A recent article by a former deputy director of the IMF highlights the challenges the Maghreb countries face in energizing their financial sectors to promote large-scale and equitable economic development. Amor Tahari is not promoting wealth redistribution or onerous regulations but rather a freeing up and development of mature financial services to generate greater opportunities for more actors.
“Achieving higher and more inclusive growth in the Maghreb region in thus required to bring down the high unemployment rate, especially among youth, and to raise living standards…Maghreb countries have to accelerate their economic reforms in various areas, in particular with regard to their financial sectors.”
Mr. Tahari notes that although Morocco has the “most advanced and diversified financial system, all the countries in the region still need to further modernize, deepen, and regionally and globally integrate their financial markets.”
Morocco’s Central Bank Moves Ahead
As if on cue, the central bank of Morocco issued an update this week on the economy’s performance, which spelled out its assessment and proposed actions. The good news is that due to external factors such as the fall in energy prices, the inflation forecast for 2013 is down to 2.1 percent. There is a general consensus that good harvests and fewer energy imports will contribute to a 5-5.5 percent GDP growth rate. The not good news is that “the international environment was still characterized by a ‘continued worsening of economic activity and the persistently high levels of unemployment,’ particularly in the euro area.”
In response to the kingdom’s unemployment challenges, the “Bank Al-Magrib said it would implement a new program to encourage banks to lend to very small, small, and medium-sized enterprises, particularly industrial companies that are export-oriented due to a continued deceleration in non-agricultural activity and bank credit.” It is this latter issue of growing the economy in non-agricultural sectors with sufficient financial support that holds back broader growth in the region. Even this program “provides banks with liquidity collateralized mostly by private securities issues by such businesses.” This is part of the problem: what banks will make loans based on collateral provided by companies with unproven or marginal performance? It is a contradiction that Mr. Tahari notes that blocks diverse and inclusive growth strategies. He calls on Maghreb countries to “double their efforts to improve access to financing and make it available to a larger part of the population…”
Reforms Captive to Politics
As in the US and Europe, financial reforms often get caught up in the political dust-ups between and among political parties seeking to take advantage of the public mood to score points against their opposition.
In Morocco, according to an article in Al-Hayat and elsewhere, “A delegation from the International Monetary Fund (IMF) threatens to withdraw the $6.2 billion in loan guarantees earmarked for Morocco if the Moroccan government doesn’t announce a schedule to reform the compensation fund, which will cost $6 billion this year….The IMF…said that the financial situation and the overall economy were worsened by the government’s inability to stop the financial waste caused by political differences.” Morocco has already been downgraded from an “emerging market” to a “frontier market” on the MSCI Index, which may affect its ability to borrow internationally. Morocco needs to borrow $6-8 billion annually to financial some development projects and pay for some economic and social obligations.
While Algeria and Libya do not face a financial crunch due to their energy exports, their financial systems are seriously lacking in the infrastructure, systems, and regulatory environment that act to stimulate business and minimize risk. In Tunisia as well as Algeria and Libya, the financial sectors are paying the price for years of neglect.
For example, financial systems are dominated by government banks and heavy public sector presence in lending portfolios. Non-performing loans (NPLs) burden the liquidity of banks and there are few if any secondary markets for fixed income (bonds) and equity (stocks) products. Insurance similarly suffers from weak guidelines and, along with banking, will be affected by the coming implementation of Islamic banking.
Regarding the banking systems, Tahari proposes that “it is urgent to increase competition and openness in the banking system in most countries.” Allowing private banks to enter the market, increasing the scale of micro-financing and micro-lending, eliminating poorly performing state banks and their high ratios of NPLs, and promoting the growth of a range of financial services and non-bank financial institutions within the context of international standards and transparent regulations, will enable Maghreb financial sectors to be on firm ground for greater regional integration.
As Tahari concludes, reducing youth unemployment “will require achieving a significantly higher and more inclusive economic growth…[by accelerating] reforms to bring about considerably higher productive investment…[including] further financial development and deepening, as well as regional integration within the Maghreb Block.” If the Maghreb countries are to make good on their promises made during the Arab uprisings, key to their progress is a sound, vibrant, equitable, and proactive financial sector.