**Polizy, Research, and External Affairs**

;I IU3s **_-**

**Macroeconomic Adjustment and Growti**

WPS 631 'I'his papcr --- a product of' Itlc Macroeconomic Adjustment and (irowth Dlivision, Countr\ **ILconomn** ics Department -- is parn ol'a PRK research project, 'l'hc Macroeconomics ol lhc Public Sector- Delicit (RI") 675-31). Copies are available f'ree flrom tlhe World Biank, 1818 li Strect NW, Washington 1)DC (0113. Please contact Raquel l.u/, rootm N 1 1-057, cxtenisionl 34303 (39 pa-Cs).

Morocco's reccnt cconomic history rcsemlblcs those of'mansv At'rican countries. Morocco's economic dilf'iculties originated in the comiminodity (phosphate) boom of'tlic mid-1970s, which coincidcd with 1-isinig govenmeint spending and an unprecedented expatnsion of'public investment -- cndilg Morocco's earlier liscal conlservatisilm. A sudden revcrsal of the temis ol' trade in tie late 1970s -- a resull of'a plunge in phosphate prices and thc second oil shockprompted Mor. 'o to resort increasingly to external capital markets to maintain an unabated level of public spending.

But the continued deterioration ol' thc terms of trade and the unexpected rise in international interest rates, together with thc severe droughlt of' 1980-84, croded debt service capacity and precipitated a major forcign exchange crisis in 1983.

In response to this crisis, Morocco launchied a medium-term program of economic rceform and introduced comprehelisive stabilization and structural adjustment measures. Since 1983, Morocco has made great progress in alleviating - botn initernal and extcrnal disequilibria reducing the budget deficit from 9 percent of' GDP in 1982 to 4.5 percent in 1988, and the current account deficit from 12 percent of GDP to 0.4 percent in the same period.

Initerestingly, growth has remained Flairly high in Morocco, at least in relation to other highly indebted countries, and inflation subdued. Morocco's perfonrancc seems to contradict the perceived wisdom that large budget deficits will foster inflation. The inflation record is particularly surprising because Morocco achieved a 20 percent real depreciation in the 1980s.

Faini argues that ;Iage moderation an1d judicious monetary policies were instrumnental in restrainiig inflation. Wilih a brief exception in 1983, monetary autlhoNtics remained firmilv committed to avoiding inflationary financing of the budget delicit, But this sitrategy could succeed only becausc of the A ide-ranging system of credit and monetary rcoulationis thalt chiainncied domestic f'unids toward thc trcasIry' al relatively low cost. But the prospects for conltinuing such a stratcey are not f'avorable.

Grolth perforlimaince canl be attributed to an outstanidinlg export responise to thc new trade regimc anl(d to F1avorable supply shocks -- includinig a strinlg ol' record agricultural harvests and thc collapse of' real oil prices.

Morocco has made gr;eat pro-gress towvard macroeconomic and liscal stability but the autlio recommends:

* An unshaken commimntcii to Fiscal discipline. Increa,sed govermcint spending will probably crowd out investment, The shor-m--un **benclets on** output of suchl spendiiing may be outweighed by its long-runi negative impact on growth.

* A deteimined el'lfol to refborm thc tax and public expcnditure system, so ihe brunit of liscal adjustment wnill not again fall mostl) on public investment.

* Encouraging thc availability ol' credit, which significantily inilueinces the demand for investment.

* Studying thie imnpact ol' macrocconloilic equilibria, especially oi tihe government budget, to assess the best spee(I lfor finalncial liherali;ation.

Thc l'RE Working Ptaper Series dissvninates the findings or \kork under w\av in th. Bank's Po h.\, kewirk h and _E\toniia_ AffairsCompte\. An oh jictivc ofthl s'rics is lo ge tth.sac fmnhngs out e en i rpre. eorains a;. t. rtan thuicktv. ftlltv pot lie d The rindfinvs. intermretins. ncf:md conchiviions in rhese p.IVT'rs d(o not neee-(:riTV represent olh ial 11:ink p,th>

**f1r,.1** ut,\,, **I\s** tie I'Rft. **'lli !lI':.** ('t',:'