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MAKING FINANCIAL SYSTEMS PART OF THE SOLUTION IN THE MAGHREB

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.

Partners can make a difference in driving economic growth

Over the past several weeks, I have been looking at media coverage of events and activities related to how Morocco is confronting its challenges in driving economic growth. One particular theme that merits more attention is how external partners, whether bilateral or multilateral, can play a significant role in enabling Morocco to maximize its reform efforts.

On March 18, the Carnegie Endowment for International Peace (CEIP) held a panel on “Economic Turmoil in Arab Countries – Can Partners Help?” that raised several key points. First of all, the drive for sustainable development must be internally driven; otherwise the needed political will is absent. Without national leadership, the longer term efforts to reform are marginalized and politicized. Secondly, greater stability in the MENA region benefits donor countries and agencies by supporting an environment in which growing prosperity, jobs, and opportunities reduce conflict and promote greater cooperation within and among countries.

While it is too soon to make conclusive assessments of these partnership arrangements, details of recent programs provide insights into their priorities. The first example is a recent press release on projects funded by the World Bank in Morocco. The funding has two components. The first is a $160 million loan to improve the competitiveness of Moroccan companies. It includes simplifying the regulatory environment and strengthening the capacity of Moroccan agencies tasked with business and investment development. Interestingly, as reported in my blog last week, this follows on a European Bank for Reconstruction and Development trade facilitation funding agreement with BMCE bank in Morocco. The programs should be mutually supportive.

Simon Gray, the Maghreb Country Director for the World Bank, commented, “Morocco has engaged in a number of promising reforms to liberalize and promote investment in key sectors over the last decade. The impact of these reforms on growth and job creation will be further enhanced by addressing the remaining rigidities in the institutional and regulatory business environment especially as they pertain to small and medium enterprises.” The reforms include addressing government payment delays, bureaucratic red tape, unfair competition, and lack of predictability in implementing rules and regulations.

Also approved by the World Bank is a $6.44 million grant to help small farmers implement land and biodiversity conservation measures in targeted regions. An interesting component of this project is using animal feed generated from by-products from agri-food chains including olive oil, cactus, and argan. This is the latest project by the World Bank in support of the Plan Maroc Vert program, which targets doubling the added-value and jobs in the agricultural sector by 2020.

A Zawya article, “Strong macro drives Morocco’s investment appeal,” notes, “Morocco has emerged as the most stable North African country, after King Mohammad VI navigated through a tricky period during the Arab Spring. A new democratically elected government with powers has led to a relatively stable country compared to the painful transitions in North African peers Tunisia, Libya and Egypt.” It goes on to list hallmarks of EU-Morocco cooperation:

  • Morocco is the first North African state to embark on Deep and Comprehensive Free Trade Agreements (DCFTAs) with the European Union.
  • An EU-Morocco Association Agreement came into effect in 2000.
  • Negotiations for a new European Neighborhood Plan (ENP) for the period 2013-2017 were concluded in November 2012 and a formal adoption process is under way.
  • An agreement on liberalization of trade in agriculture came into force on October 1, 2012.
  • The guidelines for a new Fisheries Partnership Agreement were adopted by the EU in February 2012, and negotiations are ongoing.
  • Morocco remains the largest recipient of EU assistance in the ENP-south region with EUR 580.5 million earmarked for 2011-13 with a focus on social and economic development, environmental protection, and institutional support (i.e. justice and human rights).

A recent IMF report pointed out that higher economic growth, lower unemployment, better health and educational outcomes, better access to basic infrastructure, and a marked reduction in poverty rates are tangible evidence of Morocco’s progress in fostering inclusive growth. The only black mark is youth unemployment, which remains particularly high.

It is too soon to write the headlines for Morocco’s economic future, yet it is clear that providing a platform in support of solid political, social, and economic reforms is a key role for external partners. Targeted and results-focused assistance programs, developed through frank and constructive dialogue with recipient countries, are keys to achieving tangible outcomes that promote inclusive growth and enhance stability. In this period of budgetary constraints among all the partners, it is helpful for American taxpayers to know that the US is not alone in working hard to promote security and prosperity in the MENA region.

Moving Maghreb Economic Integration Forward – Hopefully

Blog: Beating the drum for regional integration–again

This past week, yet another regional conference was held promoting economic integration in the Maghreb/North Africa. Despite all of the splintering tendencies emerging from the Arab uprisings, there is still a strong pull among leaders for greater cooperation and coordination that goes beyond security arrangements to attack the root causes of economic stagnation.

