the rest of the world's responses to the pursued fiscal policy. For example, the evolution of the real interest rate and the growth rate depend on the private sector's reaction to the government's policy. 3. The indicators used to evaluate sustainability of fiscal policies are almost exclusively based on the formal definition of government solvency. In that sense, they are only a first and incomplete step, hopefully in the right direction. The definition of solvency is derived from the government's dynamic budget constraint, which is introduced in the next section. - 121 ANNE&JUI Page 2 of 22 pages B. The Lovgrnmgnts Budget Constraint 4. The government finances its overall deficit, measured on a commitment basis and equal to the primary deficit plus interest payments on domestic and foreign debt, by borrowing domestically and abroad, by advances from the central bank and by accumulating arrears.' The government's budget constraint can be written in nominal terms as follows: D + iB + i'EB' = B + EB' * M + A (1) where D is the primary deficit (revenues minus non interest expenditures), 1(i*) is the nominal domestic (external) interest rate, B(B*) is the domestic (external) debt outstanding measured in domestic (foreign) currency, E is the nominal exchange rate, M is the advances of the central bank to the government, A is outstanding arre rs, and dots over variables signify time derivatives. 5. Dividing this equation by nominal GDP and rearranging terms, we obtain: d + (r - n)b + (r' + & - n)b b + .6' + rh + &+ Q + n) (m + a) (2) where small letters indicate shares with respect to nominal GDP r(r*) is the real domestic (foreign) interest rate, n is the real GDP growth rate, e is the real exchange rate, p is the GDP deflator and hats (A) above variables denote growth rates. 6. The left hand side of the equation shows a growth-corrected measure of the operational deficit (see Graph 1). The ordinary definition of the operational deficit excludes inflation-induced interest payments from the deficit measure by assuming that they can be assimilated to amortization payments. The growth-corrected operational deficit goes a step further and corrects for growth -- its rationale being that in a growing economy, the government can keep its debt/GDP ratio constant by letting the debt increase at the real growth rate. Furthermore, the capital losses on foreign debt induced by a depreciation of the real exchange rate have been included in that measure, because they are part of the cost of external debt service. 2 The right hand side of the equation gives the financing of the deficit expressed in terms of changes in the liability/GDP ratios. 7. The government's budget constraint can be decomposed by using equation (2), in order to determine the factors that led to the observed ~./ This last form of involuntary financing has been important in Morocco for some years. It is added to the equation in order to facilitate the empirical implementation. 21 Cf. Anand and van Wijnbergen (1989). - 122 - Page 3 of 22 pageo evolutioni of the debt/GDP ratios in the eighties.3 Graph I 8. T h 1 ~ ~ ~ ~. Different Deficit Measures debt/GDP ratio increased 20Sam of GDP greatly throughout 1981-84, on average by 11.5% of GDP a 5%. year. This increase was due 10% ........................... to a combination of high .. primary deficits (7.9% on average), low growth rates 0- (2.7% on average), and a very 5% _ I high real depreciation rate 10o 1081 1082 196 134 10I 190 167 1S6 1n89 1O of the dirham (14.6% annually .D --1- 00 AWousl) 00 (C.h) on average). This high _ Crr_tDo _t pressure led not only to increasing indebtedness, but also to an important uDi, OD.OwriIDefilt accumulation of arrears (1.9% >XuIbmt\MO,h, of GDP a year), despite negative domestic real interest real interest rates and a (modest) monetization of the deficit (0.8% of GDP annually). 9. In 1985 and 1986, total debt decreased as a share of GDP, due to much lower primary deficits (1.5% of GDP), to high growth rates (7.3% a year), strongly negative domestic real interest rates and a stable real value of the dirham. As a consequence, the stock of arrears started to decrease again in 1986. 10. From 1987 to 1990, the budgetary adjustment continued and had to be adapted to higher real interest rates and the obligation to repay arrears (0.5% of GDP a year). The government switched therefore to primary surpluses (1.2% of GDP on average). The real depreciation of the dirham had slowed down (3.3%), relieving the pressure on external debt service. Despite all these efforts, the debt/GDP ratio increased slightly (1.7% of GDP annually). J/ For that purpose, equation (2) is simply rearranged as follows: .b - i) = d + (r - n) b + (z ' + 6 - n) b' - mh - (P + n) m - ci - Q6 + n) a See Table A.III.2 for the numbers. This decomposition highlights, similarly to the decomposition of revenues and expenditures in the previous section, the role played by the discretionary variables (d,zh,A) and by the environment variables (n, r, r*, @, P). - 123 ANNEX III Page 4 of 22 pages C. Debt Dynamics 1.1. Before solving the dynamic problem and deriving indicators of sustainability, we will make three simplifying assumptions explicit in the following paragraphs. (a) In order to keep the dynamic problem simple, the domestic and the external debt were consolidated into one indicator: f - b + b*. This implication is possible if either of the following two conditions holds: (i) The interest parity condition, i.e., the domestic real interest rate is equal to the foreign real interest rate plus real depreciation:4 I = r' + 0 (ii) The composition of the debt is constant: b/f = 1 - b'/f = c . In that case, the average interest rate, defined by the equation r = C * r + (I-c) k 0) (3) does not depend on the debt level. The first condition was obviously not verified in the early eighties due to a lack of capital mobility and the considerable (unexpected) depreciation of the real exchange rate (see Graph 2). In the second half of the eighties, however, the domestic and foreign interest rate (including depreciation) moved closer because of the ongoing liberalization process. The second condition was only partly true in the eighties. From an initial level of 29% of total debt in 1981 (end of the year), the domestic debt fell to a share of 23% in 1984, and increased again to. 32% of total debt in 1990. In light of these observations, the .i/ The variable 6 designates here the expected rate of real depreciation, assumed to be equal to the observed rate. The interest parity condition is based on the hypothesis that there is perfect capital mobility. - 124- ANNEX II; Page 5 of 22 pages assumption that at least one of the two conditions holdc does not seem to be too extreme. (b) We assume that high-powered money grows at the same rate as nominal GDP, implying that hm 0. (c) Furthermore, we will simplify the budget constraint in a first stage5 by dropping the arrears component: a = 0 = O 12. These three assumptions allow us to rewrite the government budget constraint in the following simplified form: f = d + (I - n)f - (D + n) m (4) Solving the differential equation yields an expression for the debt/GDP ratio f at time t: fe= foe(rn)c + fJ (ds - + n)m) efr-n) (C-)ds = (ff° - .2nm) e(r-n)t + 13 nm + f(d5,e()-n)(c-8)ds From the first expression, it is obvious that the discounted debt/GDP ratio is equal to its initial value plus the discounted series of primary deficits, net of revenues from seignorage:6 f e-(r-n)t =fo + f|t (d, - (.+n)m) e(rn)a ds (6) Revenues from seignorage directly alleviate the pressure on the debt stemming from primary deficits. One should not forget, however, that the high-powered money ratio m is assumed to be constant, and that in the long-term equilibrium its level must be consistent with expected inflation and real growth rates. 2/ We will assume later that the stock of arrears will disappear completely only after a given year. §/ Some authors distinguish between the itflation tax, fin. , and (a more narrowly defined concept of) seignorage, nm. We will use the term seignorage for the sum of the two components. - 125 ANNEX III Page 6 of 22 pages Thus, an increase in inflation, which would supply more revenue from monetization to the government, would lead to a decrease in money demand and a reduction in the long-term level. of money held by the private sector. 13. The particular case of a constant primary deficit (dt - d) is useful. for illustrating the issue of stability, which will be discussed in the next section. The debt to GDP ratio has the following solution in that case: f= (fo , d-, (+4)m) e(r-n)t - _drP-n_ D. Government Solvency 14. l'he problem of Graph 2 government solvency appears Growth and Interest Rates only if the real interest rate exceeds the growth rate, 20% r > n.7 This condition has 1 .......... .. I............................... to be examined in more detail. %. Dvnamic Inefficiency o% v V S 15. If the opposite -I ,holds, i.e., r < n, the 1081 1982 1983 1984 1088 1e86 1067 1088 1980 1090 1901 government can always borrow R. l GDP Growth Rate Implicit RIR-Doto pay interest (the so- +- pio.t RIR-ExtRt. -'- -mplrCit RIR called Ponzi scheme is possible) and it will therefore be solvent anyway, AIR ; Rei Incuet Rile for any evolution of the primary deficit. With a constant primary deficit ratio dt - d, one can see easily from equation (5) that the debt/GDP ratio converges to the stable equilibrium: d - (15+n)m n - 2.1 Nevertheless, sustainability of fiscal policies is an issue even when r < n. The government may be solvent in a formal sense, but its debt might not be financed by the private sector and the rest of the world at the given growth and real Interest ratea. - 126 - ANNEX III Page 7 of 22 pages Consequently, the government is solvent independently of the primary deficits it runs, because its discounted debt to GDP ratio is zero in the limit. However, the undiscounted debt/GDP ratio can reach very high, but stable, levels. 