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Cablegate: Economic Challenges Facing Morocco's New Government

DE RUEHRB #1541/01 2701431
R 271431Z SEP 07





E.O. 12958: N/A

REF: A. RABAT 1525

B. RABAT 1223

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1. (SBU) Summary: Incoming Prime Minister Abbas El Fassi will
take charge this month of an economy that has performed well
over the last five years. He follows in the footsteps of a
Prime Minister who is generally regarded as having been one
of the strongest in Morocco's history, and whose business
experience gave him particular credibility with the Moroccan
business and financial community. The Jettou government,
with a range of projects and initiatives, and a favorable
international climate, was successful in boosting Morocco's
annual GDP growth above its historic average over that of
previous decades and in ensuring that non-agricultural growth
stayed strong even in years when agriculture faltered.
Significant challenges remain, however, to ensure that higher
growth is sustained over the long term, and to extend its
benefits to all Moroccans. These include continued serious
shortcomings in the moribund Moroccan educational system, a
fiscal and social security regime that has sapped the
competitiveness of Moroccan exports, and endemic corruption,
particularly in the judiciary. In his valedictory address,
Jettou forthrightly admitted that his government was less
successful in some of these areas than he would have wished,
and Fassi's initial comments (as well as the King's Throne
Day speech) make clear that Morocco's social deficit will be
the new government's primary focus. Less evident is whether
the parties that make up the governing coalition will make
good on their promises to reform Morocco's tangled fiscal
regime. End Summary.

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2. (SBU) A tough act to follow: The general consensus in
Morocco is that incoming Prime Minister Abbas El Fassi has
big shoes to fill. Prime Minister Jettou's tenure is viewed
as one of the most successful in Morocco's history, and he is
credited with imparting a new dynamism and vigor to the
Moroccan economy. Growth in real GDP has averaged 5.4
percent since 2001, despite several years of drought, exports
have increased more than 10 percent a year, while foreign
direct investment (FDI) has increased rapidly, reaching
between three and four percent of GDP annually (twice its
level at the start of the decade). The economy created
300,000 jobs in 2006, double the average of preceding years.
The confidence that the outgoing administration engendered
(admittedly coupled with a positive international
environment) was evident not just in increased FDI, but in
the flow of transfers from Moroccans abroad, which together
with tourism revenues has kept Morocco's current account in
surplus, even as import growth has outstripped that of

3. (SBU) But gaps remain, arguably in areas that will be even
more difficult to address, as they are structural and deeply
entrenched. Jettou and his team's particular focus was on
the "grands chantiers," or large scale projects that have
started to transform Morocco. These include the new
container port at Tangier Med and its neighboring free trade
zones, the Bouregreg Valley project in Rabat, and the five
mega-tourism projects that constitute the Plan Azur. The
government also worked hard to sell Morocco to foreign
investors, through sectoral initiatives targeting offshoring,
auto parts, aviation, and other sectors. High profile
investments such as Renault's decision to open a 5 billion
USD plant in Tangier and Procter and Gamble's decision to
make Morocco the hub of its regional operations highlight the
government's ability to structure deals that could entice
large investors to the country. Less successful, however,
were the government's attempts to transform the business
environment in Morocco and to remove structural factors that
impede business expansion. Morocco continues to languish in
the lower tier in "doing business" ratings put out by both
the World Bank and the World Economic Forum.

4. (SBU) Education: One key issue highlighted both by those
studies and virtually all observers is that of education.
The Moroccan education system is widely perceived to be
broken, and to fail to produce the skilled workforce that
will enable Morocco to compete in the world economy. In a

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meeting in Casablanca, one furniture manufacturer recently
complained to us that he has been obliged to create "at
considerable expense" his own training institute for company
salespeople, as he is unable to find personnel who have the
requisite language and sales skills. He stressed that the
positions he is filling are hardly those of specialized
engineers, but even finding graduates with adequate
French-language skills is difficult. Observers point to the
fact that there has never been a clear strategy for reform of
education, and that the system continues to lack resources,
with the result that teachers are unmotivated and absenteeism
is high. (Note: Fassi's Istiqlal party is widely saddled
with the blame for mismanaging the education portfolio it
held in the 1980's and 1990's, exemplified by an ill-planned
Arabization initiative that had chaotic results. End note.)

5. (SBU) Fiscal issues: Another structural problem is
Morocco's fiscal regime, which weighs heavily on the
competitiveness of Moroccan companies. With a narrow tax
base (speakers at a recent colloquium in Rabat noted that
only 50 companies pay half of all company taxes in the
country), rates are extremely high. Karim Tazi, former head
of the textile industry association, argued to us in a recent
meeting that the entire Moroccan fiscal and customs system is
skewed against Moroccan industry, and that it must be
reformed if that industry is to survive completion of free
trade with Europe in 2012. He argued that for small and
medium-sized enterprises, company (or profit) taxes, which
have been the focus of most Moroccan party programs, are not
the problem. Such companies barely make profits, he argued,
as they are weighed down by high upstream taxes on income
(which are borne by the employer, as employees negotiate a
"net" salary) and local taxes. The result has been a flight
from the formal sector to the informal sector.