The twin economic shocks of the Arab uprisings driving away tourists and potential investors and the decline of customer markets in Europe have greatly affected rates of growth throughout the Maghreb. Greater economic cooperation, particularly to access new markets and achieve greater economies of scale, would appear to be obvious, but then intraregional politics excels at obfuscation, not innovation.

At the 4th Paris Economic Forum – Casablanca Round, Tunisia’s former finance minister, Jaloul Ayed said that the lack of a working Maghreb Union linking Mauritania, Morocco, Algeria, Tunisia, and Libya is costing each country between two and three percentage points of growth. “I stress once again the absolute need for the Maghreb Union… a Union which would facilitate shared prosperity for all peoples in the region.”

His remarks were echoed by Morocco’s finance minister, Nizar Baraka, who noted that in order to “seize opportunities in a time of crisis, efforts needed to be pooled at the regional level. The democratic enthusiasm in the region should be harnessed and consolidated as democracy can only be meaningful if it translates into job creation, the restoration of social mobility, and improvements in citizens’ lives.” Minister Baraka, who was named by The Banker as the “best Minister of Finance in the Middle East” and “Minister of Finance 2012-Global Award,” speaks from hard fought experience in steering fiscal policy through the turbulence that has buffeted Morocco over the past two years. “This is why, for us, economic integration is essential and could be achieved through a cross-Maghreb growth pact with a shared ambition and a unifying aim: shared prosperity for all and the creation of a society of trust in North Africa,” he said. Baraka added that a competitive bloc needed to be created, so that it could position itself as a partner to the European Union.

While the economic benefits from a robust Maghreb Union may be somewhat obvious, as important in the long run is the positive impact on job creation, foreign direct investment, coordination of commercial regimes across borders, and the strengthening of the productive capacities of small, medium, and large enterprises at various stages of the value chain through competition, integration, and greater focus on competitive advantages. It would also have a salubrious impact on workforces throughout the region, focusing skills and capacity-building within competitive sectors to increase available pools of talent. All of this would engender greater regional stability to complement what is happening in the security realm.

Former Managing Director of the International Monetary Fund Dominique Strauss-Kahn spoke about Morocco’s economic potential as well as the difficulties facing the region. “We have moments in history where we must make difficult decisions that allow us to locate and seize the positive,” Moroccan daily L’Economiste quoted Strauss-Khan as saying. A sharp warning was given by Claire Spencer, head of the Middle East and North Africa program at the UK think tank Chatham House. She pointed out that about 75 percent of the region’s population falls between 18 and 30, which provides challenges and opportunities for the region’s economic recovery as there is an accessible workforce in the Maghreb that is well positioned to provide growing services to its neighbors in Europe whose populations are ageing. The countries of the Maghreb must make full use of this asset, Spencer said, adding that it was essential for the aspirations of the youth to be realized.

One of the commentators at the conference, economist Mehdi Zariri, highlighted the fact that the countries of the Maghreb are experiencing the same social and economic problems and must therefore come together to establish common strategies. “It’s vital to capitalize on the ways in which the economies of Maghreb nations complement one another, as they could form a strong economic unit in Africa,” he said.

It is this historic regional complementarity that holds the greatest promise for spearheading the economic growth critical to meeting the needs of the restive populations. Moving beyond rhetoric to concrete agreements that result in regional projects across key sectors—IT, transportation, value-added agricultural products, banking, specialty manufacturing, and renewable energies—is energizing private sectors to challenge business practices that under serve the needs of the Maghreb. The drums are beating.

