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The Devil is in the Details – Lebanon Gets Boost for Infrastructure Development at Paris Donors Conference

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The Paris IV conference brought together more than 40 countries and institutions to address the need for funding infrastructure projects in Lebanon. The result, as reported in numerous media accounts, is a commitment to some $11 billion in support, mainly in the form of soft loans and concessionary financing for more than 250 projects presented by the government of Lebanon. While some may see this as a ringing endorsement of Prime Minister Saad Hariri’s efforts to draw attention to the needs to stabilize Lebanon’s economy, whether or not Lebanon is up to the task of managing the commitments has yet to be determined. However, the financing will not come about without hard lessons ahead for Lebanon’s patronage and political wasta system.

According to Chris Jarvis, IMF head of Mission in Lebanon, the funding is conditioned on at least two major steps: the development of a management system to handle the funds, and a clear accountability system that ensures that funds are managed and “really contribute to growth in Lebanon.”

Hariri’s game plan has a number of triggers to attract international investors, particularly the use of Public-Private Partnerships (PPPs) that wed government planning and seed funds with investor expertise and control. The danger is in the low level of expertise in the public sector in negotiating PPPs, which can lead to unjustified risk-taking and risk-allocation by government agencies.

Reuters reported that “Jarvis also pointed out that following the IMF’s proposed measures are fundamental to reduce the government’s budget deficit, which includes raising the VAT rate, reintroducing taxes on petroleum products, and raising electricity tariffs to cut down on the subsidy bill.

“We think stricter structural reforms are very important, especially in stepping up anti-corruption efforts, and improving the electricity sector, so that people get a better supply of what they’re paying for.”

A similar concern was raised in an Asharq Al-Awsat story that “The donors would be very strict in following up the Lebanese performance and how to deal with these funding plans, which will last for six years, including two years devoted to the study of the hundreds of projects submitted, and four years of execution. The discussions revealed a key demand to adopt a ‘follow-up mechanism’ to ensure that the government is serious about implementing two issues: reforms and fighting corruption.”

The donors are well aware of the challenges to Lebanon due to many political shocks of the past decade, the continued security challenges, and the burden of support more than 1.5 million Syrian refugees. “The small Mediterranean country’s debt-to-GDP ratio is the third-highest in the world at 148%, and annual growth is projected at around 2% for 2018. Among the major donors was the World Bank, which pledged $4 billion in low-interest-rate loans. Saudi Arabia reactivated a $1 billion line of credit and France pledged $492 million in low-interest-rate loans and $183 million in grants.” The United States committed some $110 million as a grant.

Prime Minister Saad Hariri spelled out the desperate situation, pointing to the impact of Lebanon’s status on the region. “It is not the stability of Lebanon alone. This is the stability of the region and, therefore, of our world,” Hariri said, warning that a collapse in Lebanon could ricochet throughout the Middle East and Europe. Syria’s war has hindered land exports to Jordan, Iraq, and oil-rich Gulf Arab countries. And as The Washington Post added, “Rampant corruption has taken another kind of toll, hollowing out infrastructure and basic services, with frequent water and electricity cutoffs.”

The hard road ahead will only prove more difficult if Lebanon does not adopt needed reforms to make its economy and government more efficient. With a mix of grants, concessionary loans, market loans, and guarantees, having a robust and transparent management system is paramount if Lebanon is to achieve its badly needed economic targets. Estimates are that the first phase of study and initial projects will take four plus years and cost $10 billion, with a total of $17 billion needed over the following seven years.

French President Macron, the host of the conference stressed that “The delivery of the funds is also tied to a series of measures that include public-spending cuts and an assault on corruption. This conference only has a sense if it’s accompanied by your will and your courage, and a precise monitoring of the follow-up,” Macron said in his closing comments. “It only has a purpose if it’s accompanied by a profound transformation.”

Lebanese officials maintain that the private sector would finance around 40 percent of the program, while any grants and loans received would be used for the remaining 60 percent. Yet some view these soft loans – with an interest rate of around 1.5 percent over a period of 20 to 30 years – as an extra layer of debt. Not great news if not properly managed.

Up next is the Brussels conference scheduled later this spring, which will focus on the Syrian refugee crisis.

What’s not working in the World Economic Order

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I just spent three months working in Jordan and two weeks in Lebanon. Watching the spectacle of the US presidential politics from a distance has had a sobering effect on my usual quick retorts to questions about US politics even though I’ve been at it for several decades in this part of the world. Arabs of all political stripes are alarmed by both presidential candidates, one because she is well-known and carries a great deal of baggage, and the other because his posturing is both alarming and invigorating as there is still a mystical glow around hard-charging leaders in this part of the world, as elsewhere.

It shouldn’t be surprising, I suppose. The chaos that now engulfs the MENA region has much of its origins in the upheaval of autocratic regimes that once provided stability so prized by international investors and Western leadership. The irony is that today, many in society long for the law and order days of the old regimes, as long as they aren’t the targets of repression and human rights violations. And there is symmetry in their yearning in the populist rumblings across Europe and the US.

Indicative of the seismic shifts that are going on are challenges to the ‘economic order’ that has guided free market policies since the heydays of Reagan and Thatcher. Rob Rowden writes in Foreign Policy about a article by an IMF economist that takes direct aim at two cherished principles of its Washington consensus for countries in financial crisis: the need fiscal austerity during economic slowdowns and the deregulation of financial markets.

