Taxation of Agricultural Sector in Morocco: a Analysis Using a Dynamic General Equilibrium

TAXATION OF AGRICULTURAL SECTOR IN MOROCCO: A ANALYSIS USING A DYNAMIC GENERAL EQUILIBRIUM

Mohamed KARIM AND Adil EL IBRAHIMI

University of Mohammed V-Souissi, Morroco.

ABSTRACT. The agricultural sector has always been the subject of a great attention from officials in Morocco as it is a sector that maintains exchange relations with the other sectors and a production sector of the most important Fast-moving consumer goods in the rural and urban areas. ¶Indeed, agriculture accounts for 15 to 20% of the GDP and 44% of total employment. ¶If one adds food processing, its contribution to the GDP and employment passes respectively to 20 and 50%.¶

However, Moroccan agriculture suffers from low productivity, low yields and high logistics costs, in particular in transport, lack of integration between production and market, insufficient development of post-harvest systems, high costs of production, high risks, low coordination within chains, inadequate post-harvest technologies, lack of quality assurance system and limited expertise in the processing of the agricultural products.¶

For these reasons, agriculture has benefited from huge tax exemptions extended until the end of 2013. The exemption of the sector is supposed to promote, attract and develop private investments in this sector. Effectively¶Effec, for the past two years, the agricultural sector was the second sector, after the property, having benefited from tax derogations, which represents about 13,4% of total measures identified in 2011.¶

¶However, it is admitted that these tax advantages are a source of distortions and inefficient allocation of investments and resources towards this sector. The optimal tax theory provides, for this purpose, lessons that are useful for our empirical study.¶

¶Today, and besides the question concerning the place of the Moroccan agriculture in the economy which led to the design and implementation of the Green Morocco Plan (PMV), it should be noted that the question of its taxation was not as much in the central concerns as evidenced by the Royal orientations to establish an appropriate system to the agricultural sector in 2014 by taking into consideration the social security of the small-holder farmers.¶

To answer these questions we construct a Dynamic Multi-sectoral Computable General Equilibrium Model in order to quantify the impact of the taxation of the agricultural sector on the economy and on the distribution of income. ¶This tool is more preferable than macro-econometric or partial equilibrium economic tools. The model used is a static multi-sector general equilibrium model. It registered voter in the line of the models built by Shoven and Whalley (1970) like Decaluwé and Al (2001). Three agents, namely explicitly there the consumers, the producers and the public authorities, are introduced. However, to take into account the foreign trade and more

generally the degree of opening of the Moroccan economy, we add a fourth agent to it: the rest of the world.

Via an unconditional sensitivity analysis, we wish to check that the variability of the model as a whole is not too important in the event of simultaneous modification of all the parameters. To do this, the Gaussian quadrature method is implemented as developed by Arndt (1996), De Vuyst and Preckel (1997) and Piet (2002). From the methodological point of view, an unconditional sensitivity analysis allows to give evidence of the robustness of the results.

JEL Classification: ¶H21 ; Q18 ; D58.

¶Keywords: Optimal taxation; Agricultural sector; Computable General Equilibrium Model. ¶

Introduction ¶

The agricultural sector has always been the object of a great attention from officials in Morocco, and this for a number of reasons. First¶FitsF, agriculture is an important sector due to its size and its relations with the rest of the economy with the food industry sector and catering and hotels. ¶Indeed, agriculture accounts for 15 to 20% of the GDP and 44% of total employment. ¶If one adds food processing, its contribution to the GDP and employment passes respectively to 20 and 50%. As a result¶As a result, the performances or under-performances of the sector are crucial for the country’s economic growth. Second¶SecondSe, agriculture is the livelihood of the majority of rural poor populations and the production sector of the most important Fast-moving consumer goods in the rural and urban areas. ¶The effects of food prices on the cost of living in rural and urban areas and, especially for the majority of the population whose income is near or below the average income are certain. ¶Indeed, agriculture continues, in rural area where it is the only source of employment and income for 80% of the labor force, to have an important place. Finally¶Finaly, it is also a potential source of tradable goods in the economy.¶

¶In the spirit of its development, several tax advantages were granted to the agricultural sector. ¶Agriculture still profits until the end of 2013 from a system of tax exemption which aim to promote, attract and develop the private financial interventions in the sector in the form of investments. ¶For the past two years, for example, the agricultural and fishing sector was the second sector, after the property, having benefited from tax derogations in 2011. ¶It represents about13.4% of total measures identified in this exercise.