IMF report card gives Morocco thumbs up – for now



IMF report card shows challenges to sustained economic growth in Morocco

While there is a great deal of common wisdom about what the Arab governments need to do to more effectively participate in the global economy, there is much less certainty about how to get there. With no magic formula to follow, there is growing attention to the role of multilateral institutions in supporting progressive policies. For example, as Morocco continues to move forward with its economic reform agenda, the Executive Board of the International Monetary Fund (IMF) completed its first review of Morocco’s performance required under a two-year Precautionary Liquidity Line (PLL) arrangement. Agreed last August, the PLL arrangement makes available approximately $6.3 billion over two years to support the government’s program of economic reforms. The PLL provides access to liquidity against external shocks such as decreases in exports caused by shrinking markets in Europe or factors such as an excessive jump in imported energy prices.
The IMF recognizes that some form of fiscal backup is needed by countries with sound economic fundamentals and a history of moving on reforms so that their efforts continue despite factors beyond their short and medium term control. So the PLL is not a handout or a subsidy; it is meant to facilitate the government’s capacity to continue to make the needed hard decisions that will strengthen the Moroccan economy over the long run.
In its statement following the Board meeting, Ms. Nemat Shafik, Deputy Managing Director and Acting Chair, commented on the report. She praised Morocco’s “overall sound macroeconomic policies” and noted that the “worsening of the external environment and a below-average harvest” were threatening further progress.
The PLL brings into sharp relief the conundrum facing Arab governments attempting to respond to popular demands to increase jobs, broaden subsidies, and reduce barriers to accessing markets through government intervention. As Mohsin Khan pointed out in his article last week, the temptation to implement short term fixes through government employment programs, increased general subsidies, and protectionist measures end up mortgaging the country’s future fiscal health. And this is what Morocco is trying to avoid. By attacking subsidies over a four year period, and using the PLL as a safety net to avoid excessive borrowing and budgetary imbalances, the government is hoping to achieve “stronger and more inclusive growth.”
Ms. Shafik mentioned that “The arrangement…has provided Morocco with an insurance against external risks and supported the authorities’ economic strategy.” This gives the government breathing room to “move ahead with the reforms of the general subsidy system and the pension system and to better target social protection.”
Nemat Shafik is no stranger to the dislocations that accompany deep economic reforms. As the youngest ever vice–president of the World Bank and a member of the senior management team at the International Finance Corporation, she has spent several decades promoting reform policies that include “Efforts to strengthen competitiveness and better equip the economy to respond to external shocks…” She strongly emphasizes the role of the private sector and notes that “The planned fiscal consolidation and structural reforms, such as those to improve the business climate and professional training, will help underpin external sustainability.” I have always been impressed with Nemat’s wisdom and clarity, and Morocco will clearly benefit from the IMF’s support and sound advice.
One of the outcomes of the Arab uprisings is the challenge of facilitating growth without compromising the future solvency of the country. While the Gulf countries have the resources to weather short and medium term challenges, countries such as Morocco face strong domestic pressure against painful changes that affect their citizens even if they can bankrupt the country. So the PLL tests Morocco’s commitment by providing short and medium term support to facilitate the long term health of the economy. It is a partnership worth applauding and supporting.

An Elusive Target: Inclusive Economic Growth in the Maghreb

 Some of the governments in the Maghreb are facing a dilemma: how do they balance the demands from their citizens for more jobs, services, transparency, and training, when they don’t have the budgets to address short term needs without mortgaging their futures. They are caught in a bind; on the one hand, economic growth has stagnated due to decreased trade and investment with their major partners in Europe. This leads to contracting markets, decreasing FDI, and fiscal policies directed at cutting costs.

On the other hand, governments, energy and non-energy producers alike, are under pressure to generate economic expansion that either stimulates growth through exports or benefits from increased external monies from tourism and remittances. Governments from Mauritania to Libya are struggling to implement policies that both build stronger, more transparent and robust economies, while providing at least some relief to citizens with high expectations for jobs and services.

On June 13, The Center for Strategic and International Studies (CSIS) hosted, “Building Stability through Inclusive Economic Growth in the Maghreb,” which brought together experts and a senior US government official to offer their insights on the prospects for development that will benefit the broadest range of stakeholders. This notion of “inclusive economic growth” is the latest buzzword for describing the new social contracts that are emerging, albeit with some difficulty, between government and its people.

My takeaways from the presentations are that we have both learned a lot and understand a little, and that is especially true for the new governments struggling to meet rising expectations that are rapidly becoming demands. While, in hindsight, we saw everything coming, the dilemma for those countries experiencing the greatest change, i.e., Tunisia and Libya, is the lack of certain assumptions about how to proceed.

The conference focused on “political-economic factors shaping economic growth strategies,” which basically means “what do governments want to do and what tools do they have to make it happen,” and the proposition of greater regional trade and investment as an effective option for growth.

While there was agreement on the long term need for jobs, reducing wealth disparity, reforming business regulations and the financial sector, and better integration with the global economy, it is the short-terms fixes that are generating concerns. Mohsin Khan of the Atlantic Council called them a “populist economic model” that promotes government employment programs, food and fuel subsidies, cash transfers, increases in direct taxes, expansionary low interest rates, and other immediate remedies.