Commonly referred to by its critics as ‘neoliberalism,’ the IMF author criticizes these tenets for not achieving higher growth rates as promised, in fact, Rowden points out, “fiscal austerity and increased financial openness have often exacerbated economic inequality, which itself could become a drag on future economic growth rates.”

To be fair, the IMF article also notes that other principles promoted by the IMF have been more successful in addressing issues of growth, stability, and capital fluctuations. Rowden writes, “Most strikingly, the article infers that three policy prescriptions long advocated by the IMF’s critics — regulation of some capital flows, Keynesian fiscal stimulus policies, and effective economic redistribution — all have more merit than the IMF has long contended.”

bbc.com

bbc.com

An especially relevant point in the article for developed economies is that the financial crisis of 2008 demonstrated the weaknesses in the IMF’s prescriptions in dealing with economic inequality, stabilizing financial markets, and reviving economic growth. Most levels of GDP growth are still failing to measure up to levels before the crisis, hence the stagnation that is feeding the middle class angst among Europeans and Americans, benefiting non-traditional political candidates like Donald Trump.

As the FP article notes, “Today, in a time when Thomas Piketty’s critique of worsening economic inequality is a best-seller, leading U.S. presidential candidates rail against free trade deals, right-wing anti-immigrant parties win elections across Europe, and even the Organization for Economic Cooperation and Development calls on its members to put the brakes on austerity, it’s clear that the political center, which has favored neoliberal policies for the last 30 years, is no longer holding.”

For the US, the challenges of addressing economic inequality, lower growth rates, and the resulting depression in job quality and compensation, have brought out a strong anti-establishment fervor among the fast-fading white majority as well as conservative ethnic groups who see their share of the economic pie turning sour. Globalization, represented by the IMF’s Washington Consensus, is a convenient target for those who want to return to or move towards a new golden age. The lack of logical discussions in this age of turbulence has resulted in pithy pitches to damn trade deals, erect barriers, punish corporations, and target immigrants. It is hardly a basis for sustainable policies but nevertheless the reality being faced in the US and abroad as the current world order has failed to deliver its promises.

As the Foreign Policy article concluded, “The cynics who provide comfort for those delusions are as dangerous as the extremists.” It is a rough road ahead that will not be mended easily.

Feeding the Beast – Time to Separate Politics from Economic Reforms?

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Image property of SyrianFreePress@wordpress.com

Jordanians have been waiting months for a new national employment plan that is supposed to revamp the education and training systems to bridge the gap between education and employment; and provide guidance for the integration of Syrian refugees into the country’s workforce. It may appear after the Eid.

There is an interim government in place, tasked with preparations for elections in September, running the country, and implementing an agreed IMF reform agenda. According to the IMF, “These reforms will be focused on the business environment, the energy and water sectors, the financial sector, and the labor market. The reforms will also focus on protecting the most vulnerable segments of the population and in supporting Jordan’s efforts in hosting the Syrian refugees.”

he reforms include strengthening the tax base, controlling public spending, dealing with tax incentives and income tax in general, and ensuring the national safety net for the most vulnerable constituencies. The goal is to improve employment opportunities; encourage transitions from the informal to formal economy and support SME growth; promote cost recovery in the energy and water sectors; and improve the country’s financial system though greater transparency.

King Abdullah then announced an Economic Policies Council “to discuss economic policies, programs and development plans, supporting the government’s efforts aimed at overcoming economic difficulties, investing in opportunities, achieving higher growth rates and enhancing the competitiveness of the national economy.” Few women were in evidence on the Council’s roster.

The announcement of higher prices for water and energy were greeted with some small protest demonstrations and, according to the media, young people involved were demanding jobs. They initially turned down offers of private sector employment, preferring government jobs. Whatever the actual outcome, it was reported that they eventually agreed to work in the private sector…no further details.

Popular resentment towards tougher economic policies is not surprising…the US itself is unable to fund badly needed infrastructure repairs due to political sensitivities. Here in Jordan, the announcement of more economic reforms elicited three responses from local friends I consulted: the government hasn’t been doing its job properly; more meetings are a way to delay implementation of needed changes; and the government must do more to incentivize the private sector.

Women are underutilized in Jordan's development

Women are underutilized in Jordan’s development

Speaking about unemployment, one said that if Jordanians really wanted to work, there are plenty of opportunities to replace the half-million foreign workers in the country. He believes that until the government undertakes effective economic strategies that investors will not take Jordan seriously. He also spoke about the need to more proactively engage the informal sector through certification programs that enable those working outside the system to be licensed and trained to run their own businesses.

Another friend spoke about replacing the many job subsidies offered by the government with a higher minimum wage, better working conditions, and better use of government resources to eliminate waste and inefficient procurement processes. This would enable the government to pay more attention to fighting corruption and promoting effective governance, not to mention put in place more attractive job conditions.

A third source noted challenges to the economy from the impact of regional conflicts which is stifling commerce and scaring investors. He believes that business friendly reforms are the key to attracting more investments and so supports the start-up on the Economic Policies Council and the progress of the Jordan Investment Fund.