16. In theory, an economy where the g-rowth rate exceeds the real interest rate forever is said to be dynamically Inefficient, meaning that it overaccumulates capital.8 Is Morocco a dynamically inefficient economy? The growth rate was systematically higher than the domestic real interest rate until 1987 (cf. Graph 2). For 1987-90, r - n has become slightly positive on average. In order to illustrate equation (2) we will take the average values fcr 1981- 1989: d - 3.6%, n - 3.8X, r - O.OX. If the monetization term is neglected, one finds the equilibrium value for the total debt/GDP ratio of 95% (the observed debt/GDP ratio in 1989 was 88%). The equation would indicate that as long as the debt ratio is below 95%, it will grow and finally reach that level at the limit. 17. However, for the two following reasons this comparison of real interest rates and growth seems to be biased. First as Abel et al. (1989) point out, it is possible that in an uncertain world, the safe real interest is below the growth rate (it can even be negative) without implying dynamic efficiency. Second, most nominal interest rates were administered in the past in Morocco. Shadow interest rates were probably much higher, as a glance at foreign real interest rates (adjusted for real depreciation) suggests: they reached levels far above 10% between 1981 and 1984. The gradual liberalization of deposit and lending interest rates since 1985 has already increased domestic real interest rates considerably. An extrapolation of real interest rates should therefore be based on the most recent values, when they exc,.eded growth rates. The liberalization process has not been accomplished yet, so the tendency towards higher real interest rates is likely to continue in the future. We will therefore assume in the following analysis that the real interest rate exceeds the growth rate in Morocco, so that the economy is dynamically efficient. Formal Definitions of Solvency 18. Solvency is defined as the condition that government debt grows asymptotically at a smaller rate than real interest. Or equivalently, the government debt/GDP ratio must grow asymptotically at a smaller rate than the difference between the real interest and the growth rate: lim f,e-(r-n)t = 0 8 JAm- (8) This condition can be expressed in a different way, stating that the sum of discounted future primary surpluses (including seignorage revenue) must be equal to the initial debt stock: p. Cf. Abel et al. (1989). - 127 - ANNEX III Page 8 of 22 pages fJ" (-d+((9r))e(tnXds= (9) 19. This criterion has been called the weak solvency criterion by Buiter and Patel (1990), because it allows the government to increase its debt/GDP ratio indefinitely, as long as it grows at a smaller rate than r - n. The implication of a growing debt ratio is t'nat the government has to tax a growing share of GDP. As the tax base is GDP plus interest payments on government debt, taxes will eventually even exceed GDF. In reality, however, there are practical limits to the tax rates that can be imposed on the economy, because a growing tax burden inevitably creates increasingly larger distortions in the economy. Consequently, the (weak) solvency criterion is not relevant in such a case for the analysis of sustainability. Therefore, Buiter and Patel suggest a stricter and more practical solvency criterion, stating that the undiscounted debt/GDP ratio cannot have a positive trend, or equivalently that: rim ft s fo t-. E. indicators Qrsfainabilit 20. The two concepts of solvency have in common that they are defined over an infinite horizon. In practice, we need indicators that show over a finite horizon whether the government is far off the sustainable (long-term) path or not. These feasible indicators are inspired from the strict solvency criterion. 21. In the implementation of empirical measures of sustainability, we follow Blanchard et al. (1990) who suggest a class of feasible indicators.9 They are all based on the idea that, for the goveniment policy to be sustainable, the government debt ratio f has to return to its initial level fo after a given time span t. The "distatuce" between actual and sustainable fiscal policy can be measured by the adjustment, either of non-interest expenditures or of revenues, that would be necessary for the government to return to a solvent position. Blanchard proposes to take future spending plans as given and to calculate the necessary adjustment on revenues, because, he argues, governments are keener to preserve their spending plans than to leave taxes unchanged. Conceptually, there is a perfect symmetry between non-interest expenditures and revenues in the calculation of the indicators. Therefore, even if the necessary adjustment is expressed in terms of revenues, this does not mean that the government actually has to increase taxes to reestablish solvency; it can, of course, also decrease expenditures. 22. If we call g. the projected total non-interest expenditures by the government, and Et the constant overall tax rate the government has to choose in i/ The difference between their approach and ours is that we also include monetary financing in the analysis. - 128 - ANNEX III Page 9 of 22 pages order to bring the debt ratio back to its initial level after t years, i.e. ft - fo, we obtain from equation (4): F, = (r-n)fo - (fP+n)m + tn ge-(r-n)a ds (10) The indicator measuring the distance of fiscal policy from the sustainable path is then defined as the difference between Et and the observed tax rate. It depends on the time horizon t because spending and tax plans might change in the future. 23. For the borderline case of an infinite horizon, t--o, the sustainable tax rate becomes: (r-n) (fo+ f g e-(r-n) ds) - (Pi+n)m (11) It is interesting to see that this expression, which is derived from the strict solvency criterion, is identical to the sustainable tax rate that is calculated using the weak solvency condition, obtained by inverting equation (7). Thus, the difference between the two solvency criterions might be tmportant within finite horizons, but disappears in the limit. 24. Blanchard et al. (1990) select three different time horizons for calculating the indicators; one year, five years and 40 years. The computation of the short-term indicator (one-year horizon) does not necessitate any projections. Projections over a five-year horizon are regularly made for most of the macroeconomic variables; it is useful to check their consistency with medium-term sustainability. The horizon of 40 years is too uncertain to be included in the present report; no serious projections of government expenditures exist for such a long period in Morocco. In the following paragraphs, the construction and interpretation of the two former indicators will be described. & Short-Term Indicator of Sustainabilitv 25. Even if it seems paradoxical to use a short-term indicator (one-year horizon) to quantify a long-term concept, it has the advantage of being simple and rapidly available. It also indicates the tendency of fiscal policy in the short run. It is obtained by taking the limit of equation (8) for t - 0 and by subtracting the observed tax rate t: to - t = (r - n)(f d - f n)m (12) - 129 - QNN Page 10 of 22 pages 26. The short-term indicator suggested by Blanchard et al. (1990) is derived in a similar way, but differs from the one above because it excludes monetary financing. It is a more "pessimistic" indicator, because it does not account for the possibility of collecting revenues for seignorage. Blanchard calls this indicator, defined by (r-n)fo+do, the "primary gap". 27. Because of the exclusion of monetary financing from the indicator, it has also been interpreted as a measure of pressure towards monetization of the deficit.10 From the government's budget constraint, equation (2), and by assuming that the government wishes to keep its debt ratio constant, i.e., f - 0, we have: (i + n) m = d + (I - n)f. For a given debt ratio and primary deficit, the equation expresses the revenue from seignorage needed to satisfy the budget constraint."' Moreover, the short- term indicator has a simple interpretation in the case where the projected share of non-interest expenditures in GDP is constant (g8 - go). It then represents simply the gap oetween the sustainable and the actual tax rate for anytime horizon, short or long term. A Medium-term Indicator of Sustginabilitl 28. When the share of expenditure in GDP is projected to vary in the future, the choice of the time horizon becomes important. One question we want to answer is whether the planned fiscal policy goes in the right direction, that is whether it will come closer to sustainability in the medium term. The horizon of five years seems reasonable for Morocco, because projections for some macroeconomic variables exist (it also is the horizon for economic plans). For the practical implementation of the medium-term indicator, equation (8) has to be approximated in discrete time. A reasonable approximation is given by the following expression: t = (r-n)fo - (Q+n)m + g. (13) The medium-term indicator is then given by the difference between t5 and the current observed tax rate t. 1Q/ Cf. Buiter (1985) and Horne (1991). IV Because of the restrictive monetary policy in Morocco, the indicator can also be interpreted as a pressure towards the accumulation of arrears. - 130 - Page 11 of 22 pages Adding Arrears to the Sustainability Indicators 29. We assume now that the government has accumulated a certain stock of arrears and that it will have to repay it soon. The budget constraint of the government is given by equation (2), where a represents the stock of arrears expressed as a share of GDP. No interest is paid on this stock of arrears,12 so the government collects revenues from seignorage on it: (P + n)a , similar to seignorage on the money stock. The difference with the latter is that the private sector does not h;Ad the stock of arrears voluntarily. In that sense, the situation is not sustainable until the government has completely amortized the stock of arrears. In the formulation of the dynamic budget constraint of the government, we will therefore change the third assumption as follows: (c) The stock of arrears will completely disappear only after a given year Ta: at = 0 t ! Ta The solution of the differential equation for t Ž T,, is then changed to: = f-,n!3m) e (r-n) , ___+n + f ' d,e (r-n) (t8) de t (°r-n )r-n lo (14) -e ) (t-T0) ( f|T '( ) a5e (z-n)(T.)ds - aoe(r-")T- Holding a stock of arrears during a certain period reduces the debt ratio due to seignorage revenues, but the obligation to repay the initial stock ao increases it on the other hand. 13 The expression of the sustainable tax rate, given in equation (8), is consequently modified to: t, = (r-n)fo - (,6+n)m + r-n eg((f g5eir-n)s ds - fT a(.