The obvious consequences of these actions are that governments are increasing their debt in the short and medium term without a clear formula for how to pay for these expenses down the road. The impact is broadly felt across the region’s economies in terms of decreased value of the local currency, higher inflation offset by government subsidies for basic goods, budget deficits, and deferred reforms.

Over the longer term, Maghreb countries need to reduce the role of state owned enterprises, build friendlier and more transparent business environment, strengthen robust financial sectors, and figure out how to operationalize “inclusive growth.” Conference participants did not have any magic bullets as to how to balance the short term consequences with long term imperatives.

Yet there is a case to be made for greater regional trade and investment as a vehicle for growth. The often-quoted statistics about the low level of intra-regional trade make it obvious that any real growth will be beneficial. The ground-breaking Peterson Institute study in late 2008, the IMF series on the Maghreb private sector, and the latest World Bank study on the growth potential of regional integration, all point to the benefits of greater cooperation. In his remarks, Geoff Porter concluded that more economic integration is inevitable, that businesses across the region are optimistic about cooperating for the future, and that regional political obstacles are fading in importance for the private sector.

Given the still transitory nature of most of the Maghrebi governments, Morocco and Mauritania being the only exceptions, another expert source underscored how “much has changed and has not changed,” citing concerns that a populist economic model may impede the needed reforms to spur domestic investment and hopes that subsidies over time would lead to a new, more targeted social safety net strategy for each country.

The presentations mirrored the reality on the ground…no startling breakthroughs in how to satisfy citizens weary of politicians’ promises and impatient with policies that seem to benefit only those already in power. Most of the panelists were complimentary to Morocco for its stable transition under a new constitution, but its new government faces the same demands as the others.

Conflicting perceptions of what needs to be done and what can be done by governments and the private sector do not make it clear how the benefits of the short term solutions will play out over time. Since, with the advent of the Arab uprisings, it is clear that economic and political reforms are two sides of the same coin, the path forward is neither obvious nor readily accessible for most decision-makers who must craft effective solutions that do more than buy time.

Confronting Challenges to Economic Growth in Morocco

In the coming months, MATIC will take a look at a core issue being confronted by the new government in Morocco: the challenges to economic growth ranging from a mismatch between the educational system and the job market, to issues facing entrepreneurs, investors, and the government in attracting much needed investment dollars. While the previous government encountered these issues, the projected fall in agricultural production in 2012 due to drought conditions, the negative impact of the EU economic setbacks onMorocco, and continued job related demonstrations in various cities have reinforced the focus on economic growth for the new government.

We will look at four topics in this series: the Moroccan economy in 2011, before the new government assumed power in 2012; the economic development program and budget passed by the new government to stimulate growth and provide employment; key players and programs addressing economic growth issues; and the interplay between Moroccan priorities and regional economic opportunities.

2011 – Indicators drifting downward

As 2011 drew to a close, Morocco’s ability to sustain its hitherto impressive growth rate of 4-5% began to decline. Although the unemployment rate dropped to 8.5% in the 3Q from 9.1% and inflation was also on a downward trajectory owing partially to a decrease in food imports, poverty and unemployment remained at unsustainable levels.

The IMF credited Morocco with “several years of sound macroeconomic policies and political reforms” that insulated it from the 2008 global financial crisis. But it also urged Rabat tackle its mounting subsidy bill and head off a potential debt crisis. The government responded to the Arab uprisings by expanding social welfare programs, increasing food and energy subsidies, and raising public sector wages – all adding to deficits that the government could not maintain. In addition, the global recession hurt demand for Moroccan exports, further aggravating its trade deficit and remittances from the Moroccan diaspora.

Both the IMF and the OECD pressed for further improvements to business regulations, corruption, and economic diversification. The government responded with $206 million public-private sector initiatives in telecommunications, transport, finance, and property development that have promising responses from international investors. Yet challenges carried over into 2012. The decline in agricultural production, which employs 40% of the labor market and contributes 15% to GDP when rains are abundant, started the setbacks. Morocco’s dependence on foreign energy supplies limited Rabat’s options as energy prices shot up, adding impetus to the government’s efforts to rapidly ramp up renewable energy programs, and wealth disparity became more evident based on the government’s own analysis.

Heading into 2012, the new government found that it was not immune to demonstrations demanding immediate jobs and reforms. This background sets the stage for the economic program passed by Parliament in mid-April, and is the subject of the next segment.

David Forscey contributed to this article, which was originally published on Morocco on the Move.