III. ECONOMIC TRENDS AND OUTLOOK Major Trends and Outlook Morocco boasts the largest phosphate reserves in the world, a diverse agricultural (including fishing) sector, a large tourist industry, a growing manufacturing sector (especially clothing), and considerable inflows of funds from Moroccans working abroad. The production and export of cannabis also play a major (but uncounted) role in the Moroccan economy. Most of Morocco's trade is with Europe, with France alone accounting for about a quarter of Morocco's imports and a third of its exports. The Moroccan government has pursued an economic reform program supported by the International Monetary Fund (IMF) and the World Bank since the early 1980s. It has restrained government spending, revised the tax system, reformed the banking system, followed appropriate monetary policies, eased import restrictions, lowered tariffs, and liberalized the foreign exchange regime. The reforms have contributed to rising per capita incomes, lower inflation, and narrower fiscal and current account deficits. While the overall trend has been positive, there have been wide year-to- year fluctuations in the economy. This, however is expected to rebound sharply in 1994 -- real GDP could grow by 8 percent or more -- due largely to favorable rainfall following two years of drought. Principal Growth Sectors Agriculture: Agriculture plays a leading role in the Moroccan economy, generating between 15 and 20 percent of GDP (depending on the harvest), and employing about 40 percent of the workforce. Morocco is a net exporter of fruits and vegetables, and a net importer of cereals. Over 90 percent of agriculture is rain-fed. Agricultural production -- particularly cereals -- should rebound sharply in 1994, thanks to favorable rainfall following two years of drought. Fall cereals (wheat and barley) production is expected to reach a record 8.6 million metric tons, up some 340 percent from the year before, although insufficient rainfall in the spring is expected to result in a small decline in corn production. Sugar, citrus and vegetable harvests are all expected to increase slightly. Fishing: After experiencing rapid growth during the 1980s, Moroccan fisheries are approaching maturity in the 1990s. Fisheries are important to Morocco, employing over 100,000 people in fishing, canning and packing, and accounting for $520 million of exports in 1992. Despite good catches in 1992 in the export intensive, high- seas part of the industry, a shakeout of financially weak firms looms as an increasingly likely possibility due in part to weak world markets. Future investment in fisheries will be concentrated onshore in value-added activities prior to export. Industry: Industrial growth slowed in 1993 due to the effects of poor harvests on agro-industry and domestic demand, falling demand in Morocco's major European markets and frequent power outages. Industry should enjoy a rebound in 1994 as favorable rainfall spurs agroindustry and both domestic and overseas demand recover. The clothing sector in particular is likely to resume its previously strong growth after levelling off in 1993. The growth of Morocco's clothing industry over the last decade is due to low labor costs, generally free access to nearby European markets, and a temporary admission system that allows the duty free imports of inputs. The gradual phase-out of the Multi-Fiber Arrangement under the Uruguay Round Agreement could, however, adversely affect Morocco's clothing industry by increasing competition from countries currently limited by MFA-sanctioned quotas. Other labor-intensive industries such as electronics assembly also benefit from Morocco's generally low wage rates, duty-free access to the European Union, and proximity to Europe. The growth will largely depend on the pace of economic recovery in Europe. Electricity generation is expected to rise sharply in 1994 and 1995 as new thermal generating capacity comes on line. Heavy rainfall in 1993/1994 will also allow increased hydroelectric production. Mining: Morocco has the world's largest phosphate reserves. The export of phosphates and its derivatives account for over a quarter of Moroccan exports. Phosphate production and exports were up slightly in 1992. Morocco is increasing the domestic value added to its phosphate-related exports through increased local production of phosphoric acid and fertilizers. Fertilizer production and export in particular have grown significantly in recent years, while exports of raw phosphates have declined. Morocco's other mineral resources include copper, fluorine, lead, barite, iron, and anthracite. Government Role in the Economy The Moroccan government has reduced its role in the economy over the last decade. In particular, it ceased direct credit and foreign exchange allocation, reduced trade barriers, restrained spending and taxes, and began selling its shares in some companies. Monetary Policy: The central bank began a slight easing of monetary policy in late 1993. It reduced the reserve requirement from 25 to 10 percent, but required the value of reserves freed up by the measure to be placed in interest-bearing treasury bonds. The growth in