+r) axI2)B ds + a ) (15) 12/ The case of arrears bearing interest is even simpler. See below. l3/ If the government has to pay interest on arrears, the gain from seignorage vanishes, and the original solution in equation (3) has to be modified only by subtracting the term aoe(r-n)t. - 131 - ANNEXIII Page 12 of 22 pages The short-term indicator becomes, quite naturally:14 to-t = (r-n)fo + do - (,6+n) (m+ao) -c (16) 30. For the empirical implementation of this indicator, it is crucial to decide what part of the initial stock of arrears the government is assumed to amortize each year. If the amortization period is Ta, we have, with a linear amortization scheme, 60 = -60IT& 31. Finally, assuming that arrears will be repaid over five years, the medium-term indicator is changed to the following expression: t5-t =(r-n)f, - (P+n)m + l j ga + 5 (i (i+r) a8-ao) - t (17) 5,.O 5 .O Empirical Implementation of the Indicators 32. The assumptions on interest rates, growth and inflation rates, as well as on projected non-interest expenditures are crucial for the calculation of the indicators. (a) For the short-term indicators, the current observed values of these variables are used. The average real interest rate is calculated using equation (1). Expected values are assumed to be equal to observed values. Debt and money stocks are defined at the beginning of the year. As a consequence of these definitions, the difference between the real interest rate and the growth rate fluctuates considerably from one year to the next, making the short-term indicator very volatile. In order to eliminate the influence of changes in r - n, we also calculate the short-term indicator for constant values of r - n. Furthermore, a sensitivity analysis is carried out by taking different values for r - n. 14/ It can also be derived directly from equation (2), by assuming that 6+b6=it=o - 132 - ANNEX III Page 13 of 22 pages (b) Because the medium-term indicator has a longer horizon, it requires the use of expected (planned) values of all variables several years in advance. For past years, however, we will assume that expected values are equal to actual values. Projections are used for variables only from 1991 onwards, but obviously they already intervene in the calculations of the indicator after 1986. Expected real growth and interest rates, as well as non-interest current expenditures, are consequently calculated as the average of kistorical or projected values for the current year and the four following years (see Graph 3). The expected difference r - n is therefore much less volatile than that for the short-term indicator. Nevertheless, we have also calculated the medium-term indicator for (different) constant values of r - n, in order to facilitate the comparison with the short-term indicator, and to analyze the sensitivity of the indicator with respect to different values of r - n. 33. In order to assess Graph 3 the importance of the Expected Real Interest Rates different factors intervening (medium-term) in the sustainability indicators, three different 14% concepts are calculated for 12% -. .concepts.a the short and the long term. sos, ;: S; ~~~~~~~~. . . . . . . . . . . . . ...... .............. (a) T h e f i r s t 4% ..-....... definition foilows 2%. _Blanchard et al. 0% -2% (1 9 9 0) b y 1981 1982 1988 1984 181 1986 1987 1988 190f9 1990 1991 1992 1993 e x c 1 u d i n g EaIE~teri~aIIR monetization, as - R.low 09M*0tIR RealjFxtorna well as arrears, Average Rl ,I , of , from t he definition of the Nobe: Rbtes ar 5-yOr forward sustainability indicators. (b) The second definition includes the monetization term. Its exact formuiation is given in equation (10). It will always give a slightly more positive picture than the first definition because the latter does not account for revenue from seignorage. (c) The third definition includes not only the monetization term, but also a treatment of arrears. Their expression is given by equation (14) for the short-term indicator, and by equation (15) for the medium-term indicator. With respect to the repayment schedule of the stock of arrears, the short-term indicator is based on a rather extreme assumption, i.e., that the government would only return to a sustainable fiscal policy path if the entire stock was - 133 - ANNEX III Page 14 of 22 pages repaid for during the current year. This assumption is to be taken as a borderline case and explains the sometimes large differences between this definition and the two others. The medium-term .ndicator leaves the government much more time to return to a sustainable position. Hence the smaller difference between this definition of the medium-term indicator and the two others. F. Results 34. All indicators point in the same direction; there is a clear tendency from unsustainable fiscal policies in the first half of the eighties (gaps between 10% and 15% of GDP) towards the reestablishment of a sustainable position in 1990 (surplus of around 3% of GDP). Almost all indicators converge surprisingly well in 1990, showing that the central government had resumed the path of sustainability. The results are summed up in Table A.III.3. 35. The medium-term indicators especially show the steady improvement in sustainability, except for 1985, when the return to a sustainable path proved to be fragile and transitory. The short-term indicators are far more volatile, but they come remarkably close to the medium-term indicators between 1987 and 1990 (see Graph 4). This might indicate that the government had chosen a more consistent path for fiscal policy after 1986, and that the environment had become more stable in the long run (e.g., positive real interest rates, etc.). 36. The more detailed discussion of the results will begin by the first definition of the indicators, which excludes seignorage and arrears. The short- term indicator (1) is heavily influenced by changes in the difference between growth, and real interest rates (including real depreciation): Graph 4 Sustainability of Government Debt (a) Because of the 28hot of GOP important real deprec iat ion 16S% .... . . . . ........ lduring 1983 and tO% .... ...................................... 11984, average interest rates 6% ... ....... were very high, os / p u s h in g th e primary gap to -6S .............. ----- ........... \;/ -- --------levels above 15% -S * I I of GDP (see t98t ¶982 9893 ¶184 1986 1988 1987 1988 t989 t990 Graph 4 and Table A.III.2 at the end |Prbnaryp Modlm-Twr | of this annex). m\.Ib.rto4Iosra.N.\S - 134 - ANNEX III Page 15 of 22 pages (b) The combination of low real interest rates, a stable real exchange rate and high growth during 1985 and 1986 resulted in negative primary gaps. Here the distinction between solvency and sustainability becomes important: the short-term indicators are derived from a (strict) solvency criterion. This criterion is only binding if r - n 2 0, which was not so in 1985 and 1986. The government will not have to worry about solvency, if r - n remains negative indefinitely in the future. However, as argued earlier, such an evolution is very unlikely and r - n is bound to become positive. Hence, even if the government is solvent at the current interest and growth rates, its position is not sustainable. 37. Takinga constant value for r - n corrects for Graph 5 this problem. This Primary Gap and Sensitivity definition of the short-term to Values of r - n indicator is of course much more stable, but cannot Share ofGDP account for changing trends 20% .. in these two variables (see 10% .............................. Graph 5). What level to os choose for r - n? The os biggest uncertainty in the r -..-.-.<>><2X. past has come from the real -10% exchange rate. The capital 1981 1Q82 1989 1984 1985 1986 1987 1988 1989 1990 losses from real depreciation E0(1) (with r-MRS) between 1981 and 1984 --aG t0(1) (with r..G%) outweighed the low real interest rates. On average, r - n amounted to lOX Noto: PG Primary G including real depreciation, ft%&1btrt*Npvgr&ph*\7 but only to -0.7% when the real depreciation was not taken into account. Between 1987 and 1990 the situation was more balanced; r - n was equal to 3% if depreciation was included, and to 1% if depreciation was excluded. 38. We have therefore chosen to test the sensitivity of the short-term indicators by giving a range for r - n between 1% and 5X.15 The results show the importance of this variable (see Graphs 5 and 6, and Table A.III.3. at the end of this annex). A change of 1% in r - n produces a change of 0.9% in the sustainability indicators. In 1990, with r - n equal to 1%, the central government budget shows a negative primary "gap" of 2% of GDP, meaning that revenues can be lowered by 2% of GDP without compromising solvency. With r - n equal to 5%, however, there is a positive gap of 1.5% of GDP. Unless Morocco is far from its equilibrium exchange rate, the latter value for r - n seems to be L5 In their analysis of long-term sustainability in industrialized countries, Blanchard et al. (1990) assume (r - n) equal to 2%. - 135 - EELI Page 16 of 22 pagesi clearly an upper bound. Therefore, the indicators of the primary gap would lead us to conclude that the central government respects the formal criterion of solvency in the short run. 39. Projections for real interest rates, growth Graph 6 and depreciation rates inter- Primary Gap and Repayment of Arrears vene in the calculation of the medium-term indicator Share of GDP (1). Based on recent histor- 20% .. ; ical values, we project the 15% ... . . real domestic interest rate 10% ......... to equal to 5% between 1991 5% .......... - and 1996, and the real exter- 0- nal interest rate to equal . .. 6%. To be safe, we have -10% I chosen rather high values. 1981 1982 198 1984 1985 1988 1987 10'8 1989 nWe As for the real exchange - nt1 - PW2I rate, a real depreciation of - 6.7% in 1991 is expected to _ follow an annual appreciation of 2.5% to 3% until 1994. Note: PG*PrimaryGap The real growth rate is ft%aIb*r4t\pe\r&phv\* assumed to increase from 4.4% in 1991 to 4.9% in 1995. The non-interest expenditures are assumed to decline from 21.6% of GDP in 1990 to 19.6% in 1994 (see Table A.III.4). 