What these various perspectives underscore is that Jordan, at least for these sources, has a long way to go to rebuild the ties between decision-makers and the people. There seems to be a shrug when hearing about sacrifices needed when GID officers steal arms meant for anti-Assad fighters and sell them on the black market – their only punishment being kicked out of the service keeping their pensions and ill-gotten gains.

King Abdullah seems to sense that time is against the country. At the first meeting of the Economic Policies Council, he tasked them to “put solutions in place without any [hidden] agendas except serving people and combating poverty and unemployment. These are the interests of the people who are concerned with issues that matter to the country.”

For its part, members of the Council “underlined the indispensability of a participatory approach in the economic decision making and integrity between financial, monetary, investment and labour policies.” Time will tell is this is a call for effective action or another opportunity to avoid proactive and sometimes painful policies.

 

Tough Love Economic News Requires Array of Strategies

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Jordanians are chattering about how the interim government is facing a number of difficult choices, none of which are of its own making. There is painful medicine for Jordanians in the prescription agreed with the IMF this past week, and people felt it immediately in prices paid for energy and power. No one argues that Jordan needs to take immediate steps to stop its slide into even lower growth, and there is little disagreement among leading Jordanian economists about how to move forward. However, medium and long term reforms will not do much to alleviate the pressure felt by consumers.

This is the dilemma facing oil producers and non-oil producers alike: How to bring about long-needed reforms that will ameliorate inadequate planning and decision-making by past leadership. One approach is HRH Mohammed bin Salman – high visibility, high energy, let’s take on entrenched interests approach while continuing to coddle citizens, which Saudi Arabia can afford to do.

On the other, there are Jordan and Morocco, balancing competing economic interests among potentially volatile political constituencies. Their way forward is constrained by internal and external factors that are not easily controlled. Morocco is in a more favorable neighborhood that encourages FDI and a more stable domestic political structure. Jordan faces both short and long-term challenges that are intertwined with all of their neighbors.

An article in The Jordan Times on the reaction to the IMF  tough love agreement noted, “This means there are more hard times ahead for Jordanians…the targets set by the government seem too difficult to achieve within the framework and the time schedule agreed on with the IMF.” The government is in a quandary inherited from the previous administration. With a public debt equal to 93% of the country’s gross domestic product, “and the stubborn problems of poverty and unemployment,” former finance minister Mohammad Abu Hammour blamed the fact that “There have been no real economic reforms over the past years in Jordan. Reforms should have been incremental, because they cannot be done overnight.”

The former minister said that the situation is already gloomy as exports dropped by 10% in 2015, foreign direct investments declined by 35%, and “unemployment rose to the unprecedented 14.2% mark.”

While Arab countries face similar dilemmas – a demographic bulge, inadequate education resulting in a mismatch between education and employment, and stagnant to slowing growth, the political dynamics of each country require avoiding a single remedy formula.

In Saudi Arabia the focus is on economic restructuring to promote jobs for men and women and soak up all those Saudis who are being educated abroad since there are few excellent universities in the Kingdom. This, of course, does not resolve the issue of those young people who are not university bound but still want jobs.

Jordan is different. It has no sovereign funds to bridge its economy to a brighter tomorrow. It hosts hundreds of thousands of refugees that have absorbed any spare capacity to deliver services. And it has to rely on infusions of foreign funds and loans to maintain its operations.

jordan flagSo what should Jordan’s government do? Given the obstacles of growing an economy burdened by providing services to citizens and refugees, here are three paths to follow, each with its own consequences. First, Jordan needs to cut government spending – always tough when there are so many vested interests in the current system. Secondly, Jordan needs to move more proactively to create a more business-friendly environment, promoting transparency, reducing corruption, and building public-private partnerships focused on short to medium term results.

One area that needs more emphasis is on convincing wealthy Jordanians at home and abroad to make significant job-creating investments in their country. Real estate aside, there must be more productive sectors for Jordanian, and Moroccan investors. Jordan and Morocco have wealthy citizens that could contribute to the country’s growth if they were incentivized properly. Investment capital is notoriously risk averse so this will take the most persuasive power of both monarchs.

Local investment funds, properly incentivized, can be quite powerful in the near term for targeting job growth for unemployed university graduates as well as those in the vocational/technical skills groups. When under- and unemployed youth believe that they can get jobs with wages for more than basic necessities, they will take advantage of many programs available to equip them for jobs in commerce and industry…but they must see a way forward.

Jordanian economist Hosam Ayesh summed it up best when he said “Increasing prices of water and electricity as of next year will push up the prices of many commodities. Citizens are always asked to tighten the belt, but shortly, there will be no belt to tighten.” Long days ahead.

Translation Please – What Does this Gibberish Mean?

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Morocco Gets Positive Evaluation from IMF – In So Many Words

A colleague dropped by my office yesterday and said, “This looks like something for you; it’s just gibberish to me,” handing me the latest review by the IMF Executive Board of Morocco’s second PLL Arrangement and its final assessment of the first PLL. Yes, it certainly did sound incomprehensible to those of us uninitiated into the vocabulary of financial instruments related to government fiscal behavior (have I lost you yet?). So I decided that the good news story underneath the jargon needed to be translated so that more people are aware that Morocco continues to be headed in the right direction in its spending policies.