deposits after October 1992 is only subject to the 10 percent reserve requirement, and not to the treasury bond requirement. In early 1994 the government revised the interest rate ceilings on bank loans. The ceiling had previously been set as a 2.5 percentage point markup over the average rate banks receive on deposits, excluding the below-market-rates for some required holdings. The new ceiling is set as a 3 to 4 percent markup over the rate received on deposits, including the below-market-rates on required deposits. The effect of the change is to lower the interest rate ceilings by several points, although real rates remain high; The lending rate stood at 12 percent in June 1994 (inflation is under 6 percent). Fiscal Policy: The Moroccan government has reduced significantly its budget deficit over the last decade. The fiscal deficit as a percent of GDP fell from 12 percent in 1982 to an estimated 2.6 percent in 1993. The 1994 budget calls for a fiscal deficit of under 1.5 percent of GDP, although it will probably be higher. Foreign Exchange: The dirham is convertible for all current transactions (as defined by the IMF's Article VIII) as well as for some capital transactions, notably capital repatriation by foreign investors. Foreign exchange is routinely available through the commercial banks for such transactions on presentation of documents. The Central Bank sets the exchange rate for the dirham against a basket of currencies of its principal trading partners. The rate against the basket has been steady since a nine percent devaluation in May 1990, with changes in the rates of individual currencies reflecting changes in cross rates. Moroccan companies may borrow abroad without prior government permission. Foreign Trade: Morocco gradually reduced barriers to trade over the last decade, although the level of protection remains high. In recent years the government replaced quantitative restrictions with tariffs for all but a few goods, notably foodstuffs and textiles. The maximum tariff rate is currently 40 percent and the average tariff rate is under 25 percent. There is also a 10 to 15 percent surtax on imports, depending on the item. The government retains a monopoly on the import of some politically-sensitive commodities such as wheat, feed grains, vegetable oils, tobacco, sugar and tea. European Union Trade Preference: Morocco and the European Union (EU) have begun discussions on an association agreement that may eventually lead to the reduction of trade barriers between the two areas. Moroccan industrial exports currently enjoy duty free access to the EU market, but most agricultural exports are limited by the EU's Common Agricultural Policy. Morocco hopes to obtain better access for its agricultural products in exchange for elimination of Moroccan customs duties on EU goods. Detailed negotiations are just beginning, and any resulting reduction in Moroccan tariffs would likely be phased in over a long transitional period. Balance of Payments Situation Morocco runs a chronic merchandise trade deficit which is offset by large tourism receipts and workers remittances. Morocco enjoys substantial net capital inflows -- especially foreign investment -- giving it a healthy balance of payments surplus. Morocco's foreign exchange reserves continue to grow. By early 1993 foreign exchange reserves totalled about seven months worth of merchandise imports. Foreign debt payments are scheduled to decline in coming years. Trade: The trade deficit narrowed slightly in 1993 due to increasing exports and falling imports. The value of Moroccan exports rose by 0.8 percent. Exports of traditional agricultural products and raw phosphates fell while exports of shellfish, fertilizer and knitwear grew. The trend points to increased exports in 1994 due both to favorable rainfall and an upturn in demand from European markets. Moroccan imports fell by 1.6 percent in 1993. Large increases in cereals imports caused by the drought were offset by declines in imports of most other commodities, reflecting the sluggish economy. The trend is likely to be reversed in 1994 as cereal imports are expected to fall due to favorable rainfall while other imports should rise in response to the rebound in the domestic economy. Tourism: Tourism receipts fell by 2 percent in 1993 while the number of tourists visiting Morocco fell by 9 percent. The fall was largely due to a 25 percent drop in the number of Algerian visitors, who account for the largest share of tourists but a disproportionally small share of receipts. The number of European tourists rose by 10 percent, led by a 14 percent increase in French tourists. Workers' remittances: Remittances fell slightly in 1993. Falling remittances from France and the northern European countries where Moroccans have traditionally settled generally fell while remittances from the southern European countries that have more recently attracted Moroccan immigrants generally rose. However the estimated 700,000 Moroccans in France still account for over 60 percent of total remittances. Foreign Investment: The dramatic growth in foreign investment in recent years shows no signs of abating. Foreign investment inflows