40. These assumptions imply that the expected average, five-year forward, of r - n is equal to 1.5% in 1989 and 0.7% in 1990. The comparison of the medium-term tar. gap (1) with the other medium-term indicators (see Graph 7),16 calculated with a constant r - n, shows that the former was closer to the indicator calculated with r - n equal to 5% in the early eighties, whereas it approaches the indicator with r - n - 1% in 1989/90. Again, the crucial role played by the real exchange rate, and its projected stabilization in the nineties, seems to be largely responsible for that evolution. For constant values of r - n, the medium-term indicator produces more favorable results in 1990 than the primary gap. Its range goes from -3% of GDP for r - n - 1% to 0.5% of GDP for r - n - 5%. However, the medium-term indicator is as sensitive as the primary gap with respect to the assumptions on r - n. 41. The second definition of the sustainability indicators takes revenues from seignorage into account. Even if the share of high-powered money in GDP remains constant, as we assume, the government collects revenues, which depend on that ratio and the nominal growth rate of GDP. In other words, the indicator is not based on actual monetization of the deficit, but on potential monetization consistent with a "sustainable" targeted inflation rate. Because of the relatively low inflation rates in Morocco, revenues from seignorage are limited. j_/ See also Table A.III.3. - 136 - ANNEX III Page 17 of 22 pages This explains the small differences, especially towards the end of the decade, between the two definitions of the sustainability indicators. The values produced by this second definition of the medium-term indicator were lower on average by 1-1.5% of GDP between 1981 and 1985, and by 0.5% of GDP after 1986, indicating that revenues from seignorage have declined. 42. Arrears have been Graph 7 an important means of deficit Sustainability - Medium-Term Indicators financing in Morocco. The stock of arrears reached its Shr of GODP maximum in 1984/85 at 7.5% of 816%ks . ............................ GDP, and declined then to 6%i hb -__ << ... . .2.7% in 1990. This form of 4% ............. forced financing cannot be 2% considered as sustainable, 0%o since its indefinite contin- -2% .... < ; uation would imply a loss of -4,4 * I I . . l . , . confidence in the Treasury. 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Therefore, the third class of - MT Tax Gap + MT Tax Gap (r-wg2%s sustainability indicators M MTTaxGap (r-n1%) MT Tax Gapf(r-%) corrects for the fact that arrears have to be repaid, before a fiscal policy can be Note: MT * Medium-term considered as sustai-Lable. m\aIbtrtoXpa\grapha\@ The correction of the short- term indicator is based on a very strong assumption, as mentioned above: The entire stock of arrears is supposed to be amortized in the current year. As expected, the difference between this definition of the short- term indicator and the other definitions is greatest between 1985 and 1987 (see Graph 6). One implication of this extreme correction is that, even in 1990, the government had not returned to a sustainable position. The correction of the medium-term indicator is not that important, because by definition the government has five years to achieve sustainability. By 1990, the effect of including the obligation to repay arrears is more than compensated by revenues from seignorage, and this definition of a medium-term tax gap gives a more optimistic picture than Blanchard's. G. Sustainability 43. The concept of fiscal policy sustainability is much wider than the concepts of solvency from which the indicators presented above are derived. Some important questions remain to be answered: (a) The definition of (strict) solvency assumes that the debt/GDP ratio will stay constant in the future. What if, at prevailing interest rates, the supply of domestic or foreign capital changes exogenously? Is the assumption that the current high debt/GDP ratios will be maintained in the future realistic? If the supply of capital diminishes exogenously, the government can envisage two - 137 - ANNEX III Page 18 of 22 pages possibilities to restore a sustainable fiscal position. Either it will have to pay a higher price on new debt, increasing thereby the crucial variable r - n, or it decreases its debt burden. 17 Both possibilities call for a simultaneous reduction in the primary deficit, if the government does not want to increase inflation. This question appears often in the context of external debt. Because of repeated rescheduling, it is difficult for Morocco to find new foreign credits that will maintain its external debt/GDP ratio. The government's external debt accounts for more than 60% of total external debt. It is assumed that total external debt will decrease from around 92% of GDP in 1990 to 66% in 1994, when Morocco would no longer need exceptional financing.18 If the proportion of government debt in total debt is maintained, this implies that the government external debt ratio will shrink from 58% of GDP in 1990 to 42% in 1994, an annual reduction of 4% of GDP. Consequently, the medium-term indicators of sustainability would have to be corrected by 4% of GDP in 1990, in which case they would show a slight tax gap of 0.2 to 1% of GDP. (b) A somewhat related question refers to external sustainability. The analysis of the results shows that the expected depreciation of the real exchange rate in the medium/long run is important in determining fiscal policy sustainability. Therefore, the question of whether Morocco's external debt is sustainable, closely linked to the problem of determining the equilibrium real exchange rate, is also crucial for fiscal sustainability. Only a complete macroeconomic framework can answer this question in a consistent manner. (c) Another problem related to external indebtedness is the influence of too high a debt burden on growth prospects (debt overhang). It has been shown that high levels of external debt can be a deterrent to investment and growth. This implies that, in our projections of growth rates, the latter should be endogenized, and made dependent on the debt/GDP ratio. As a consequence, the difference r - n would increase and deteriorate the sustainability position.19 (d) Because of compulsory placement ratios for commercial banks20, marginal interest rates are higher than average interest rates for 17 This can be treated in a similar way as arrears. tJ As an example, we will take the extreme hypothesis that all this reduction takes place at constant real interest rates, only because supply of foreign capital dries up. 19J See the sensitivity analysis with respect to r - n. 2./ Deposit banks have to hold4 35% of their sight deposits in low-yield government bonds. - 138 - Page 19 of 22 pages domestic bonds. The financial sector liberalization process will narrow these differences in the near future. If we assume that average domestic interest rates increase, how will this affect the sustainability indicators? The average domestic interest rate in 1990 was 9%. If it increased to a level of 12% (the rate for three- year Treasury bonds), the average interest rate on total debt would increase by 1%. As shown in the sensitivity analysis in Table A.III.3, the sustainability indicators would deteriorate marginally, by 0.9% of GDP, but the government would still respect the solvency criterion in 1990. (e) Some sources of revenue in the budget are only transitory (e.g., proceeds from privatization, tax amnesty, the change of IS on a current year basis). For that reason, they should be excluded from the computation of the sustainability indicators. For example, the tax amnesty in 1990 produced revenues corresponding to 1% of GDP; the sustainability indicators should be corrected consequently by that amount. 44. Most of the above issues tend to influence the value of the sustainability indicators, but most often by relatively small amounts. Only extreme assumptions, on the necessary reduction of external debt for example, would change the fundamental conclusion that the central government is on a sustainable fiscal policy path. However, this conclusion depends very much on the projections of crucial macroeconomic variables. Furthermore, a fiscal policy that would go beyond the strict criterion of solvency would have the advantage of reliev4-g the pressure the budget deficits puts on domestic credit, and to become less vulnerable with respect to unexpected shocks. 45. Extensions from these simple sustainability indicators could be explored by combining the sustainability analysis with the two following approaches: (a) The domestic real interest rate could be endogenized. Blanchard (1984) has focused on this issue by building a model where agents have finite horizons and Ricardian equivalence does not hold. He derives an equation that explains the difference between the real interest rate and the subjective discount rate as a function of government debt and spending. However, the quantitative effect of the debt/GDP ratio on the real interest rate seems to be rather small. (b) The growth rate could be endogenized. This issue is addressed in a recent paper by Barro (1990). In his model, private capital and public spending are complementary in production, and government derives its revenues from a flat income tax. The government is assumed not to run any deficits and spends all its revenues. One result of this endogenous growth model is that the size of government has an influence on the long-term growth rate. These approaches are very recent and it may be too early to quantify them. Nevertheless, they can be a good point of departure for qualitative analysis. - 139 - ANEX II Page 20 of 22 pages Table A.III.l: Prolected Macro6conomic VYaXikale (In percentage) 1.991 1992 1993 1994 Real Growth Rate 4.4 4.3 4.6 4.7 Domestic Inflation Rate 7.2 7.3 4.7 6.6 Domestic Real Interest Rate 5.0 5.0 5.0 5.0 External Real Interest Rate 6.0 6.0 6.0 6.0 Rate of Real Depreciation 6.7 -2.8 -3.0 -2.3 Non-Interest Expenditures/GDP 21.1 20.7 2u.1 19.6 Table A.III.2: Governmert Debt ynaamics average average 