A PLL or Precautionary and Liquidity Line is a two-year arrangement whereby the IMF provides Morocco insurance against external risks, such as defaulting on government loans or excessive borrowing against its foreign currency reserves. Essentially, it meant that during the first PLL, Morocco could draw up to $5 billion to support its balance of payments, if needed. The PLL facility, as these instruments are called, introduced by the IMF in 2011, is designed to support countries that have the right budgetary policies but are experiencing difficulties due to external circumstances, such as natural disasters that devalue local agricultural or commodity production, excessive increases in imported energy costs, or other factors that upset their normal fiscal stability.

Morocco is now in its second two-year PLL. It treated the first, and now the second PLL as insurance policies and has not drawn down any of the available funds, preferring to implement budgetary and fiscal measures that strengthen the country’s capacity to absorb challenges to its economic health.

The IMF, as a matter of policy, reviews the PLL after the first year to assess how successfully the country manages the facility. So this year’s Executive Committee meeting both completed the final review of the first PLL and carried out the second evaluation of the current PLL.

Why so many assessments? The IMF does not give away money; rather, it provides financial means to countries under strict conditions linked to performance and agreed-upon metrics, sometimes requiring reforms on the part of the recipient country. In other words, no free rides.

Report Card on Morocco

So how did Morocco do? Well according to Mr. Min Zhu, IMF Deputy Managing Director, “Morocco’s overall economic performance has been strong. Following a slowdown in 2014, growth is expected to pick up in 2015. Policy action has helped reduce fiscal and external vulnerabilities and significant progress has been achieved on reforms. In an environment that remains subject to important downside risks, sustaining the momentum will be important to reduce remaining vulnerabilities and achieve higher and more inclusive growth.”

Min Zhu, Deputy Managing Director, IMF credit: IMF

Min Zhu, Deputy Managing Director, IMF
credit: IMF

So Morocco has been moving to lessen the negative impact of expensive energy imports; increased its exports to generate more foreign currency reserves; and continued with incremental reforms to its public budget to reduce inflationary items such as public pensions, to close the spending and revenues gap.

The IMF noted that Morocco is improving its banking sector by adopting the Basel III standards related to increased currency reserves and implementing a new banking law. It cautioned, however, that “an important further step should be the timely adoption of a new central bank law. Ongoing work toward a more flexible exchange rate regime and a new monetary policy framework, in coordination with other macroeconomic and structural policies, is welcome.” It also noted that “further progress on structural reforms, including improving the business environment, governance, transparency and the job market will help strengthen competitiveness, growth and employment and enhance the economy’s resilience to shocks.”

In looking back at the previous 2012-2014 PLL, the board agreed that Morocco had performed successfully due to sound economic fundamentals despite rising external risks such as decreased exports to Europe and investor concerns with stability in the region. In fact, the board commended “the authorities for not drawing on the arrangement in spite of external economic headwinds.”

All in all, it was a valuable report for both the IMF and Morocco. The country is more aware of the need to look at several medium-term policy challenges, such as controlling public expenditures related to salaries and increased imports of high-value items; and the IMF Directors “noted some useful lessons learned with regard to program design and implementation.”

So, gibberish aside, Morocco is acting responsibly and proactively to maintain fiscal discipline, reduce its budget deficits, and adopt even more helpful reforms to the business and financial policy environment. That’s the good news and why Morocco continues to deserve support from the IMF.

Morocco Continues Growth on Strong Economic Fundamentals

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Will it be enough to provide needed jobs, improve GDP performance?

During the past week, several reports and interviews provided insights into Morocco’s economic performance, including challenges and strategies to expanding opportunities for growth. An article in the Business Standard noted an interview with World Bank Managing Director for Finance, Bertrand Badre, who said that “Morocco showed great institutional and economic stability amid the turmoil that has been going on over the past few years regionally.” He was referring to the financial meltdown of 2007-2008, resulting in a continued global slowdown, as well as the Arab Spring.

The article mentioned that “Badre also highlighted the construction of infrastructure and the advanced urbanization taking place in Morocco, which are ‘very important’ for the World Bank because of Morocco’s pivotal role in the West African and sub-Saharan region.” He also noted that the country must do more to diversify its economy to create more centers for growth and enable more stakeholders to participate in the formal economy. The reporter concluded that “Besides its macroeconomic, institutional, and economic stability, Morocco has an asset of location in the crossroads of sub-Saharan Africa and Europe, in addition to openness on the Atlantic.”

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Another look at Morocco’s performance came from Fitch Outlook, the ratings agency. Under the headline “Fitch confirms Morocco’s Investment Grade with Stable Outlook,” Morocco’s state news agency reported that Morocco’s grade remained stable as a result of its “macroeconomic stability in an unstable international and regional environment and the resilience of GDP growth, despite a drop in the foreign demand of Europe.”

Once again, Morocco received recognition for its ongoing efforts to decrease its budget deficit, due to controls on current expenditures, reductions in subsidies, falling energy costs, “the consolidation of public finances, acceleration of exports by new industrial sectors, and improvement in the overall” business environment.

Strong Economic Medicine while Forward-leaning into Africa

Morocco’s exception to the tumult in the region was also noted in a Financial Times interview with Finance Minister Mohamed Boussaid. “Good news is a rare commodity in the Arab world these days. Violence is raging across Syria and Iraq, Egypt has retrenched into authoritarianism and Libya is in chaos. Even Tunisia, which is managing its transition to democracy with aplomb, is facing huge economic challenges. But in the far west corner of North Africa, Morocco has so far been spared much of the pain of the last four years.”

