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R 271431Z SEP 07
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UNCLAS SECTION 01 OF 04 RABAT 001541 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT PASS USTR FOR BURKHEAD 
USDOC FOR ITA/MAC/ONE ROTH 
TREASURY FOR OASIA 
USDA FOR OCRA CATHY MCKINNELL 
 
E.O. 12958: N/A 
TAGS: ECON EINV ETRD EFIN EAGR MO
SUBJECT: ECONOMIC CHALLENGES FACING MOROCCO'S NEW GOVERNMENT 
 
REF: A. RABAT 1525 
 
     ¶B. RABAT 1223 
 
Sensitive but unclassified - entire text.  Please handle 
accordingly. 
 
¶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. 
 
¶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 
exports. 
 
¶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 
 
RABAT 00001541  002 OF 004 
 
 
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 
balance. 
 
¶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 
 
RABAT 00001541  003 OF 004 
 
 
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 
Comment. 
 
 
 
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RABAT 00001541  004 OF 004 
 
 
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