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1981-84'1987-90' Change in Debt/GDP Ratio: Domestic 2.2% 1.4% 3.3% -0.4% 3.0% 1.5% 5.2% -1.62 1.4X -2.52 1.62 0.68 Foreign 10.7% 5.9% 11.3% 11.52 -5.6% -7.9% 2.9X 1.02 -0.0% 0.52 9.8% 1.1% TOTAL 12.9% 7.3% 14.6% 11.1% -2.7% -6.4% 8.0% -0.6% 1.4X -2.0% 11.5% 1.7% Primary deficit: (d) 10.5Z 8.8% 7.2X 5.1% 3.4S -O.5 -0.1% -1.6% -0.22 -2.9X 7.9% -1.2% dom. component: (r-n) b 0.0% -1.5% -G.1% -1.2% -1.12 -1.9% 1.6% -1.7% 0.9% 0.2% -0.7% 0.22 ext. com,ponent: (z*-n+e^) b* 4.52 1.2% 10.42 9.9% -4.72 -4.52 5.4% 2.42 2.1% -0.3% 8.52 2.4X - seignorage: -(m+(p+n)m)) . -2.1% 1.5% -2.6% 0.12 0.82 0.32 0.72 -0.82 -0.32 -0.22 -0.8% -0.2% - change in arrears: (a) -0.72 -3.2% -0.6% -3.1% -1.02 0.42 0.5% 1.2% -1.O 1.2% -1.92 0.5% residual 0.6% 0.5% 0.12 0.32 0.02 -0.12 -0.12 -0.22 -0.02 0.02 0.4% -0.12 Memorandum items ---------------- 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1981-841987-90S Real growth rate (n) -2.82 9.6% -0.62 4.32 6.32 8.3% -2.6% 10.4X 1.52 2.62 2.72 3.0% Domestic real int. rate (r) -2.42 -0.9% -0.92 -1.82 0.22 -0.92 3.92 3.92 4.72 3.3% -1.5S 3.9% ( r - n ) 0.32-10.6% -0.32 -6.12 -6.1% -9.2% 6.42 -6.52 3.2% 0.72 -4.22 0.92 External real int. rate (r*) -2.0% 2.6% -1.4% 13.42 5.52 -3.7% 10.0% 4.4X 2.62 -0.86 3.2% 4.0% Depreciation of RER (e^) 15.3% 10.1% 24.42 8.42 -6.2% 4.32 -2.52 10.32 2.52 2.9% 14.62 3.32 ( r* + e^ - n ) 16.12 3.12 23.62 17.42 -7.02 -7.72 10.12 4.32 3.72 -0.62 15.12 4.42 Average real int. rate 8.8% 9.02 16.72 16.4% -0.5% 0.12 %.3% 11.22 5.02 2.5% 12.72 6.22 (weighted average of r and (r* + e^) ) Domestic inflation (GDP defl.) 9.72 7.22 7.32 8.68 8.42 10.32 3.92 5.02 4.0S 5.72 8.22 4.62 Domestic debt/GDP (b) 1/ 15.52 16.92 20.2% i9.8X 22.82 24.3% 29.42 27.82 29.2S 26.72 18.1% 28.32 External debt/GDP (b*) 38.72 44.62 55.92 67.32 61.72 53.82 56.62 57.72 57.62 58.12 51.62 57.52 Total debt/GDP (b+b*) 1/ 54.22 61.5X 76.1% 87.1% 84.52 78.02 86.12 85.5% 85.82 84.82 69.72 85.82 CB advancea/GDP (m) 12.22 8.92 10.9% 9.6% 7.52 6.0% 5.22 5.32 5.31 5.12 10.42 5.32 Arreara/GDP (a) 1.72 4.62 4.92 7.5X 7.52 5.92 5.42 3.4* 4.3X 2.7X 4.7Z 3.92 1/ excluding arrears 140 -ANNEX III Page 21 of 22 pages Table A.III.3: Indicators of Sustainability 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Short term indicators: primary gap (1) 15.12 8.5% 17.62 13.92 -2.4X -7.0% 6.9X -0.92 2.7X -3.0X primary gap (1) (r-n - 22) 11.32 9.92 8.52 6.62 5.1X 1.12 1.52 0.12 1.52 -1.12 primary gap (1) (r-n - 1I) 10.92 9.3% 7.8% 5.92 4.32 0.32 0.7X -0.72 0.62 -2.02 primary gap (1) (r-n = 52) 12.52 11.5'- 10.32 8.92 7.72 3.72 3.8X 2.7X 4.02 1.52 primary gap (2) 14.32 6.42 17.02 12.42 -3.8% -8.42 6.92 -1.7X 2.52 -3.52 primary gap (2) (r-n = 22) 10.6% 7.82 7.9Z 5.2X 3.72 -0.22 1.42 -0.72 1.22 -1.6% primary gap (3) 15.32 7.82 21.32 16.72 2.5% -2.2X 12.72 2.92 5.7% 0.42 primary gap (3) (r-n - 2%) 11.52 9.22 12.22 9.52 10.12 5.92 7.2% 3.92 4.42 2.32 t!edium term (MT) indicators: MT tax gap (1) 8.5% 4.8% 5.02 2.42 0.62 2.92 3.42 0.42 -0.4% -3.22 MT tax gap (r-n - 22) 6.72 4.62 3.52 2.72 2.42 3.72 2.12 0.5% 0.02 -2.12 MT tax gap (r-n - 12) 6.3% 4.02 2.92 1.92 1.62 2.92 1.32 -0.42 -0.82 -3.02 MT tax gap (r-n - 52) 8.02 6.22 5.32 4.92 5.12 6.22 4.X2 3.12 2.62 0.52 MT tax gap (2) 7.32 3.12 4.12 1.02 -0.5% 2.12 2.92 -0.12 -0.92 -3.8% MT tax gap (2)(r-n=2X) 5.52 2.92 2.52 1.32 1.42 3.02 1.62 -0.02 -0.52 -2.72 MT tax gap (3) 7.42 3.42 4.92 1.92 0.92 3.62 4.02 0.92 -0.22 -3.02 MT tax gap (3)(r-n-2%) 5.72 3.22 3.42 2.22 2.8% 4.42 2.72 1.02 0.22 -1.92 (1) excluding arrears and monetization (2) including monetization (3) including arrears and monetization Memorandum item: Operational deficit 13.12 10.12 10.02 6.4% 3.22 0.32 2.82 0.02 1.12 -2.3X (medium term - adjusted for growth and depreciation) - 141 - ANNEX III Page 22 of 22 pages BIBLIOGRAP 1. Abel, A.B., Mankin, N.G., Summers, L.H., and Zeckhauser, R.J. (1989). Assessing Dynamie Efficiency: Theory and Evidence. Review of Economic Studies, 56:1-20. 2. Anand, R. and van Wijnbergen, S. (1989). Inflation and the Financing of Government Expenditure: an Introductory Analysis with an application to Turkey. Tha World Bank Economic Review, 3(1):17-38. 3. Barro, R.J. (1990). Government Spending in a Simple Model of Endogenous Growth. Journal of Political Economy, 98(5):Sl03-S125. 4. Blanchard, O.J. (1984). Current and Anticipated Deficits, Interest Rates and Economic Activity. European Economic Review, 25:7-27. 5. Blanchard, O.J. (1990). Suggestions for a New Set of Fiscal Indicators. OECD Working Papers No. 79. 6. Blanchard, O.J., Chouraqui, J., Hagemann, R.P., et Sartor, N. (1990). La soutenabilit6 de la politique budg6taire: nouvelles r6ponses A une question ancienne. Revue 6conomique de 1'OCDE, 15:7-39. 7. Blejer, M.I. and Cheasty, A. (1990). Analytical and Methodological Issues in the Measurement of Fiscal Deficits. IhF Working Papers 90/105. 8. Buiter, W.H. (1985). A Guide to Public Sector Debt and Deficits. Economic Policy, 1(l):14-79. 9. Buiter, W.H. and Patel, U.R. (1990). Debt, Deficits and Inflation: An Application to the Public Finances of India. NBER Working Papers, 3287. 10. Horne, J. (1991). Indicators of Fiscal Sustainability. IMF Working Papers 91/5. m \&lbeito\ps\#nnex3 - 142 - THE KINGDOM OF MOROCCO ISSUES AND PROSPECTS IN THE PUBLIC SECTOR Statistical Annex - 143 - 1NNlEX-I1 Page 1 of 21 pages Table 1.1: MOROCCO - POPULATION BY SEX AND AGE GROUP, 1987 (In Thousands of Units) Age Grcup T o t a I M a l e F e m a L e Nuiber % NuTber % Nujnber X 0- 4 3715.0 15.9% 1888.0 16.1% 1827.0 15.7% 5 - 9 3013.0 12.9% 1527.0 13.0% 1486.0 12.7% 10- 14 2895.0 12.4% 1474.0 12.6% 1421.0 12.2% 15- 19 2548.0 10.9% 1308.0 11.2% 1240.0 10.6% 20 - 24 2202.0 9.4% 1084.0 9.3% 1118.0 9.6% 25 - 29 1964.0 8.4% 980.0 8.4% 984.0 8.4% 30 - 34 1526.0 6.5% 771.0 6.6% 755.0 6.5% 35 - 39 1121.0 4.8% 553.0 4.7% 568.0 4.9% 40 - 44 820.0 3.5% 386.0 3.3% 434.0 3.7% 45 - 49 854.0 3.7% 384.0 3.3% 470.0 4.0% 50- 54 684.0 2.9% 335.0 2.9% 349.0 3.0% 55 - 59 666.0 2.8% 314.0 2.7% 352.0 3.0% 60 - 64 412.0 1.8% 216.0 1.8% 196.0 1.7% 65 - 69 429.0 1.8% 211.0 1.8% 218.0 1.9% 70 - 74 192.0 0.8% 108.0 0.9% 84.0 0.7% 75 - over 335.0 1.4% 172.0 1.5% 163.0 1.4% Totals 23376.0 100.0% 11711.0 100.0% 11665.0 100.0% Source: Direction de la Statistique - 144 Page 2 of 21 pages Tabte 2.1: 9ROCCO - Gross Domestic Product by Sector (Current Karket Prices, mitions of DH) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Agriculture 13653 10206 14225 15034 16851 21497 29526 24075 31347 32650 32661 Iniustry 22923 26924 29629 32954 37384 43238 49942 51511 60492 62554 68497 Energy, Pub. Utilities 2396 2361 3009 4049 4958 6190 11140 11538 14220 13983 13834 Mining 3411 413 3949 4109 5306 5629 4547 3992 5243 4875 5318 Manufacturing 12466 14301 16087 18224 20741 24032 26586 28587 31891 33378 37880 Construction 4650 5849 6583 6572 6380 7387 7668 7394 9139 10318 11465 Services 31725 35427 40807 43562 49632 55725 64109 69079 75709 80155 87213 Transportation, Other Services 13405 14851 16972 18615 21962 25004 28066 30603 33925 36571 38086 Commerce 9533 10144 12063 11768 13663 15884 19886 20657 21878 20775 23786 Goverrment 8787 10431 11772 13179 14007 14837 16157 17818 19906 22809 25341 lmport Taxes 5788 6478 8238 7593 8477 9047 11150 12025 14035 16217 19506 GROSS DOMESTIC PROPUCT 74090 79034 92898 99143 112345 129507 154725 156689 181583 191576 207876 Source: Direction de ta Statistique - 145 -ANNEX.I Page 3 of 21 page Table 2.1A: MOROCCO - GOP BY SECTOR (DefLators) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 ~~~~~~~~~~~~~~~... ... ..... ...... .... ...... .. ........ ....... ....... ....... ....... ....... ... .... ... .... . ..... ... .... . ...... ...... Agriculture 100.00 104.71 108.14 127.50 137.83 148.45 149.11 159.09 157.64 159.96 171.6 Industry 100.00 114.50 122.54 134.48 150.48 164.54 188.28 191.05 207.44 220.39 224.6 Energy, Pub. UtiLities 100.00 100.01 123.10 157.96 189.02 225.18 382.58 368.54 423.27 406.36 374.3 Mining 100.00 127.24 119.94 120.12 145.68 155.33 129.16 114.85 134.67 156.05 155.0 Manufacturing 100.00 113.02 120.77 131.28 143.25 155.01 169.44 176.75 186.09 200.55 209.9 Construction 100.00 116.21 128.56 141.66 155.60 167.82 174.16 176.81 191.51 199.38 215.4 Services 100.00 108.87 116.88 120.01 130.45 140.26 153.49 160.32 166.96 171.74 182.2 Transportation, Other Services 100.00 110.51 120.88 129.32 147.16 161.27 175.05 185.06 194.38 206.75 210.0 Comwerce 100.00 109.88 119.04 119.10 132.11 145.35 171.96 179.33 176.83 163.84 181.0' 5ioverment 100.Ou 105.71 109.61 109.61 109.60 111.58 114.03 118.54 128.25 139.91 152.9 Import Taxes 100.00 103.80 122.49 127.91 124.30 136.45 178.22 177.88 197.56 215.14 232.9 GROSS DOMESTIC PRODUCT 100.00 109.71 117.63 126.25 137.11 148.65 1l-.99 170.42 178.91 185.99 196.6' Source: Direction de la Statistique - 146 - S I Page 4 of 21 pages Tab(* 2.2: MOROCCO - Gross Domestic Product by Sector (Constant 1980 Prices, MfiLions of DH) ............... ......................................... e............ ............................................................................... ......... 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 AgricuLture 13653 .9746 13154 11791 12226 14482 19801 15133 19885 20411 19029 Induztry 22923 23515 24179 24504 24844 26279 26526 26962 29162 28383 30485 Energy, Pub. UtiLities 2396 2361 2444 2564 2623 2749 2912 3131 3360 3441 3695 Mining 3411 3468 3293 3421 3642 3624 3521 3475 3893 3124 3429 Manufacturing 12466 12653 13321 13881 14179 15504 15690 16174 17137 16643 18040 Construction 4650 5033 5121 4639 4100 4402 4403 4182 4772 5175 5320 Services 31725 32539 34913 36300 38047 39729 41767 43087 45346 46672 47842 Transportetion, Other Services 13405 13439 14040 1439 5 14924 15504 16033 16537 17452 17689 18130 Corwerce 9533 9232 10133 9881 10343 10928 11565 11519 12373 12681 13140 Govrrnent 8787 9868 10740 12024 12780 13297 14169 15031 15521 16303 16572 Import Texes 5788 6241 6725 5936 6820 6630 6256 6760 7104 7538 8373 GROSS DOMESTIC PRODUCT 74090 72042 78972 78531 81937 87119 94350 91942 101496 103004 105728 Source: Direction de ls Statistique - 147 AN1EX TV Page 5 of 21 pages Table 2.2A: MOROCCO - Gross Domestic Product by Sector (Growth Rates, Constant 1980 Prices) ~~~~~~~~~~~,... ... ... ... .... ..... ...... ..... .......................... ... ... ........................................... ...... 