The IMF and Morocco: A 65-year-old story

Replacing the franc

When King Mohammed V established a central bank independent of France in 1958, he faced financial difficulties in covering the value of the new currency, the Dirham, which drew inspiration from Arab Islamic heritage.

France vehemently opposed Morocco's exit from the Franc zone, fearing a similar rebellion from its former colonies. But the King insisted on complete financial and monetary independence.

Consequently, the Moroccan government acquired French shares in the State Bank of Morocco's capital.

The State Bank of Morocco had been issuing the Franc currency since 1912, after its approval by the Algeciras Conference in Spain in 1906 and following the Kingdom of Morocco's failure to pay its French debts, incurred during the construction of the port of Casablanca.

The central bank, Bank Al Maghreb, was inaugurated in October 1959, issuing new banknotes under the name of the Moroccan Dirham. The banknotes were printed in Switzerland and bore the image of the King. The exchange rate was set at 1.20 French Francs.

Per Jacobsson, the Managing Director of the IMF at the time, played a vital role in providing Morocco with the financial cover they needed, which amounted to $25mn in Special Drawing Rights (SDRs).

Relations between France and the IMF underwent a period of strain and near rupture.

The director of the Paris office, Jean-Victor Malathic, was accused of expediting Morocco's exit from the Franc zone and facilitating support from Washington and the Board of Governors at Bretton Woods institutions.

Some accounts suggest that prominent Jewish figures in finance and business played a discreet role in helping Morocco consolidate its economic independence from France. This was seen as the return of a favour to King Mohammed V, who had refused to hand over Moroccan and Algerian Jews to the Vichy government, allied with the Nazis during the Second World War.

Since then, many countries' relations with the IMF and the Bretton Woods institutions have intensified. Several nations reach out to them during times of global crisis.

However, for historical reasons, Morocco has often received more favourable financial treatment than others in similar situations.

Structural adjustment programme

The Moroccan economy, like other Arab countries, expanded during the 1970s. It benefited from the rise in prices of phosphates, raw materials, minerals, and tourism in the aftermath of the war and the energy crisis of October 1973.

Public investments and foreign debt for infrastructure expanded, wages and consumption increased, and individual income doubled.

However, raw material prices collapsed in the global market amid an unprecedented financial crisis in the early 1980s, catching Morocco off guard.

The budget deficit rose to 15% of the Gross Domestic Product (GDP), inflation exceeded 10%, and the trade deficit was above 12% after the depletion of cash reserves and the fall of the currency's value.

Once again, the IMF's aid was needed.

But between 1983 and 1993, a strict Structural Adjustment Programme was imposed in exchange for financial facilities known as Special Drawing Rights accounts.

The annual budget preparation was controlled by "letters of intent".

Spending on education, health, social care, and employment went down. Unemployment rates, prices, taxes, school dropouts, and rural migration all increased.

Social unrest, including strikes and labour protests, also grew. This was in opposition to the introduction of privatisation programmes, and the selling of parts of the public sector to reduce the financial deficit.

In a previous interview with Al Majalla, Nicolas Blancher, former head of the IMF's Northwest Africa department, outlined the major flaws in placing financial goals and macroeconomic calculations ahead of human education and health.

The Cold War was ongoing between the Eastern and Western powers during this period. Morocco was listed as one of the 17 countries eligible for financial aid in exchange for implementing structural reforms and rescheduling foreign debt, which proved to be divisive.

Under President Ronald Reagan in Washington, Prime Minister Margaret Thatcher in London, and the unlimited liberal alliance, financial support was based on ideological reasons rather than economic ones.

Blancher told Al Majalla: "The generation working at Bretton Woods at the time came from a secluded school of thought that caused social problems in many Third World countries."

This dark phase in Morocco's economic and social history was dubbed the "time of cardiac arrest," as the late King Hassan II described it in one of his letters to the President of the World Bank, James Wolfensohn.

At the time, Morocco was experiencing violent social unrest (between 1981 and 1990), known as the Bread Riots, which affected all North African countries from Algeria to Egypt, passing through Tunisia.

The IMF was in charge of implementing structural adjustment programmes in these countries.

The Arab Spring

The economy improved between 1968 and 2011, with per capita income rising from $220 to $3,000. The average life expectancy increased from 48 years in 1960 to 75 in 2015.

However, the Arab Spring, which occurred after the global financial crisis in 2008, hindered the growth rates that were once considered among the best in the world. These rates were estimated to be 5% during the third millennium's first decade.

Morocco's budget suddenly dropped after the mortgage crisis and the domino effect of bankruptcies and American and European bank failures.

The fiscal deficit rose to 7.5% of the GDP, and the external balance deficit neared 10%. Financial challenges and the consequent social fallout began to mount as the Arab Spring's flames roared in Tunisia, Egypt, Libya, Syria and Yemen.

Anyone whose house didn't burn – so to speak – was hit by neighbouring smoke.

In the summer of 2011, the IMF proposed a Precautionary and Liquidity Line (PLL) with a cap of $14bn, for a renewable period of two years, to address external risks and uncertainties in international markets.

Bretton Woods launched this initiative in Washington, DC, after the Kingdom adopted a new constitution with major reforms in governance, human rights, and social justice.

The IMF announced its support for Morocco, banking on its success and eventual expansion across the region once nearby fires died down.