¶¶It should be noted that the primary role of taxation is undoubtedly to generate, in the most neutral way and with the least possible distortions, revenue required for the government budget. ¶However, as discussed in section 2, the taxation cannot fulfill its budgetary role only if, at the same time it does not plan to set other objectives, often contradictory. ¶The proliferation of exemptions and derogatory regimes observed these last years in Morocco goes against these principles. ¶With the result that taxation must first seek for economic efficiency. ¶The tax advantages can be a source of distortions and inefficient allocation of investments and resources. In addition¶In II, exemptions create a shortfall in the State’s budget.¶

¶Today, and besides the question concerning the place of the Moroccan agriculture in the economy which led to the design and implementation of the Green Morocco Plan (PMV), it should be noted that the question of its taxation was not as much in the central concerns ¶of the King and the government and the public opinion.¶

¶The two Speeches of the King have traced the roadmap for the establishment of an appropriate tax regime for the agricultural sector. ¶The sovereign in his address to the presidents of the Chambers of Commerce, the public institutions, and other economic operators, dated September 26, 2000 to specify "We have given Our instructions to Our government to develop a tax reform based on the transparency, simplification and rationality ". ¶Moreover, the Royal Speech given on the occasion of the 55th anniversary of the Revolution of the King and the People in 2008 specified that "…In this perspective, we are determined to establish a tax system in agriculture, based on the principles of tax justice and social solidarity, as well as, the need to preserve the competitiveness of the agricultural activities. ¶All this must be within the framework of the overall coherence of the national tax system… The proposed new tax regime should be adopted and implemented from the Finance Act 2014. ¶In addition, the new tax regime adapted to the agricultural world should take into consideration the social security of the small-holder farmers, and reflect the duty of solidarity towards them, by continuing to subsidize traditional subsistence crops in low- yield.¶"¶

¶To clarify the extent of this reform project, several analytical questions can be asked. ¶It is possible to remove all the tax exemptions enjoyed by the agricultural sector and when and how? ¶Should we not introduce a VAT into the sector because the farmers and ranchers already bear a VAT on the inputs they use for their productions and from which taxable turnover? ¶It is appropriate to raise the tax exemption of agricultural income and what impact will have this measure on the farmers' income and what impact will it have on the small ones among them? ¶It will not be judicious to submit to the corporation tax, the agricultural profits generated by agricultural companies operating essentially in irrigated agriculture? ¶What are the implications of these measures on the allocation of productive resources and social well being, including small farmers who represent 90% of the sector, the middle and the rich ones? ¶What are the repercussions of these measures on the government budget? Should¶should still maintain the tax exemption for a few years more for the small farmers only?¶

In addition¶In , anticipate challenges to better guide our choices of development of the agricultural sector in the short and medium term, understand the political assumptions, economic and technical of the prospective global data, propose some strategic insights on the tax policy appropriate for the sector, that what should be our area of investigation.¶

¶This paper is organized as follows: ¶the second section will present the main nodes of development in the agricultural sector. ¶The third is devoted to budgetary provisions, tax and custom regulations affecting the sector. ¶The fourth examines the analytical framework of optimal taxation of goods and incomes. ¶The fifth will discuss the matrix of social accounting (SAM) built for this model, whose structure is also discussed. ¶The use of this model and the simulations results will be examined in the sixth section while the last section summarizes the results of different scenarios and outline the implications in term of fiscal and economic options.¶

Nodes of development in the agricultural sector ¶

In the early 80s, Morocco has embarked on the path of structural adjustment, trade liberalization and policy reforms. ¶Managed economy was gradually abandoned. ¶During the 90s and beyond, these reforms have affected the industrial sector first. ¶As in other countries in the world, the agricultural sector was the most difficult sector to make progress.¶

The examination of the sector show that one of the most difficult problems plaguing the Moroccan agriculture is the low value added generated at its branches in spite of the tax exemptions that the sector enjoys.¶