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 ... .. .. .. .. ... .. .. .. .. .. . .. . . .. . . .. . . .. . . .. . . .. . . . . . . . . . . . . . . . . . Agriculture 14.02% -28.62% 34.97X -10.37X 3.69X 18.45% 36.73% -23.57% 31.40% 2.64% -6.77% Industry -1.27% 2.58% 2.82% 1.35% 1.38% 5.78% 0.94X 1.64% 8.16% -2.67X 7.40% Energy, Pub. Utilities -1.47% 3.52% 4.88% 2.31% 4.82% 5.92% 7.51% 7.31% 2.42% 7.38% Mining 1.68% -5.05% 3.89% 6.46% -0.51% -2.84% -1.28X 12.02% -19.76% 9.77% Minufecturing 1.50% 5.28% 4.21% 4.31% 7.08% 1.20% 3.08% 5.95% -2.88% 8.39% Construction 8.24% 1.75% -9.41% -11.62% 7.37% 0.02% -5.02% 14.11% 8.45% 2.81% Services -3.03% 2.57% 7.30% 3.97% 4.81% 4.42% 5.13% 3.16% 5.24% 2.93% 2.51% Transportation, Other Services 0.26% 4.47% 2.53% 3.68% 3.88% 3.42% 3.14% 5.53% 1.35% 2.50% Commerce -3.16% 9.76% -2.49% 4.67% 5.66% 5.82% -0.39% 7.41% 2.49% 3.62% Goverrment 12.30% 8.84% 11.96% 6.29% 4.05% 6.56% 6.08% 3.26% 5.04% 1.65% Import Taxes 7.83% 7.76% -11.73% 14.89% -2.79% -5.64% 8.06% 5.09% 6.11% 11.08% GROSS DOMESTIC PRODUCT 9.10% -2.76% 9.62% -0.56% 4.34% 6.33% 8.30% -2.55% 10.39% 1.49% 2.64% ... .. . .............................. ................................. ......................................... ............. Source: Direction de tl Statistique - 148 - ANNEX IV Page 6 of 21 pages Table 2.3: MOROCCO - National Accounts (Current Market Prices, MitLions of DH) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 ~~~~~~~~~~~~~~~~~~~~~~~................... ....... ............ ....... .......... ....... .......... . .. ....... ....... .......... ... ....... ....... .......... ....... ......... .... GROSS DOMESTIC PRCODUCT 74090 79034 92898 99143 112345 129507 154725 156689 181583 191576 207876 lports, Goods & NFS 1/ 20657 27466 31311 30032 38676 43685 42717 42319 45772 53368 64702 Exports. Goods & NFS 1/ 12883 15941 17882 21290 26765 32048 32920 35396 44939 42765 51977 Resource Beance -7774 -11525 -13429 -8742 -11911 -11637 -9797 -6923 -832 -10603 -12725 TotaL ConsumtIon 63931 69918 80111 84098 95850 108711 129250 130569 144153 156136 167179 Goverrnsent ConsLuption 13589 15077 16999 16626 17478 20517 23752 24629 28035 30411 32976 Private Consurztion 2/ 50342 54841 63112 67472 78372 88194 105498 105940 116118 125725 134203 Gross Investment 17933 20641 26216 23786 28406 32433 35272 33043 38263 46043 53422 Gross Fixed Investment 16478 20512 25376 24233 25954 29928 32991 31632 37235 44171. 51179 Change in Stocks 1455 129 840 -447 2453 2505 2281 1411 1028 1869 2243 Gross Domestic Savings 10159 9116 12787 15044 16495 20796 25476 26120 37430 35440 40697 Net Factor Inc From Abroad (exct w/r) -2213 -3632 -3914 -4412 -5068 -7705 -6269 *6409 -8512 -9841 -8121 let Curr Trsf from Abroad (inct w/r) 4395 5527 5909 6945 8190 10701 14103 14702 131C0 13604 19125 Gross NationaL Savings 12341 11011 14782 17577 19617 23792 33310 34413 42019 39203 51701 Gross Nationat Product 71877 75402 88984 94731 107277 121802 148457 150280 173071 181735 199755 Source: Direction de la Statistique 1/ Data from BOP 2/ Residuat - 149- AuMLSX Iv TabLe 3.1: MCROCCO - BALANCE OF PAYMENTS Page 7 of 21 pages (MiLlions of Current DH) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 GoD0S AND SERVICES (NET) -9987 -15157 -17343 -13154 -16979 -19342 -16065 -13332 -9344 -2044.5 -20846 Exports of Goods + Services 13031 16128 18033 21365 26909 32203 33056 35526 45089 43036 52660 Exports of Goods + NFS 12883 15941 17882 21290 26765 32048 32920 35396 44939 42765 51977 Exports of Goods (FOB) 9505 11807 12304 14835 19041 21584 21946 23251 29626 28121 34704 Exports of Non-Factor Dcrvices 3378 4134 5578 6455 7724 1V464 10974 12145 15313 14644 17274 Tourism 1785 2050 2480 3250 4220 6100 6730 7800 9045 8614 10548 Freight & insurance 484 549 956 1021 1079 1280 1599 1583 2373 1641 1826 Other Transportation 472 573 608 489 448 660 595 560 475 432 491 Govt Transactions 291 341 480 505 589 687 714 713 1139 994 1139 Other NFS 346 621 1054 1190 1388 1737 1335 1490 2281 2964 3269 Factor Serv Receipts, excl wlr 148 187 151 75 144 155 136 130 150 271 683 Investment Income 148 187 151 75 144 155 136 130 150 271 683 Imports of Goods + Services 23018 31285 35376 34519 43888 51545 49122 48858 54433 63481 73506 Imports of Goods + NFS 20657 27466 31311 30032 38676 43685 42717 42319 45772 53368 64702 Inports of Goods (FOS) 14840 19860 22978 23472 31443 35350 31655 32184 35791 42369 51775 Imports of Goods (CIF) 16864 22569 26112 25794 34555 38848 34789 35379 39351 46589 56941 Irnorts of NFS (exci Freight) 3793 4897 5199 4238 4121 4837 7928 6940 6421 6780 7761 Inports of Non-Factor Services 5817 7606 8333 6560 7233 8335 11062 10134 9981 11000 12927 Freight & Insurance 2024 2709 3134 2322 3112 3498 3134 3195 3560 4220 5166 Govt Transactions 2819 3612 3760 2841 2669 3092 6049 4595 3315 3717 4163 Other Transportation 270 275 337 213 253 273 291 365 574 647 825 Travel 385 485 soo 590 620 885 910 1100 1345 1301 1539 Other NFS 319 525 602 594 579 587 678 880 1186 1115 1235 Factor Serv Payments, exct w/r 2361 3819 4065 4487 5212 7860 6405 6539 8662 *0113 8804 Private Sector Payments tIIP) 192 170 151 133 200 213 244 351 499 474 551 PubLic Sector Payments 2169 3649 3914 4354 5012 7647 6161 6188 8162 9638 8253 Net Factor Serv Inc, excl wIu -2213 -3632 -3914 -4412 -5068 -7705 -6269 -6409 -8512 -9841 -8121 NET CURRENT TRANSFERS, inc w/r 4395 5527 5909 6945 8190 10701 14103 14702 13100 13604 19125 Current Transfer Receipts 4927 6178 6556 7592 8867 11316 14584 15244 13656 14169 19645 Workers Remittances 4148 5242 5115 6515 7681 9732 12731 13268 10700 11344 16537 Private Transfers 374 559 876 561 632 896 1012 1094 1184 1223 1327 OfficiaL Transfers 405 377 565 516 554 688 841 883 1772 1603 1781 Current Transfer Payments 532 651 647 647 677 615 481 542 556 565 520 Workers Remittances 256 242 227 240 235 177 141 136 115 96 94 Private Transfers 55 75 67 49 88 73 54 92 87 71 82 Official Transfers 221 334 353 358 354 365 286 315 355 399 344 CURRENT ACCOUNT BALANCE -5592 -9630 -11434 -6209 -8789 -8641 -1962 1370 3756 -6841 -1721 NET NON-MONETARY CAPITAL 4611 8284 9721 5041 8214 8828 5301 1037 -1452 7467 16532 Private Capital (net) -448 1267 1950 -209 1416 2465 1509 -1475 -4691 3526 3563 Disbursements 1123 2776 2320 656 1681 2817 2347 941 1078 4131 4209 - 150 - ANNEX IV Page 8 of 21 pages Table 3.1: MOROCCO - BALANCE OF PAYMENTS (MiLLions of Current DH) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Anortization 1571 1509 370 865 265 352 838 2416 5768 605 646 PubLic Capitat (net) 5059 7017 7771 5250 6798 6363 3792 2511 3239 3941 12969 Disbursements 7110 10123 11198 9039 9095 11536 9341 8175 10165 9973 19446 Amortization 2051 3106 3427 3789 2297 5173 5549 5663 6927 6033 6476 NET MONETARY MOVEMENTS 981 1346 1713 1168 575 -187 -3339 -2407 -2304 -627 -14811 Source: Office des Changes - 1S1 - AEX Table 3.1A: MOROCCO - Balance of Payments Page 9 of 21 pages (In Millions of US DoLLars) ...........--....-.-- -...- .---..--.- --------------------------------------------------------------------------------------,, 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 GOODS AND SERVICES -2536.9 -2930.4 -2879.5 -1849.7 -1927.1 -1922.2 -1764.6 -1594.9 -1138.2 -2408.6 -2529.2 Exports of Goods 4 Services 3310.1 3118.1 2994.0 3004.4 3054.2 3200.3 3630.8 4249.9 5492.5 5070.1 6389.0 Exports of Goods + NFS 3272.5 3082.0 2969.0 2993.9 3037.9 3184.9 3615.8 4234.3 5474.2 5038.2 6306.2 Exports of Goods (FOB) 2414.5 2282.7 2042.8 2086.1 2161.2 2145.0 2410.5 2781.5 3608.9 3312.9 4210.4 Exports of Non-Factor Services 858.1 799.3 926.1 907.7 876.7 103$.9 1205.3 1452.9 1865.4 1725.3 2095.7 Tourism 453.4 396.3 411.8 457.0 479.0 606.2 739.2 933.1 1101.8 1014.9 1279.8 Freight & Insurance 122.9 106.1 158.7 143.6 122.5 127.2 175.7 189.4 289.1 193.3 221.6 Other Transportation 119.9 110.8 100.9 68.8 50.8 65.6 65.4 67.0 57.9 50.8 59.6 Govt Transa'tions 73.9 65.9 79.7 71.0 66.9 68.3 78.4 85.2 138.7 117.1 138.2 Other NFS 87.9 120.1 175.0 167.3 157.5 172.6 146.7 178.2 277.9 349.2 396.6 Factor Serv Receipts, excl w/r 37.6 36.2 25.1 10.5 16.3 15.4 15.0 15.6 18.3 32.0 82.8 Investment Income 37.6 36.2 25.1 10.5 16.3 15.4 15.0 15.6 18.3 32.0 82.8 oiforts of Goods + Services 5847.0 6048.6 5873.5 4854.1 4981.3 5122.5 5395.4 5844.8 6630.8 7478.7 8918.1 Imports of Goods + NFS 5247.3 5310.2 5198.6 4223.1 4389.8 4341.4 4691.9 5062.5 5575.6 6287.4 7850.0 Imports of Goods (FOB) 3769.7 3839.7 3815.0 3300.7 3568.8 3513.0 3476.9 3850.1 4359.9 4991.5 6281.6 Imports of Non-Factor Services 1477.6 1470.5 1383.5 922.5 821.0 828.3 1215.0 1212.4 1215.8 1295.9 1568.4 Freight & Insurance 514.1 523.8 520.3 326.5 353.2 347.6 344.3 382.2 433.7 497.2 626.8 Govt Transactions 716.1 698.3 624.3 399.5 302.9 307.3 664.4 549.6 403.8 437.9 505.1 Other Transportation 68.6 53.2 56.0 30.0 28.7 27.1 32.0 43.6 70.0 76.2 100.0 Travel 97.8 93.8 83.0 83.0 70.4 88.0 100.0 131.6 163.8 153.2 186.7 Other NFS 81.0 101.5 100.0 83.5 65.7 58.3 74.4 105.3 144.5 131.4 149.8 Factor Serv Payments; exct w/r 599.7 738.4 674.9 631.0 591.6 781.1 703.5 782.3 1055.1 1191.4 1068.1 Private Sector Payments (DIIP) 48.7 32.8 25.1 18.7 22.6 21.2 26.8 42.0 60.8 55.9 66.8 Public Sector Payments 551.0 705.6 649.9 612.2 568.9 759.9 676.7 740.3 994.3 1135.5 1001.3 of which: MLTINT 607.4 681.1 594.5 551.4 522.0 484.1 617.4 614.0 797.6 1078.6 886.6 Net Factor Serv Inc, excl w/r -562.1 -702.2 -649.8 -620.4 -575.2 -765.7 -688.5 -766.7 -1036.8 -1159.4 -985.3 MET CURRENT TRANSFERS, incl w/r 1116.4 1068.6 981.1 976.6 929.6 1063.5 1549.1 1758.8 1595.8 1602.7 2320.4 Current Transfer Receipts 1251.6 1194.4 1088.5 1067.6 1006.4 1124.6 1601.9 1823.7 1663.5 1669.3 2383.4 Workers Remittances 1053.7 1013.5 849.2 916.1 871.8 967.2 1398.3 1587.2 1303.5 1336.5 2006.4 Private Transfers 95.0 108.1 145.4 78.9 71.7 89.0 111.2 130.9 144.2 144.0 161.0 Official Transfers 102.9 72.9 93.8 72.6 62.9 68.4 92.4 105.6 215.9 188.8 216.0 Current Transfer Payments 135.1 125.9 107.4 91.0 76.8 61.1 52.8 64.9 67.8 66.6 63.1 Workers Remittances 65.0 46.8 37.7 33.7 26.7 17.6 15.5 16.2 14.0 11.3 11.5 Private Transfers 14.0 14.5 11.1 6.9 10.0 7.3 5.9 11.0 10.5 8.3 9.9 Official Transfers 56.1 64.6 58.6 50.3 40.2 36.3 31.4 37.7 43.3 46.9 41.7 CURRENT ACCOUNT BALANCE -1420.5 -1861.8 -1898.4 -873.1 -997.6 -858.7 -215.5 163.9 457.5 805.9 -208.8 Net Capital Grants 97.5 313.6 123.5 142.0 16.0 300.0 16.5 0.0 90.0 0.0 760.0 Net Direct Foreign Investment 142.8 118.3 139.1 78.2 74.4 54.9 89.0 112.0 129.0 217.0 216.5 Net MLT Private Capital 410.4 85.3 602.6 -15.2 402.6 213.4 165.6 177.1 100.1 14.7 160.9 152 - IV Page 10 of 21 pages TabLe 31A: MOROCCO - Balance of Payments (In Millions of US DoLlars) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Disbursements, Private 860.0 573.1 1246.4 530.6 442.7 314.1 323.2 356.1 248.5 200.6 400.5 Amortization, Private 449.6 487.8 643.8 545.8 40.1 100.7 157.6 179.0 148,4 185.9 239.6 Net NLT Official Capital 727.2 1108.6 838.1 467.3 598.9 446.6 514.7 428.6 453.1 440.5 685.9 Disbursements, Officiat 842.7 1229.5 965.6 585.6 761.9 849.1 1011.1 84.6.9 813.1 863.5 1209.0 Amortization, Official 115.5 120.9 127.5 118.3 163.0 402.5 496.4 418.3 360.0 423.0 523.1 Net Short-Term CapitaL -123.7 178.3 330.9 15.6 3.4 167.5 133.7 -217.7 0.0 0.0 0.0 Capital NEI, icl errors & omiss -229.9 -201.7 -540.6 -41.3 -182.9 -353.3 -318.7 -369.6 -922.1 218.8 188.7 Change in Reserves 156.0 36.0 -76.9 157.5 -13.2 -55.9 -72.7 -156.5 -202.9 -2.4 -1640.8 Net IMf 190.1 163.4 441.7 94.0 124.7 54.2 -312.6 -137.9 -104.8 -82.7 -162.4 IMF Dratjings 277.8 227.3 478.3 122.3 184.5 218.4 35.2 209.6 147.9 179,5 65.2 IMF Repurchases 87.7 63.9 36.6 28.3 59.8 164.2 347.8 347.5 252.7 262.2 227.6 Reserve Level inct Gold 813.6 509.8 539.7 375.6 266.0 345.2 486.2 751.8 835.8 770.3 2337.0 Reserve Level excl Gold 399.0 230.0 218.0 107.0 49.0 115.0 211.0 411.0 547.0 488.0 2066.0 Sources: Office des Changes, IMF - 153 - Page 11 of 21 pagea Table 3.8: MOROCCO - INTERNATIONAL RESERVES, END OF PERIOD (Millions of US DolLars) .............................. ........................................................................................ 1980 1981 1982 1983 1984 1985 1986 1987 19S8 1989 1990 TotaL International Reserves 428.0 253.0 238.0 122.0 62.0 129.0 225.0 427.0 562.0 503.0 2083.0 SDRs 1.0 2.0 1.0 1.0 1.0 0.0 19.0 4.0 0.0 0.0 1.0 Reserve Position in IMF 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Foreign Exchange 398.0 228.0 217.0 106.0 48.0 115.0 192.0 407.0 547.0 488.0 2066.0 Gold (National Valuation) 29.0 23.0 20.0 15.0 13.0 14.0 14.0 16.0 15.0 15.0 16.0 Memo Items: Reserve Level inct GoLd 1/ 813.6 509.8 539.7 375.6 266.0 345.2 486.2 751.8 835.8 770.3 2337.0 Reserve Level exct Gold 399.0 230.0 218.0 107.0 49.0 115.0 211.0 411.0 547.0 488.0 2066.0 Source: IMF, Intl Fin Statistics 1/ Gold valued at London Gold Market Price - 154 - AIilEXIV Page 12 of 21 pages Table 4.1: MOROCCO - EXTERNAL DEST OUTSTANDING AND DISBURSED (Miltions of US Dollars) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 A. MLT PPG Debt 8324.8 9118.0 10246.9 10975.6 11812.4 13823.4 25836.3 18615.4 19445.7 20310.4 22097.2 Total Official 4446.2 5392.5 6118.0 7111.6 7927.3 9767.8 11618.8 14058.1 14544.9 15494.3 16877.2 Bilateral, of which: 3722.9 4471.8 5017.0 5792.8 6577.6 7835.1 8896.1 10465.7 10945.9 11588.4 12408.0 MuLtilateral 723.3 920.7 1101.0 1318.8 1349.7 1932.7 2722.7 3592.4 3599.0 3905.9 4469.2 of which: IRRD 538.8 601.0 697.5 821.0 867.1 1288.2 1858.9 2558.4 2573.5 2666.Z 3099.1 IDA 39.2 39.9 40.8 41.8 43.0 42.7 42.1 41.3 40.6 40.0 39.1 Total 578.0 640.9 738.3 862.8 910.1 1330.9 1901.0 2599.7 2614.1 2726.2 3138.2 Total Private 3878.7 3725.5 4129.0 3864.0 3885.2 4055.6 4217.6 4557.3 4900.9 4816.2 4920.2 Suppliers Credits 315.2 297.5 329.3 339.6 317.9 300.3 268.8 288.9 234.0 191.6 161.5 Financial Markets 3563.5 3428.0 3799.7 3524.4 3567.3 3755.3 3948.8 4268.4 4666.9 4624.6 4758.7 FinanciaL Inst 3390.7 3270.4 3683.0 3439.9 3501.7 3707.3 3916.6 4243.9 4654.6 4617.8 4751.4 Export Credits 949.6 997.6 1188.8 1074.0 1049.4 1216.6 1391.9 1562.4 1467.8 1443.0 1420.1 Conercial Banks 2441.1 2272.8 2494.2 2365.9 2452.3 2490.7 2524.7 2681.5 3186.8 3174.8 3331.3 Bords 172.8 157.6 116.7 84.5 65.6 48.0 32.2 24.5 12.4 6.8 7. D. Total Private Non-Guar Debt 150.0 210.0 250.0 225.0 168.7 200.0 200.0 200.0 200.0 200.0 200.0 C. Total MLT Debt (PPG+PNG) 8474.8 9328.0 10496.9 11200.6 11981.1 14023.4 16036.3 18815.4 19645.7 20510.4 22297.2 D. IMF 457.1 578.4 989.6 1031.3 1084.8 1274.3 1093.5 1119.4 956.9 849.7 749.6 E. Short-Term Debt 775.0 786.0 1031.0 1131.0 1153.4 1229.5 1022.2 1038.4 365.9 299.8 476.9 F. Total External Debt CC+D+E, 9706.9 10692.4 12517.5 13362.9 14219.3 16527.2 18152.0 20973.2 20968.5 21659.9 23523.7 Sworces: Direction du Tresor, IMF, IECOI 155 - ANESIV Page 13 of 21 pages Table 4.2: MOROCCO - CENTRAL GOVERNMENT DEST CiltLions of US Dotlars) 19fl0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 BILATERAL CREDITORS 3564.7 4273.2 4734.2 5533.9 6340.6 7508.9 8432.3 9889.9 10394.7 11009.4 12045.0 of which: France 426.2 382.5 348.6 494.0 833.2 1387.3 175t;9 2578.2 2602.1 2895.3 3772.2 Saudi Arabia 1013.9 1792.3 2187.5 2327.1 2490.8 2570.2 2569.4 2574.8 2712.2 2714.0 2727.4 MULTILATERAL INSTITUTIONS 294.0 459.1 582.4 714.6 795.9 1180.7 1678.0 2342.8 2447.8 2812.8 3191.6 of which: IBRD 202.3 239.5 296.8 386.2 491.4 790.3 1181.1 1747.4 1846.5 2034.9 2309.8 IDA 35h.2 39.9 40.8 41.8 43.0 42.7 42.1 41.3 40.6 40.0 39.1 Total 241.5 279.4 337.6 428.0 534.4 833.0 1223.2 1788.8 1887.2 2074.8 2348.9 PRIVATE CREDITORS 1552.7 1627.4 1901.3 1780.6 2005.6 2026.1 2408.9 2836.8 3650.8 3692.5 3912.9 FINANCIAL INSTITUTIONS 1/ 1317.4 1202.2 1300.6 1318.7 1521.8 1546.3 1969.9 2262.4 2940.5 2930.6 3168.6 of which: Syndicated Banks 1218.9 1106.7 1211.1 1202.4 1420.2 1420.2 1857.0 2148.3 2858.9 2858.9 3029.0 EXPORT CREDITS 1 98.8 393.8 552.6 420.1 454.1 440.2 400.8 537.4 681.9 736.5 719.9 BONDS '2.3 9.5 7.4 5.6 4.8 5.3 5.8 6.6 5.8 5.7 6.2 SUPPLIERS CREDITS 24.2 22.0 40.8 36.2 25.1 34.3 32.4 30.4 22.6 19.6 18.2 TOTAL CENTRAL GOVERNMENT 5411.4 6359.7 7217.9 8029.1 9142.2 10715.8 12519.1 15069.5 16493.3 17514.7 19149.4 1/ LonXon Club - 156 - ANNE I Page 14 of 21 pages Table 5.1A: MOROCCO - FINANCIAL TRANSACTIONS OF THE CENTRAL GOVERNMENT IMF PRESENTATION BEFORE DEBT RELIEF (MiLlions of DH) .................................................................. ... ... ........................................................................................ 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 TOTAL CURRENT REVENUE 15193 17838 20480 21085 23469 26747 29150 32747 41050 43825 50852 Tax Revenue 13888 15321 18t41 19098 21173 23695 24064 26294 31691 35313 40731 Non-Tax Revenue 1305 2517 2339 1987 2296 3052 5086 6453 9359 8512 10121 TOTAL EXPENDITURES 22633 29186 32002 33075 36044 39204 37440 41934 49269 55194 57834 Total Current Expenditures 15734 19440 21280 23517 26960 29899 31818 32269 37587 40872 42713 Expenditure on Goods & Services 10511 12188 13703 14918 15308 16357 18827 20016 22786 24852 26222 Interest Payments on Public Debt 1883 3066 3349 4818 6834 8066 9132 9333 11129 11824 12970 Subsidies I Current Transfers 3340 4186 4228 3781 4818 5476 3859 2920 3672 4196 3521 Total Capital Expenditures 6899 9746 10722 9558 9084 9305 5622 9665 11682 14322 15121 OVERALL DEFICIT (COMMIT. BASIS), BDR -7440 -11348 -11522 -11990 -12575 -12457 -8293 -9'87 *8219 *113M9 -6982 ChVaneo in Arrears, Net 764 569 2961 572 3514 1353 -544 *751 -2263 1982 -2534 OVERALL DEFICIT (CASH BASIS). BOR -6676 -10779 -8561 *11418 -9061 -11104 *8834 *9938 *10482 -9387 *9516 FINANCING, BEFORE DEBT RELIEF 6676 10779 8561 10582 9061 11104 8834 9938 10482 9387 9516 Financing, Foreign Sources 3341 6761 6503 4543 6923 4884 1194 2458 4648 3349 9538 OfficiaL CapitaL Grants 380 1623 744 1010 139 2508 140 0 1089 0 6265 Foreign Borrowing, Net 2961 5138 5759 *221 -1905 -4831 -11599 -7438 *4053 *3973 *6672 Gross Borrowing 5574 8451 9861 3574 6363 5071 5026 5243 5962 6680 5085 Amortization, BDR 2613 3313 4102 3795 8268 10167 16627 12681 10015 10653 11757 Arresra on Amortization 0 0 0 0 0 265 2 0 0 0 0 Debt ReLief 0 0 0 3754 8689 7207 12653 9896 7612 7322 9945 Financing, Domestic Sources 3335 4018 2058 6039 2138 6220 7640 7480 5834 6038 -22 Banking System 2731 3842 2021 6344 2166 4490 4635 2225 2441 4035 -3284 Nonbank 604 176 37 -305 -28 1730 3005 5255 3393 2003 3262 ..................................... ........................................................................................ Sources: Min des Finances; IMF -157 - ANNEX IV TabLe 5.2A: MOROCCO CENTRAL GOVERNMENT CURREbT REVENUES g 15 of 21 pages IMF PRESENTATION (MiLtions of DX) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 TAX REVENUE 13888 15321 18141 19098 21173 23695 24064 26294 31691 35313 40731 Texes on Net Inc & Profits 3339 3766 3832 4341 4986 5933 6234 7087 8683 9745 11243 AgriculturaL Tax 48 55 18 5 2 3 3 t 1 1 1 TotaL Business Profit Tax 1719 1801 1561 1785 2145 2484 2525 2826 3720 4019 5439 IBP (Non-Corporate Taxes) 0 0 0 0 0 2168 2525 2826 964 1095 826 IS, exci OCP (Corporate Taxes) 1417 1518 1561 1785 2145 0 0 0 2309 2924 4613 IS, OCP 302 283 0 0 0 316 0 0 447 0 0 Tax on Salaries & Wages 1088 1306 1564 1847 2026 2417 2694 2975 3397 3956 4268 Urban Property Tax 22 37 36 44 29 39 32 65 66 79 38 Complementary Incorne Tax 84 103 104 64 134 136 134 277 374 401 436 Tax on Dividends 66 65 43 37 44 62 52 62 77 85 102 Taxes on Urban Sites 0 0 4 12 0 C 0 0 0 0 0 Penalty on Arrears 45 49 66 65 75 108 95 91 117 176 61 Tax on Housing Profits 63 54 79 81 69 103 106 t11 91 75 127 Particip in Nati Solidarity 204 302 357 401 462 58' 593 679 840 953 771 Less: Contrib to Reg Dev Fd 0 0 0 0 0 0 0 0 0 0 0 Tax on Property Transfers 280 272 303 346 392 472 522 632 707 706 808 Taxes on Goods & Services 5806 6040 7813 893 9561 10847 10939 12124 14037 15327 17354 Value Added Tax 3665 4040 5439 6005 6557 7741 7842 8200 9536 10560 12008 Domestic TransactIons 1927 2003 2620 3129 2933 3646 3679 3801 4289 4551 £98. Irrorts 1738 2037 2819 2876 3624 4095 4163 4399 5247 6009 7024 Selective Excise Duties 1822 1744 1937 2286 2504 2581 26/.3 3163 3539 3864 4441 Petroleun Products 532 496 500 499 504 508 516 533 572 590 660 Tobacco 847 848 958 1266 1477 1526 1620 2040 2361 2565 2987 Sugar 122 115 113 127 120 124 13n 135 140 143 150 Other 3,1 285 366 394 403 423 377 455 466 566 644 Business License Tax 194 167 288 258 272 386 315 534 741 630 568 motor Vehicle Taxes 125 89 149 144 228 139 139 227 221 273 337 Tax on IntL ?rade & Transsetions 4121 48;2 5792 5268 5627 5771 5600 5639 7345 8517 10083 Inport Duties and Taxes 3316 3951 4697 4229 4418 4466 4406 4461 7126 8319 9830 Inmort Custom Duties 1230 1506 1703 1598 1885 2245 23-r3 3059 3529 3958 4708 Other l,port Duties 1 0 0 0 0 0 0 0 0 0 0 Special Tax on Itfports 2085 2445 2994 2631 2533 2221 2033 1402 3597 4361 5122 Steep Out'es 591 684 849 816 913 972 970 995 50 21 90 Export DGtles and Taxes 214 257 246 223 296 333 224 183 169 177 163 Statistical Tax on Exports 34 41 48 59 65 80 3 0 0 0 0 Export Ztx on Minetals 177 212 195 159 225 246 216 178 162 177 163 of which: OCP 170 190 170 150 202 218 198 164 157 160 140 Export Tax on Other Productc 3 4 3 5 6 7 5 5 7 0 0 Other Texes 342 351 401 450 607 672 769 812 919 1018 1243 Registration Fees 106 115 131 130 206 237 275 293 339 433 550 Stsnp Tex 2 6 234 270 320 401 395 455 472 532 5e5 643 Travel Stenp Duties 0 0 0 0 0 40 39 47 48 0 SO - 158 ANNEX IV Page 16 of 21 pages TabLe 5.2A: MOROCCO - CENTRAL GOVERNMENT CURRENT REVENUES IMF PRESENTATION (MiLLIons of DN) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 ........._. ._.... ......... ........... ....... ............ ....... .......... ....... .......... ..... ......... ....... ......... ............: ....... .......... ....... ......... ... NON-TAX REVENUE 1305 2517 2339 1987 2296 3052 5086 6453 9359 8512 10121 Dividendh from Public Enterp 665 1560 1555 1320 1710 2182 319 934 1557 1346 2174 of which: OCP 498 . 1014 540 750 1100 1422 0 459 293 0 600 Property Income 57 56 55 57 62 83 76 97 118 103 154 Adsin Fees and Charges 441 535 592 443 S10 737 843 938 1516 1903 2064 Other 142 366 137 167 14 50 77 78 282 15 0 Exctptional Levy on Petroleun 0 0 0 0 0 0 3771 4406 5886 5145 3640 TOTAL CURRENT REVENUE 15193 17838 20480 21085 23469 26747 29150 32747 41050 43825 50852 ..................................... ........................................................................................ Souirces: Mlnittere den finances; IMF - 159 - A LY Page 17 of 21 pages TabLe 5.4: MOROCCO - CENTRAL GOVERNMENT EXPENDITURES IMF PRESENTATION - BEFORE DEBT RELIEF (MiLlions of DH) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 TOTAL CURRENT EXPENDITURES BEFORE DR 15734 19440 21280 23517 26960 29899 31818 32269 37587 40872 42713 Expenditure on Goods & Services 10511 12188 13703 14918 15308 16357 18827 20016 22786 24852 26222 Wages and Salaries 7912 9330 10420 11420 12074 12648 14197 15392 17215 19616 21591 Materials and Supplies 2502 2771 3154 3352 3060 3533 4434 4397 5321 4961 4329 Other 97 87 129 146 174 176 196 227 250 275 302 Interest Payments on Public Debt 1883 3066 3349 4818 6834 8066 9132 9333 11129 11824 12970 Domestic Debt 547 694 765 997 1332 1927 2738 2987 4175 4454 5154 Foreign Debt 1336 2372 2584 3821 5502 6139 6394 6346 6954 7370 7816 Subsidies & Current lransfers 3340 4186 4228 3781 4818 5476 3859 2920 3672 4196 3521 Conscuer SubQidies 1677 2372 2323 2032 3033 3349 1533 632 1277 1572 1350 Other 1663 1814 1905 1749 1785 2127 2326 2288 2395 2624 2171 of which: LocaL Authorities 318 396 447 468 500 613 674 725 443 540 44.8 Public Enterprises 483 591 593 614 622 747 784 714 749 845 720 Other 862 827 865 667 663 767 868 849 1203 1239 1003 TOTAL CAPITAL EXPENDITURES BEFORE DR 6899 9746 10722 9558 9084 9305 5622 9665 11682 14322 15121 TOTAL EXPENDITURES BEFORE DR 22633 29186 32002 33075 36044 39204 37440 41934 49269 55194 57834 sources: Ministers des Finances; IHMt - 160 - ANE% IV Page 18 of 21 pages Table 5.5 MOROCCO - CENTRAL GOVERNMENT INVESTMENT EXPENDITURES (Millions of OH) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 ,,,,,,@,,,,,,,,,, ,,,,.,,.............,,, r..... .. ,........ ,,.... ...... . ...... ........ ....... ........ ....... ....... ...... ....... .......... ....... RoyAL Services 74 86 107 117 120 124 127 113 112 126 Prime Minister & Sec. of Plaitrfg 61 173 509 266 187 290 226 165 257 213 Administrative Affairs 0 0 0 0 0 2 1 2 0 26 Parliament 0 0 0 0 0 0 0 0 0 0 Information 13 47 0 45 22 21 7 0 2 2 Justice 62 U 30 12 22 22 25 39 47 73 81 Foreign Affairs 5 13 14 6 3 3 41 25 21 50 interior 403 89 112 96 342 469 523 4'O 541 631 Defense 1585 1640 1847 229 250 1849 1177 945 1224 1467 Urbanism and Housing 94 144 208 223 149 220 227 107 84 80 130 Finance 1771 1259 1889 837 460 888 3183 1913 3059 3133 Trede and Industry 18 21 28 36 34 36 30 31 9 35 Agricutture 940 1387 1070 971 1043 771 1330 1181 1097 1630 1404 Public Works 1251 1915 2795 2486 1478 1574 2504 1606 1924 2191 2431 Eduicatlon and Cultural Affairs 545 791 986 681 812 609 1138 794 999 1043 918 Labor and Socia lAffairs 32 42 210 240 0 1 1 1 2 3 Pubtlic Hrealth 103 118 179 72 110 129 115 125 169 189 220 Islufic Affairs 3 6 4 2 1 1 0 1 1 2 Cooperation 0 0 0 0 0 0 0 4 6 3 Energy and Mino 362 331 445 542 648 719 563 473 368 437 Transport 328 394 695 447 340 453 686 302 330 676 557 Tourism 34 27 41 20 43 70 86 60 59 64 Regional Development Fund 195 194 97 63 22 18 56 29 84 33 Sahara Provinces 39 81 139 71 77 91 68 0 0 0 Local Governments 590 365 698 238 739 861 971 1337 2432 3011 2807 Subtotal 8208 9167 12103 7700 6902 9221 13085 9743 12827 15118 8548 Inv. Advances to Annex Budget 351 "45 378 279 128 91 246 98 155 272 TOTAL 8565 9612 12481 7979 7030 9312 13331 9841 12982 15390 ................................... ......................................................................................... Source: Ministere des Finaners - 161 - ANNE -y Tabie 5.6: IOROCCO TREASURY DOMESTIC AND EXTERNAL ROWING Page 19 of 21 pages (Iiltions of DH) . ............................... .............................................................. I..... ............ .............................................. 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 DO9ESTIC B0RROWING: Gross Disbursents 6007 7182 8195 21365 48936 94905 176004 146911 131642 146782 Long-Term 1068 580 634 1028 955 1233 1173 1575 1914 2761 Medltium-Term 0 500 0 485 132 39 3203 4052 5837 3356 Short-Term 4939 6102 7561 19852 47849 93633 171628 141284 123891 140665 Repayments 4421 5747 6308 17718 47199 88260 165198 138331 127267 140068 Lor.-gTerm 192 245 273 421 441 501 463 625 518 745 M*dium-Term 40 46 70 32 19 0 530 582 2132 2706 Short-Term 4189 5456 5965 17265 46739 87759 164205 137124 124617 136617 Not Disbursents 1586 1435 1887 3 364 1737 6645 10806 8580 4375 6714 Long-Term 876 335 361 607 514 732 710 950 1396 2016 Mediun-Term -40 454 -70 453 113 39 2673 3470 3705 650 Short-Tera 750 646 1596 2587 1110 5874 7423 4160 -726 4048 Sources 1386 1662 1687 3647 1739 6640 10516 5823 4375 6703 Cofmerciat Banks 848 1319 839 3246 3948 4450 6596 3154 3517 4264 Other Domestic Sources 538 343 848 401 -2209 2190 3920 2669 858 2439 Interest Payments 547 694 764 1000 1332 1927 2738 2987 4175 4454 Net Transfers 1039 741 1123 2647 405 4718 8068 5593 200 2260 EXTERNAL BORROWING: Gross DIsburse nts 5702 8500 9861 7660 6670 5271 5202 5242 6712 6680 Long-Term 4256 5081 5236 2835 3594 3095 2910 3910 5071 4325 Saudi Arabia 1315 3729 2536 375 854 14 8 0 793 0 Intl fIn Markets 1352 315 1474 398 0 0 0 0 0 0 France 252 372 238 192 181 205 97 484 318 226 . USA 0 139 212 tli 260 632 300 394 569 70 Germrny, Fed Rep of 38 69 103 78 152 16 19 49 71 0 IBRD, IDA, ADB 94 253 409 704 1779 1951 2051 2702 3101 3765 Others 1205 204 264 970 368 277 435 281 219 264 Mediun-Term 399 706 669 176 194 171 218 260 115 230 France- SupplIers 79 57 310 41 46 51 73 97 23 68 prsnre - Other 320 370 297 115 148 120 145 163 92 142 Others 0 279 62 20 0 0 0 0 0 20 Short-Term 1047 2713 3956 4649 2882 2005 2074 1072 1526 2125 USA Commodities 0 405 440 1080 2719 96 935 1032 988 1041 USA Other 798 1165 2143 2902 0 0 666 0 0 191 Kuwait 0 0 389 0 0 0 0 0 0 0 BID 59 178 129 G 0 0 0 0 0 0 . . Arab Monetary Furd 0 289 210 190 51 212 219 40 387 230 Intl Fln Markets 190 0 0 0 0 0 0 0 0 0 Franc (wheat) 0 676 580 466 112 1697 254 0 151 663 United Kingdom (wheat) 0 0 65 11 0 0 0 0 0 0 Reayment 2125 2863 3616 5279 1184 3083 4508 4241 3460 3081 Long-Term 1024 1356 1127 1192 675 991 1332 1349 1566 1520 oedIlo-Term 203 303 296 215 30 243 239 369 312 525 Short-TerA 896 1204 2193 3872 479 1849 2937 2523 1582 1036 - 162 - ANNEX IV Page 20 of 21 pages Table 5.6: MOROCCO - TREASURY DOMESTIC AND EXTERNAL BORROWING (Mittions of DH) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Net Disbursements 3577 5637 6245 2381 54.86 2188 694 1001 3252 3599 Long-Term 3232 3725 4109 1643 2919 2104 1578 2561 3505 2805 Medius-Term 196 403 373 -39 164 -72 -21 -109 -197 -295 Short-Term 149 1509 1763 7T7 2403 156 -863 -1451 -56 1089 interest Payments 1209 2230 2380 2549 3111 4307 3993 3746 4173 5380 .. Net Transfers 2368 3407 3865 -168 2375 -2119 -3299 -2745 -921 -1781 .. Source: Minister* des Finances - 163 - ANNEX IV Page 21 of 21 pages Table 6: M0ORCCO - COUNTERPARTS OF THE I4ONEY 9SJPPLY (Mitlions of DH) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 .............................................................. ....... .......... .. ........ ....... .......... .. .......... ....... .......... ........ . ..... .. ...... . Foreign assets Bank AL-Maghrib 945 86 743 -55 -299 973 1705 2985 4293 3951 16599 Deposit Banks 588 1007 1523 1853 2111 2628 2638 2879 3226 3591 4462 Total 1533 1093 2266 1798 1812 3601 4343 5864 7519 7542 21061 Claims on Goverrment Bank Al-Maghrib 8002 9624 8259 10802 10737 9704 9287 8183 9644 10249 10702 Banking Syst Govt Sec Portfolio 6287 7340 8220 11466 12405 16855 23451 26605 30158 34417 31963 Deposit of banks with Treasury 878 737 440 677 91 122 130 67 31 36 54 Private Sector 1/ 2211 2498 2746 2141 2085 2270 2524 3108 4675 5483 5837 Totat 17378 20199 19665 25086 25318 28>51 35392 37963 44508 50185 48556 Claims on private sector 1/ Bank Al-Maghrib 2355 2449 3050 3007 3840 5773 7486 8524 8472 9623 9779 Deposit banks 10279 12390 14163 17274 19680 21620 22274 23994 27048 29799 34095 Total 12634 14839 17213 20281 23520 27393 29760 32518 35520 39422 43874 Total co.nterports 31545 36131 39144 47165 50650 59945 69495 76345 87547 97149 113491 Other balancing items (net) -713 -735 422 -845 -764 -529 -647 -799 -888 -296 1311 Money and quasi-oney 30827 35396 39566 46320 49886 59416 68848 75546 86659 96853 114802 ......................................................................................................................... Note 1/: Including public enterprises. Source: ax* Al-K.ghrib