6. (SBU) Morocco's tenuous budgetary situation, and
persistent deficits, however, make this a difficult issue for
any government to address. While the overall government debt
to GDP ratio and budget balance have improved over the last
five years, budgetary pressures this year will not leave
Fassi much room to maneuver. Increased subsidies for basic
commodities and fuel, as well as abolition of duties for
wheat, milk and other products will worsen this year's budget

7. (SBU) Trade Policy: Critics blame not just fiscal policy
for Moroccan industry's lack of competitiveness, however.
They cite shortcomings in Moroccan trade policy as well,
noting that while duties have come down on finished products
as a result of Morocco's numerous free trade agreements
(including with the U.S.), many inputs remain subject to high
protective tariffs. Thus Tazi, who operates in the furniture
sector as well as textiles, noted that his attempt to supply
Morocco's large furniture chains (Ikea imitators Mobilia and
Kitea) foundered when he found that the cost after duty of
imported composite material exceeded the price of finished
imported products. Producers in other sectors have had
similar experiences. Morocco continues to protect producers
of sugar, for instance, so that domestic candy and biscuit
makers have had difficulty competing with cheap imports from
Turkey and Tunisia. Only the recent rapid rise in
international commodity prices has started to cushion the
impact of this disadvantage.

8. (SBU) Trade Gap: The net result of these shortcomings has
been that while Moroccan exports have grown over the last
five years, their rate of growth is slowing, and the export
coverage ratio for imports continues to decline. This year
it fell below 50 percent for the first time. As IMF experts
told the government in this year's Article IV consultations,
action on competitiveness is essential to ensure that the
external sector emerges alongside domestic demand as a
"second growth engine."

9. (SBU) Judicial corruption: Beyond trade competitivity,
additional structural issues surround the troubled Moroccan
judiciary, which operates lethargically, and is widely
perceived to be riddled with corruption. Seasoned observers
of the Moroccan scene tell us that money plays a key role in
many decisions, though of course they are reluctant to cite
specifics. Our own experience with small and medium-sized

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American investors is that whether or not the process is
corrupt, it rarely comes to closure in a timely fashion, and
judgments are often not enforced. Instead, the losing party
files suit again-- either an appeal or a new case-- and puts
off the day of reckoning. One bankrupt American company that
experienced difficulties with a Moroccan partner is still in
court, years after it won a series of initial judgments.

10. (SBU) Agriculture: Another long neglected area is that of
agriculture, a sector that accounts for 15 to 20 percent of
GDP, but continues to employ 40 percent of the nation's
workforce. How to modernize and strengthen the sector in the
face of climatic changes is a key challenge that previous
governments have shied away from addressing. Moroccan
agriculture is overly specialized in grains (as a result of
government price supports), is generally composed of small
uneconomic production units (75 percent are less than 12
acres), and suffers from weaknesses including lack of
research and development, weak marketing infrastructure and
absence of market information. No Moroccan government has
yet been able to balance the conflicting goals of modernizing
the sector through economies of scale and capital investment
while also alleviating poverty and maintaining the social
structure of traditional rural society. (Note: A start will
be made in coming years through the new U.S.-Morocco MCC
Compact, however, as MCC will invest some 300 million USD to
modernize segments of the fruit tree sector, and encourage
farmers in marginal areas to move away from cereal crops.
End note.)

11. (SBU) Growing disparities: A final, and key, concern is
how equitably Morocco's recent success has been shared
through the economy. Income inequality appears to be growing
rapidly, though precise statistics are hard to come by.
Certainly, dramatic new wealth is evident in Morocco's major
metropolis, Casablanca, and is also apparent in the exploding
cost of real estate. The broad mass of the population has
not shared in these gains, however. Many civil servants and
other middle income workers find themselves priced out of
Morocco's cities, while worker incomes have stagnated, and
new employment, while impressive, has not kept pace with new
entrants to the labor force. The head of one respected think
tank told us he attributes much of the voter apathy that was
evident on September 7 to the public's belief that government
policy has brought it little benefit. The "working poor," he
argued, constitute 3/4's of Morocco's population and the
outgoing government's record was mixed on their key concerns
of employment, education and health. Recent riots over
rising prices for basic commodities (reftel), as well as the
palpable anger Emboffs found during regional election trips
in some economically disenfranchised parts of Morocco show
that the margin of social stability is narrow in some areas,
and that sharing the benefits of growth more widely must be a
high priority.

12. (SBU) Comment: The incoming Prime Minister appears to be
cognizant of this social deficit. His initial comments to
the media after he was entrusted with forming a new
government focused exclusively on social issues, a fact that
did not escape public comment here. Observers also found
significant King Mohammed VI's call for urgent action to
address shortcomings in the Moroccan educational and judicial
system in his July throne speech. A number of contacts
observe that this is the first time in their memory that a
Moroccan monarch had spotlighted these problems. Longer
range, some action is likely to mitigate the impact of
Morocco's fiscal regime, given the fact that most parties
supported such action in their electoral programs. Concern
about the impact on public finances will probably preclude a
dramatic cut in tax rates, however. Other priorities such as
agricultural reform, will likely continue to languish, given
the range of other pressing problems. In sum, Jettou has
left the Moroccan economy in solid shape, but it remains
fragile, and does not leave the incoming government an
opportunity to rest on the laurels of past successes. End

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