2.1. ¶Problems of agricultural activities in production

The weakness of the agricultural productivity is the real sickness of Moroccan agriculture. ¶Between 1993 and 2002, the productivity of the grounds in Morocco was equivalent to 11% of that of South Korea, 12% of that of Egypt, 23% of that of Chile and 26% of that of Turkey and 50% of that of Tunisia (World Bank, 2007). ¶And the cause is that less than 1% of wheat producers use intensive agronomic practices. ¶Indeed, the farmers use only 50 kg of fertilizer per hectare, a low level according to international standards. ¶According to a study by the World Bank 2007, 80% of the wheat producers do not employ any plant protection product. In the view¶In of the farmers the use of few inputs minimizes the risks in case of drought without liaison with output that could only be minimal. ¶The use of inputs is also the consequence of the limited access of producers to financings and technical information. ¶The pricing policies incite the farmers to plant cereals in marginal areas where they get limited outputs and where the wheat culture aggravates soil erosion. In addition to low yields and high logistics costs, including transport especially to the EU markets, and undermine the competitiveness of the exporters of horticultural products. ¶Spanish strawberries exporters pay less than 2800 Euros to transport a truck of 22 pallets to the United Kingdom, while it costs between 4 500 and 6000 Euros to Moroccan exporters. ¶Morocco is far from Spain of about 15 km, but nearly half of carriage cost of goods on 600 or 700 km in Spain is due to the crossing of the Straits of Gibraltar[1]. ¶For most Moroccan exporters of horticultural products, the high cost of transport cancels the advantages offered by low-costs labor[2]. Add to this, lack of integration between production and market, insufficient development of post-harvest systems, high costs of production, high risks, low coordination within chains, inadequate post-harvest technologies, lack of quality assurance system, and limited expertise in the processing of the agricultural products.¶

2.2. Main cross-cutting issues

Four other cross-cutting issues affect the sector as a whole and which are:¶ (i) the incompleteness of market liberalization and domestic prices and incentive measures which continue to distort the system, (ii) the situation of land insecurity which penalizes the investments in the sector and should attract the attention of the public authorities and, (iii) the poor management of irrigation water in order to increase the productivity of the factors of production and to reduce the country’s dependence vis-à-vis climate hazards. ¶Progress has been made in terms of prices and institutional reforms, but some critical issues still not resolved.¶

¶First, in the mid-90s, Morocco had undertaken measures to support the emergence of a market economy for agricultural products. ¶The privatization of food industries for goods of equipment and agricultural products, the creation of a rural banking system, and the installation of the institutional structure and public administration device required for a private type of agricultural economics constitutes the highlights of this liberalization.¶

¶However, the actual measures taken since 1996 were diverse. ¶SStrategic commodities such as cereals, sugar and the oilseeds were the most difficult to fully deregulate with minimal price distortions, while the fruits and vegetables export-oriented passed to a system of incentives and undistorted markets, with open trade policy.¶

2.3. ¶Consequences of law agricultural value-added ¶

Three immediate consequences can be formulated starting from the report of the weakness of the value added: ¶a lack of diversification of the production, little incentive for private investment in and a bad quality/price ratio for the consumer. Obviously Moroccan agriculture is also penalized by other cross-cutting issues. ¶Without claiming completeness we include mainly: Incomplete liberalization of domestic prices and markets in particular for wheat and sugar, barriers erected against foreign trade, the lack of security of tenure, and the institutional framework which does not favor its recovery by private operators.¶

We should note that the constraints associated with the low creation of the added value are not due, only to a specific actors and activities concerned by the production line, marketing, or transformation, but also to other cross-cutting issues. ¶The values added created at the sub-level sector of cereals, animal husbandry, orbicular or of the industrial cultures are generated by various actors exerting various activities. I¶Increasing this value must pass, in our view, by a differentiation of these products and an adaptation of a domestic and foreign consumers demand which must be inelastic at any price increases of these products.¶

In addition, regarding the close link between the agricultural activity and poverty, the stagnation of the agricultural economics weighed heavily on the poor’s incomes of the poor in spite of a relatively strong growth of the production of fruits, vegetables, and livestock products, while satisfying more than the half of its cereal requirements. ¶The magnitude of this problem is appreciated and its predominantly rural character is recognized as long as the poor represent more than a quarter of the total population, and that two thirds live in rural areas.¶

2.4. ¶Problems of the agricultural activities on exportation ¶

Moroccan exports of agricultural products with the EU, which remains the principal partner of Morocco, includes at least 15 vegetables and fruits which are exported: tomatoes, cucumbers, artichokes, zucchinis, oranges, mandarins, clementines, lemons, apples, pears, grapes, apricots, cherries, peaches and plums. ¶It should be noted that Moroccan exports to the UE haven’t a free access to the European markets. Contigentement are imposed and take the form of either a quotas system, fixation of a minimum price for importation or, determination of the periods of importation and eliminate much of the direct competition with the EU production. We clarify also that import quotas and minimum import prices can be modified according to the period of importation. ¶The periods of importation oblige Morocco to produce and export during an identified niche markets.¶

¶Even the tomato, which is highly exported to the EU, is experiencing barriers at export. ¶An annual quota of 220 000 tons in 2006-2007 is allocated each month, a margin report is envisaged if the quota is not fully achieved in a given month. ¶In practice, Morocco exceeds sometimes the limit, and provided approximately 80% of imports of tomatoes of the UE coming from non-members country. ¶The majority of tomatoes are cultivated in greenhouses in the southern Morocco.¶