rose by some 20 percent in 1993 (details in Section VII). France remains the largest source of foreign investment with 20 percent of the total, followed by Great Britain, Switzerland, Spain and the United States. Foreign investment will likely grow further, due in part to the government's program to sell shares in a number of firms. Foreign Debt: Morocco's foreign debt burden has declined steadily in recent years. Debt service payments before rescheduling, as a share of goods and services exports, have fallen from over 50 percent in 1989 to under 30 percent in 1992, which is roughly what actual rescheduled debt service payments have averaged in recent years. Trade and Investment Barriers Poor regulatory environment. The legal framework is, in general, favorable to trade and investment, although there are several notable deficiencies such as restrictive labor laws and an absence of explicit copyright protection for computer software. The implementation of the laws and regulations is, however, deficient. Bureaucratic delays are endemic. The legal system is slow, inefficient, and often believed to be biased against foreign investors. Corruption is considered widespread. The poor regulatory environment presents problems for both U.S. investors and exporters. Competition from contraband. Extensive contraband imports, especially from the Spanish enclaves of Ceuta and Melilla, represent significant competition to imports from the U.S. and to goods produced in Morocco by U.S. firms. Inadequate infrastructure. Morocco suffers from inadequate infrastructure, particularly an electricity shortage exacerbated by a two year drought. Suitable commercial and industrial sites, particularly in Casablanca, are very expensive. This is a problem for U.S. investment in Morocco, but not for U.S. exports. Lack of skilled labor. While unskilled labor is generally plentiful, there is a shortage of certain skilled and professional workers. Low literacy rates also limit labor productivity. Poor transportation links. There are no scheduled U.S. air or sea carriers directly serving Morocco. Most travel and goods shipments must transit Europe. Long transport times to the U.S. disadvantage U.S. exports relative to European competitors, who can often export to Morocco by truck. This is exacerbated by the high cost of financing imports during the transit. This is a problem for both U.S. investment and exports to Morocco. Relative volatility of the dollar. European currencies, particularly the French franc, weigh heavily in the basket of currencies against which the dirham is set. Moreover, most of the European currencies in the basket are at least loosely linked to each other. The fluctuation of the dollar against the European currencies therefore results in a greater volatility of the dollar than the European currencies against the dirham, resulting in greater foreign exchange risk of Moroccan importers. It also increases the foreign exchange risk for U.S. investors. Linguistic and Cultural differences. While Arabic is the official language of Morocco, French is generally the language of business. Spanish is also widely spoken in the northern part of the country. While use of English is growing, French-speaking, and to a lesser extent Spanish speaking, businesspeople have an advantage over their English-speaking competitors. Sales and service material are also more effective in French than in English. Commercial practices tend to follow French tradition. These factors present barriers to U.S. exports and investment. Labor Force Morocco's population is currently estimated at about 26 million and is growing at a rate of about 2.2 percent a year. Approximately half of the population is under 20 years of age. Slightly over half of the population lives in rural areas, although rural-urban migration is rapidly shifting the balance toward the cities. Morocco's literacy rate is only 45 percent, with the rate significantly lower in the countryside than in the cities, and lower among women than men. Population growth, rural-urban migration, and increasing labor force participation rates are contributing to rising urban unemployment, in spite of generally strong economic growth and job creation. Urban unemployment is currently estimated at about 16 percent. The rapid increase in secondary and university (but not primary) enrollments in the 1980s exceeded the economy's capacity to create jobs, resulting in particularly high unemployment rates for graduates. Rural unemployment rates are much lower than urban unemployment rates, although the rural statistics are largely meaningless due to the prevalence of informal activity (particularly small-scale farming and petty commerce) in the countryside. Major Local & Third Country Competitors in Specific Sectors Major competitors of the U.S. are EU countries with France the dominant supplier mainly for capital goods and services. France accounts for 25% of total Moroccan imports and exports. Other major competitors are Spain, Germany, Italy and Great Britain. The local competition is strong in selected consumer goods but is limited due to lack of expertise in various sectors. Despite this, the U.S. remains very