Morocco has managed to reduce its fiscal deficit from 7.4 percent of GDP in 2012 to 5.5 percent by the following year, “and remains on target for further reduction this year, as Rabat slashes subsidies and reforms its economy. The country’s economic and political stability – rare commodities in the region – have already brought returns. Tourists numbers were up by 7 per cent in 2013 as many Europeans, scared off by the unrest in Egypt and Tunisia, traveled instead to Morocco.”

blog growth 2The article went on to note the growth of automotive manufacturing and the positive response to the government’s “€1bn Eurobond – its first euro-denominated bond in four years,” as additional indicators of Morocco’s success. While the rest of the Arab world, racked by falling oil prices and increasing instability due to the impact of the conflicts in Syria, Iraq, Yemen, and their spillover to neighboring countries, “Many analysts predict Morocco will be North Africa’s best performing economy in coming years. Although growth slowed slightly this year because of low agricultural yields and weak growth in Europe – Morocco’s main export market — the International Monetary Fund (IMF) estimates GDP will grow at around 4.7 percent in 2015.”

Boussaid credits this success to “reforms begun more than a decade ago, including investment in major infrastructure projects and programmes for industry and renewables, particularly solar energy.” The minister also talked at length about Morocco’s partnership strategy in sub-Saharan Africa. Its goal is to become “a platform for production and export to African countries through Casablanca Finance City (CFC), a new regional finance hub.”

More than 60 multinational banks, insurance companies, professional and legal services, private equity, and asset management companies have signed up for offices in the CFC. Already headquarters for the African Development Bank’s new $3bn Africa50 Fund that will finance infrastructure on the continent, CFC hopes that up to 100 companies will be based in its special zone.

Still Tough Going Ahead

While the IMF has projected healthy growth for Morocco in 2015, the outlook for the rest of the region is not as positive, according to Marketwatch. Regional instability coupled with the continued weakness is the global economic system, are a drag on economic expansion, and Morocco feels this impact directly.

“One major contributor to recent socioeconomic ills has been double-digit unemployment rates in many Middle Eastern countries. But the IMF’s baseline gross domestic product growth projections aren’t high enough to reduce unemployment in a meaningful way, it said. Unemployment is of special concern among oil importers such as Egypt, Jordan, Morocco and Tunisia, which have some of the highest jobless rates in the region, especially among young people.”

The government has implemented a broad range of incentives to encourage agencies and investors to accelerate the pace of training and education to align workers’ skills with market needs. Yet the slowdown in FDI and the need to increase domestic private investment are constraining opportunities for job growth. “To solve the jobs riddle, Middle Eastern countries needed ‘deep, multifaceted transformation’ that buttressed the private sector and raised living standards. The region needs sustained, stronger and more inclusive growth to markedly reduce unemployment–a critical issue facing nearly all countries in the region,” said Masood Ahmed, IMF’s Director of the Middle East and Central Asia Department.

To maintain its momentum, Morocco is implementing a multifaceted growth strategy that focuses both on key sectors and driving job growth. It is tackling government policies and regulations to maximize flexibility in labor markets, property ownership, and public expenditures so that the private sector and people of Morocco have access to resources needed to expand economic opportunities and build a healthy, sustainable, and inclusive job market.

What is driving the remake of how Morocco does business?

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Its recipe for growth is changing the country’s economic profile

Recent reports on growth trends in Morocco focused on the seismic shifts in the make up of its economy. Now less reliant on the

A leading business review cites Morocco's progress

A leading business review cites Morocco’s progress

export of agricultural commodities, growth is spread across many sectors, reflecting both the goals of raising job quality and promoting valued-added and downstream products in existing sectors.

For example, Zawya e-News identified how manufacturing in the automotive and aeronautics sectors have become engines for moving Morocco’s new economy forward. Building on its latest industrial development plan, the country has seen automotive

exports jump 37.2 percent year-on-year, electronic exports up 25.2 percent, and aeronautical exports up 14.1 percent. Exports rose more than five percent during the period despite a drop of 13.3 percent in phosphates exports and little expansion in agricultural exports.

According to the Financial Times, there are multiple benefits to the growth of automotive manufacturing. “The country’s auto sector will help push GDP growth up 4.5 to 5 per cent in 2015-2016, from 2.5 per cent in 2014, predicted Capital Economics in a note, making Morocco ‘North Africa’s best performing economy over the coming years’.” Despite this trend, agriculture still has a significant impact on the economy, providing 15-20 percent of GDP, depending on rainfall and market conditions. So the government continues to push ahead with agricultural reforms as well, promoting better water and crop use, accommodating changes in water supplies, and improving access to regional and international markets.

Growth continues across multiple sectors

Minister Lahcen Haddad

Minister Lahcen Haddad

At a recent tourism conference in Rabat, Minister of Tourism Lahcen Haddad gauged the progress made from 2010 to 2013. Revenues grew more than 78 percent, to $1.3 billion. Flight capacity increased by 10 percent and some 50,000 jobs were created. While the rest of the region was experiencing turmoil, Morocco’s tourist arrivals increased by eight percent and bed capacity grew by 30,000 units. The national tourism master plan is being reset to diversify both the types and locations of tourist destinations in order to spread the impact of the sector to benefit other regions.