Morocco was no longer just a "client" of the IMF. It became a leader in an experiment and a geostrategic bet in the entirety of the MENA region. The aim was to spread political stability, attract more foreign investments, integrate into the international economy, and benefit from global trade.

The IMF considered Morocco's success in the automotive industry and producing aircraft components unique to the Arab and African world. It was seen as an advantage of the country being open to foreign investment and globalisation.

Also, Morocco did not hesitate to replace any of their outdated ways with new ones. It implemented fresh ideas it had picked up on over time, whether from the experiences of others or its learnings.

Not only that, but an expert revealed that the IMF itself drew inspiration from Morocco's thoughts on sustainable development, infrastructure, and anticipatory economics.

The IMF subsequently used these ideas as recommendations for economic development in other countries.

Over time, Morocco decreased its dependence on the IMF by reducing its use of special drawing rights and focusing on developing self-sufficiency.

Despite the IMF's interest in involving Morocco in developing other regions, especially in sub-Saharan Africa, the country's economic resilience has enabled it to rely on its own resources and local expertise.

During the COVID-19 pandemic, the World Bank criticised developed countries for their selfishness and greed in distributing vaccines.

This provided a window for Morocco to establish pharmaceutical industrial units that would produce medicine and vaccines to meet the needs of the African continent that had been deprived of them during the pandemic, which the World Bank supported.

Another crisis

Nine years after the Arab Spring hit, COVID-19 struck.

Economic growth in Morocco tapered by an unprecedented 7%, the budget deficit reached 8%, and the external balance deteriorated again due to a rise in trade deficit and a decline in tourism revenue worldwide.

Morocco turned to a $3bn precautionary credit line from the IMF to deal with border closures and travel suspension. However, it managed only to use $2bn of these funds.

Things began to look up in 2021. After utilising $13bn in local funds to stimulate the economy and job market, the country witnessed an 8% growth.

Another crisis, however, arrived the following year – a lack of rainfall, a decline in agricultural production, and an increase in global prices.

This forced Morocco to request a $5bn Flexible Credit Line (FCL), which would help it mitigate the repercussions of the Russian war on Ukraine and the supply chain crisis. By then, Morocco had been removed from the grey list of the Financial Action Task Force (FATF), which qualified it to receive support.

However, the cost of economic liberalisation, especially when it came to fuel, had a negative impact on prices and inflation. It had a notable impact on the middle class, who were also suffering from high bank interest rates, as the IMF had tied all financial support to economic liberalisation and market expansion.

IMF recommendations

Currently, the IMF is urging Rabat to increase the scope of liberalisation of the Dirham exchange rate. However, the central bank is of the view that the current global scenario is not conducive to further floating, after reaching 10% in two stages.

The Governor of the central bank, Abdullatif Jouahri, told Al Majalla that the Kingdom is not receptive to pressure, or coercion attempts, when it comes to freedom of exchange.

"We await suitable opportunities to expand the margin as the international situation improves. We have enough reserves to cover seven months of imports," he said.

"The float could take an average of 15 to 20 years. We are not in a hurry, and we have a plan and (have made) a decision on the pace of its implementation. We are now moving towards issuing a digital currency that can be adopted in all commercial and banking transactions."

The Dirham has undergone several changes over the years. In 1959, it was decoupled from the French franc. Later in 1973, its value was determined with respect to the European Common Market countries after a surge in its value. Since 1990, a basket of reference currencies has been used to determine the value of Dirham in banking transactions.

The current basket was adopted in 2015; it is 60% weighted to the euro and 40% to the dollar.

Sources from the Ministry of Finance and Economy believe that 85 countries in the world have adopted a flexible exchange rate system, most of which are free-market economies and developed countries.

Meanwhile, 65 countries adhere to a fixed exchange rate system.

Therefore, Morocco chose a flexible exchange rate system by virtue of its geographical location, its integration into the global economy, its membership in the World Trade Organisation, and its free trade agreements with 56 countries.

As for the IMF, it recommends that Morocco welcome foreign investment in areas like renewable energy and advanced industries.

It should also focus on adopting new technologies, improving the business climate, digitising administrative processes, and updating outdated laws. These measures will help modernise the economy and inject it with vitality, while also improving its overall balance sheet and reducing debt to less than 60% of the GDP.

In addition, addressing direct support to targeted groups and phasing out price subsidies will be one of Morocco's biggest hurdles in addressing poverty and vulnerability.

On the other hand, Morocco needs to combat corruption and continue education and healthcare reform. It will have to address the job market, reduce youth and female unemployment and reduce social inequalities.

It should look to enhance the state's involvement in developing the private sector's role in total investment by facilitating financing mechanisms.

Finally, it will need to support youth projects, individual initiatives, and startup companies.

A pioneering exeperience

Morocco has undoubtedly benefited from more than 65 years of having the IMF at its side, along with the World Bank.

Its total GDP was estimated at $2bn in 1960 and reached around $140bn in 2022, a growth that took place over the course of two and a half generations.

When calculating profits and losses, it becomes clear that Rabat has gained a lot from the IMF's support and advice over the decades. Indeed, the partnership resulted in positives for both parties, which they will present together in Marrakech in a variety of languages...

"Look at what Morocco has achieved in cooperation with us," the IMF may proclaim. A pinch of exaggeration and a lot of truth.