competitive in various sectors such as high tech control equipment, heavy construction equipment, engineering services, wheat and coarse grains, coal, computers and software along with some consumer goods. Infrastructure Situation for the Distribution of Goods and Services Morocco is making the development of its communication and transportation networks a top priority. With many improvements already achieved and several projects underway in these two sectors, Morocco's infrastructure for the distribution of goods and services is good. Roads and Highways Morocco's 50,000 Km road network is among the best in Africa. All parts of the country are readily accessible by well-surfaced roads. Most agricultural and manufactured goods move by road. Highways are under construction to relieve traffic congestion from Tangier in the North to the main economic and commercial city of Casablanca. 800 Km's of existing roads are currently being improved with financial assistance from the World Bank. Airports There are 11 major airports in the country. The major airport "Mohammed V", located 35 Km south of Casablanca, offers about fifty regular flights per day to the EU, the United States, Canada, The Middle East and several African cities. "Mohammed V" handled over 42,000 tons of freight in 1993. Merchandise can be transported to and from the airport by truck or by train. The Rail Network The rail network has 2000 Km of track. The network is managed by the "Office National des Chemins de Fer" (ONCF), and plays an important role in the Moroccan economy. It employs 13,820 people. ONCF handles the transportation of phosphates, fertilizers, chemical products and other minerals. Ambitious plans are scheduled (but not funded), to modernize and extend the network such as the linkage of Marrakech- Agadir-Laayoune in the south and Oujda-Taourirt in the north. Marine Transportation There are frequent scheduled ferry sailings to and from Spain and France for tourists. For merchandise imports and exports, the port of Casablanca handles 50 percent of national traffic. There are ports throughout the country in the cities of Mohamedia, Safi, Kenitra, Tangier, Nador, Agadir, Jorf Lasfar and in a few Saharan provinces. The National Port Authority (Office de Developpement et d'Exploitation des Ports) is the principal managing authority. Telecommunications The telephone system has been greatly improved in the last five years. It is now possible to call most countries by direct dialing. Telex and telefax communications to most parts of the world are widely used. The use of cellular phones is spreading among the business community and government security forces. Major Infrastructure Projects Underway The major infrastructure projects currently open to foreign investors are the following: 1. Telecommunications The Office National des Postes et Telecommunication (ONPT) is planning to expand and upgrade its telephone network. Two tenders have already been issued to purchase fiber optic transmission equipment for urban networks in Rabat, Fez, Meknes, Taza, Oujda and Nador and for inter-urban networks. The first project is financed by the European Investment Bank while the second is financed by the World Bank. There are numerous competitors in the telecommunication sector. The major ones are Alcatel, Bell Canada, Northern-Telecom, Siemens, NEC, Nokia , and Ericsson. 2. Transportation Highways The GOM continues to extend and improve the 50,000 Km national road network. There are projects to construct 4 new highways: Rabat-Fes (200 Km); Casablanca-Marrakech via Settat (200 Km); Casablanca-El Jadida (60 Km) and Tetouan-Ceuta (55Km). GOM is seeking foreign financing to implement these projects. 3. Power Generation To satisfy Morocco's growing demand for electricity, the Office National de l'Electricite (ONE), has issued tenders to construct two independent electric power plants in Mohamedia and Kenitra. Morocco's demand for electricity has grown dramatically. ONE is committed to satisfying this fast growing demand from urban areas and getting power to all rural areas. Six U.S. led groups and fifty other foreign companies have submitted preliminary bids to build and operate independent power plants in Morocco. The first power plants to be built are (1) a 300/600 MW steam thermal power station using fuel and gas for the city of Mohammedia; (2) a 300/500 MW combined-cycle power station using natural gas for the city of Kenitra. The value of these two projects is estimated at USD 1.2 billion. 4. Dams Dams in Morocco are used for hydro-electric power and irrigation of agricultural lands. Morocco aims at constructing one dam per year. Dam projects to be realized and for which studies have already been completed are: -Dchar El Oued dam to irrigate 35,000 hectares and produce 220 million of kwh per year. -Sidi Mohammed Ben Abdallah dam improvement to increase storage capacity to 1,300 cubic meters. -Hydroelectric power and hydro-agricultural complexes of Haut Sebou river including 3 dams and 2 galleries. -Two compensating dams for the Al Massira dam. -Jbel Lakhal dam to irrigate 4,800 hectares. There are also 13 other large dam construction projects under study.