According to World Bank data, just under 30 percent of the 2013 GDP was generated by manufacturing, which underscores the importance of Morocco’s continuing progress in economic reforms and incentivizing foreign direct investment. This is reflected in the government’s industrial investment strategy, wherein 34 percent of the funds are directed towards training Moroccans in market-focused skills and 24 percent is allocated to the incentives programs. Additionally, the central bank announced a new policy easing financing access for small and medium-sized firms engaged in industrial sectors or exports.

The IMF commented that “The newly developed industries will play even bigger roles in years to come and will further improve the resilience of the economy to external shocks.” Traditional industries are also re-tooling their market strategies. OCP, the country’s largest company and global phosphate leader, has signed multiple agreements to extend its production and distribution facilities in Africa and elsewhere, creating products that focus on the continent’s specific needs from cocoa to undernourished soils.

Morocco’s economic growth strategy is strongly supported by multilateral institutions such as the World Bank, International Monetary Fund, various Gulf sovereign wealth funds, the European Bank for Reconstruction and Development, and others. The African Development Bank, for example, recently approved a $125 million loan to support an ongoing program to upgrade Morocco’s financial sector – a key component in building a vibrant private sector. Beginning in December, the program will build on previous efforts in 2009 and 2011 that “focus on creating requisite conditions for inclusive economic growth.” In practical terms this includes: improving access to financial services by individuals and small and medium-sized firms; deepening capital markets by enabling the creation or broadening of financial instruments to raise capital and support loans; and strengthen governance in the financial sector through efficient regulations that enhance business development. According to the Bank, “The program is expected to benefit all Moroccans by improving conditions for sustainable and inclusive economic growth that would positively impact their living conditions.”

From the largest manufacturing facilities to the grassroots entrepreneurs, Morocco is undertaking a significant transition to a modern, diverse economy that will have a beneficial impact across all regions of the country, provide much-needed jobs, and reduce the country’s reliance on foreign assistance and energy imports. At the same time, Morocco is using this growing capacity to build and expand its footprint in Africa and elsewhere, through a balanced and inclusive economic growth strategy.

IMF’s Christine Lagarde on Need for Strengthening “the Middle”

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Speaks in Morocco on challenges of post-Arab Spring economic and human development

In Rabat on May 8, Christine Lagarde, the Managing Director of the International Monetary Fund (IMF), provided her analysis and prognosis of the “The Arab Countries in Transition—Strengthening the Economic Middle,” an insightful overview of the challenges and trends in the region.

Lagarde noted that despite the overwhelmingly economic and political nature of the demands for change, all were grounded in a basic human need for dignity. She quoted noted Moroccan author Fatima Mernissi, “Dignity is to have a dream, a strong dream that gives you a vision, a world where you have a place, where your contribution, however small it may be, will change things.”

More than three years after the Arab Spring began in December 2010, unfinished reform and development agendas throughout the region are complex, difficult to manage in the short term, and vary widely in responses and successes. What began as demonstrations about lack of jobs and transparency across the region turned political as people felt that they lacked the levers by which to effect policy changes. And now that many political participation issues are being resolved in the transition countries, some are moving forward to consolidate growth strategies.

Citing Morocco as an example she said: “Countries like Morocco are reaping the fruits of their efforts by diversifying and spurring both exports and foreign investment—especially in high value-added areas like cars, aeronautics, and electronics.”

Yet Lagarde is clear that there is much still to be done if the goals of people and governments are to be met. “So the great challenges for the next step of the transition are clear: How to create the jobs needed to meet the aspirations of a rising generation. How to create a vibrant and dynamic economy that offers opportunities to all.” It is this link between economic needs and the elusiveness of ready solutions that frustrates both governments and society. What seem at street level to be easy answers, such as increased pay, subsidies, and public employment, are in fact corrosive factors that undermine a country’s capacity for economic growth in the medium and long term. “These tasks are daunting. To make inroads, we would need to see growth rates doubling from the current levels of around 3 percent. We also need to see growth feeding into jobs to a far greater extent than is currently the case.”

Success Comes from Building the Middle

Lagarde has no illusions about the difficulties ahead, but she believes that strengthening the “middle” of the economy, society, and state economic policies can lead to progress and solutions. “Strengthening the economic middle means giving a shot in the arm to small- and medium-sized enterprises (SMEs) in the formal sector. These are the kinds of firms that form the backbone of a healthy economy, and— in other regions of the world—are the main engines of job creation.”

Leather and brass souk in Morocco

Souk in Morocco

Note her emphasis “in other regions of the world” since, in the MENA region, SMEs generate less than 20 percent of the jobs in the formal sector. Moreover, because informal companies have no access to formal financing, are not protected by the regulatory environment, cannot guarantee labor rates and benefits, and lack the ability to access formal distribution channels, they are doomed to remain small players in creating jobs and wealth. Policies that transition the informal sector into a valued player in a country’s economic growth strategy are an essential ingredient in building the private sector and rewarding entrepreneurs.

Lagarde then addressed the importance of the second key “middle.” “Global experience tells us that we need a strong middle class to drive an economy forward. A strong middle class sustains consumption and invests in the future. A strong middle class makes societies more cohesive, and lays the groundwork for stability and prosperity. A strong middle class is also home to the kinds of entrepreneurs we need for today’s modern economy.”

One of the essential vehicles for growing a middle class is the kind of public-private partnerships Morocco is supporting that match the professional and technical expertise of private sectors with the economic and financial goals and policies of governments.  Through its incentives for investment, training, and site selection, and reforms to the education and training sectors, the government of Morocco is striving to promote entrepreneurism and mobility to the middle class through the third “middle” – balanced economic growth policies.

“Looking ahead, the state needs to step back from some areas and step forward in others. It needs to provide fewer blanket subsidies, and more of a basic safety net for people who fall through the cracks. Perhaps most importantly, it needs to become less of an employer, and more of an effective and impartial regulator and enabler of the private sector—the ultimate source of good jobs.” She adds, “Just look at Morocco. Over the past couple of years, it has managed to cut its subsidy bill while increasing spending on programs aimed at improving access to health and education for the poorest.”

Of particular interest to Lagarde is the importance of broadening opportunities for women. After recounting statistics that show the critical contribution greater female participations can make to a country’s GDP, she said “So it is imperative to let women contribute, by removing outdated obstacles and introducing enabling polices. After all, it was Ibn Rushd who said that ‘treating women like a burden to the men is one of the reasons for poverty.’ The logic is clear—greater opportunities for women mean greater rewards for everyone.”

Growth and Dignity

Christine Lagarde, IMF, in Morocco

Christine Lagarde, IMF

Christine Lagarde is no stranger to the challenges facing the MENA region and emerging economies globally. She has provided important leadership in the IMF’s response to crises ranging from the Ukraine to sub-Saharan Africa. And the IMF is evolving, with greater attention to its role as a facilitator rather than a guardian of strict and rigid growth mandates. Her focus on the “middles” represents a clear and deliberate enunciation of how Arab countries can move ahead in response to their particular needs for growing their economies and their societies.

Dignity does not derive from food and energy subsidies, shadow employment, or passive participation in society. Citizens want to feel that they are invested in by their governments and in turn they can invest in their country’s future. Valued jobs and a vibrant public space are vital ingredients in securing the stability and economic growth that nurture and protect the “middles” Lagarde describes. This is the daily agenda for the leadership and civil society in Morocco, where they are working to realize both economic and political agendas that encourage and facilitate human and economic development.

Morocco’s King Drives Regional Economic Integration with Africa

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Morocco and Mali sign 17 different bilateral cooperation agreements to strengthen economic and development ties

Even before the publication of a 2008 landmark study by the Peterson Institute identifying the benefits of regional economic integration in the Maghreb, international organizations and experts were expressing concerns that cross-border politics were depriving the area of much needed incentives to intra-regional trade. This past week, at the 3rd Maghreb Entrepreneurs Forum held in Marrakech, that theme was echoed by participants from the private and public sectors.

The Forum was organized by the Maghreb Employers Union, a coalition of employers from across the region who are trying to do what politicians are reluctant to do – move towards greater economic integration through closer cooperation and coordination of supply chains and marketing. Among the many speakers was Miriem Bensalah Chaqroun, president of the Moroccan business confederation (CGEM), which hosted the event. She noted that “Trade between the UMA [Arab Maghreb Union] countries [Algeria, Libya, Mauritania, Morocco, and Tunisia] represents on average only 3 percent of global trade in these countries, which represents the lowest level of integration in the world.” The forum has created an initiative called the Maghreb Trade and Investment Initiative (IMCI) to provide a roadmap to strengthen trade and intra-regional investments.

The topic of lost opportunities was echoed in a message to the participants from IMF Managing Director Christine Lagarde: “The economic integration of the countries of the Maghreb Union could create, according to our studies, between 2 and 3 percent additional GDP per year for each country.” Simon Baker, Director of the Maghreb section of the World Bank, added, “Currently the Maghreb counties often compete on products exported to the EU in particular. But there is a significant potential for a better division of labor through the establishment of value chains and regional production.” He also noted that “Studies conducted by the World Bank show that the loss of earnings due to the lack of Maghreb integration is estimated at 3 to 9 billion dollars per annum for the region as a whole.”

King Follows Own Path to Regional Integration

While the countries of North Africa struggle to overcome obstacles to greater integration, King Mohammed VI of Morocco has turned his attention to West and Central Africa as natural markets for the Kingdom. He has embarked on his second trip to Africa in less than a year to strengthen diplomatic, economic, and cultural ties with Morocco’s neighbors to the south. “This keen interest in the continent’s development is nothing new.” according to the Med Africa Times, “since Morocco cancelled as early as 2000 all the debts of the poorest African countries and exempted their products and goods from customs duties.”

The current visits are taking the King to Mali, Guinea, Cote d’Ivoire, and Gabon. The article goes on to point out that “Morocco has tirelessly endeavored to strengthen and diversify its economic relations with Africa and to encourage investments, at the institutional level as well as at the level of the private sector which has significant investments in several sectors including banking, telecoms, housing, insurance, and mining.” As with his earlier tour of African countries, the King will preside over political and economic cooperation agreements to support increased economic partnerships throughout the continent.

For example, it was announced that Morocco and Mali had signed 17 different cooperation agreements, promoting increased investment, industrial cooperation, air services, trade, health services, telecommunications, job training, natural resource and drinking water management, and others.

In one initiative, for example, the OCP Group, Morocco’s giant fertilizer company, the largest producer in the world, will invest more than $600 million to build a fertilizer factory in Jorf Lasfar dedicated entirely to the African market, where record level economic growth is anticipated in the next ten years. The plant’s planned production of one million tons of fertilizer annually will be exported exclusively to Africa, according to OCP Group’s president Mustafa Terrab, who made the announcement during the King’s visit to Mali.

Although Morocco’s strategy for regional economic integration may be said to mirror the movie line “If you build it, they will come,” it is apparent that its drive for regional economic integration both in the Maghreb and throughout West and Central Africa is looking more achievable every day.

Maroc Business Matters” January 2014

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This is the first installment of a periodic blog, “Maroc Business Matters,” which will review news that highlights Morocco’s economic progress with a particular focus on what moves trade and investment forward. Unlike much of the region, which continues to experience political turmoil eroding business confidence, Morocco continues to build its bona fides as the platform for business in Europe, Africa, and the Middle East. This is Morocco’s story.

Morocco continues to improve economic basics – report card from the IMF

This past month, a high level IMF staff team visited Morocco to assess its performance as called for under the Precautionary and Liquidity Line (PLL) agreed in August 2012. This 24-month agreement makes available around US$6 billion as a support mechanism for Morocco’s liquidity. The delegation also gathered data to prepare a comprehensive profile of the performance of the Moroccan economy.

According to the statement issues by the head of the team, Jean-Francois Dauphin, Morocco’s economy is improving “Despite an unfavorable regional and global economic context…” He cites a low inflation rate, a decline in the external current account deficit, and expected 4-5 percent GDP growth rate, among other factors. Mr. Dauphin noted that the Moroccan economy needs to “strengthen competitiveness, ensure stronger and more job-rich growth, and improve social protection, particularly for the most vulnerable segments of the population.”

As part of its strategic economic policy, the government of Morocco has a full agenda in Parliament including a new organic budget law, reform of the judicial system, strengthening the powers of the transparency agency, and broadening support for entrepreneurs and small and medium-sized enterprises.

 Attracting new manufacturing partners through expanding free zones

Indicative of Morocco’s push to create jobs by attracting foreign direct investment (FDI), good news is coming from Midparc, one of the primary new-generation industrial parks, which has already landed Canadian aircraft manufacturer Bombardier. This new free zone covers more than 300 acres close to the seaport and Mohammed V International Airport in Casablanca.

GCC continues to invest in Morocco – Qatar latest to step up

As part of its commitment under a Gulf Cooperation Council (GCC) agreement to provide US$5 billion to Morocco over five years, Qatar signed a US$1.5 billion agreement this past month. As Reuters reports “Four Gulf states – Qatar, Saudi Arabia, Kuwait and the United Arab Emirates – agreed in 2012 to provide aid worth a total $5 billion to Morocco in the period 2012-2017 to build up its infrastructure, strengthen its economy and foster tourism.”

The welcome assistance pact was signed during a recent visit of the Emir of Qatar to Morocco and will help the country reduce its budget deficit by 10 percent in 2014.  Details have yet to be announced although previous packages from Saudi Arabia, Kuwait, and the United Arab Emirates (UAE) have focused on investments in key growth sectors such as agriculture, tourism, and financial services.

Morocco committed to become regional financial center

The emphasis on investing in financial services is putting smart money on smart business, considering Morocco’s deep and broad commitment to this sector through Francophone Africa.  Over the past five years, Moroccan banks have greatly expanded their footprint throughout the region and the government has launched the Casablanca Financial City as the nexus for regional financial services. A recent Forbes article credited Morocco’s strategic geographic position and political stability, especially when compared with the rest of North Africa and the Middle East, as key reasons that foreign manufacturers were flocking to Morocco to establish factories — among them Renault, Bombardier Aerospace, and Dell.

A paper prepared by the Wharton School concluded that tax incentives for expatriate companies and employees, lack of customs duties, proximity to Europe, and less government regulations, “along with Morocco’s position as a stepping stone to the rest of North, West, and Central Africa, are expected to drive much of the interest in the CFC.”

Morocco ups efforts to go green, abetted by the World Bank

Morocco recently garnered a US$300 million loan from the World Bank to promote a “more sustainable and inclusive development model.” Simon Gray, Director of the World Bank Maghreb team pointed out that “Morocco is putting the green agenda at the forefront of its development priorities to secure a resilient and strong economy providing opportunities to vulnerable populations. The Program will introduce sustainable practices in agriculture and develop new sectors such as eco-tourism and aquaculture which have the potential to create jobs and diversify revenues in rural areas, where 70 percent of Morocco’s poor live.”

Andrea Liverani, World Bank Task team leader noted that “The shift to green growth is a homegrown strategic agenda, deeply rooted in the minds of policymakers. The Development Policy Loan series backs this policy priority and complements the World Bank’s package of support in areas such as such as energy, water and agriculture.”

This comes as no surprise to Morocco-watchers as it has set an ambitious target of more than 40 percent of its energy from renewable sources by 2024. According to a recent article, after a slight decline worldwide in 2013, wind power is expecting strong growth in 2014 in Morocco, the US, and South Africa.

Look for more economic news on Morocco in the next posting of Maroc Business Matters.