Zawya/Middle East Banker, by Amor Tahari (June 12, 2013) — In an exclusive report for BME, Amor Tahari, International Consultant and Former Deputy Director at the IMF, states that for economic development and job creation, financial deepening and integration within the Maghreb Block are essential
Key challenges for Maghreb countries and role of the financial sector
Two years after the “Arab Spring”, the Maghreb region – Algeria, Libya, Mauritania, Morocco and Tunisia – is still facing major challenges of achieving higher and more inclusive growth and creating jobs, especially for an increasing number of educated youth. With a total population of close to 100 million and a per capita income averaging less than $4000, the growth and employment generation performances have been modest in the Maghreb region in recent years compared to other emerging market economies. Annual real GDP growth before the onset of the “Arab Spring” averaged three per cent in the Maghreb, or little over half of what was achieved by emerging market economies (Table 1). Official unemployment data show a very high youth unemployment rate in the Maghreb, exceeding 30 per cent in Tunisia (Chart 1).
Achieving higher and more inclusive growth in the Maghreb region is thus required to bring down the high unemployment rate, especially among the youth, and to raise living standards. To that end, the Maghreb countries have to accelerate their economic reforms in various areas, in particular with regard to their financial sectors.
As the experience of other emerging market economies has shown, a healthy and dynamic financial sector is essential to achieving high and sustainable economic growth. Financial intermediaries promote investment and productivity growth by efficiently allocating resources over space and time, facilitating the exchange of goods and services, mobilizing savings, lowering the cost of financing, and facilitating the management of risk. Financial integration within the Maghreb countries will also help deepen financial markets, increase their efficiency, and enhance the resilience of their economies to shocks. It can also play a catalyst role for the regional and global financial integration of the Maghreb countries.
Characteristics of the financial systems in the Maghreb
Although the financial systems in the Maghreb region differ from one country to another and they are at different stages of development, with perhaps Morocco the most advanced and diversified financial system, all the countries in the region still need to further modernize, deepen, and regionally and globally integrate their financial markets.
The main characteristics of the financial systems in the Maghreb region include the following: bank dominance and heavy public sector presence in most countries; limited financial sector openness in some countries; bank soundness exhibiting significant cross-country variations; public banks burdened with inefficiencies and a high level of nonperforming loans (NPLs) in certain countries; still embryonic fixed income and equity markets, with the exception of Morocco and possibly Tunisia; nascent institutional investor industry and generally underdeveloped microfinance; shortcomings in the legal, regulatory and supervisory frameworks despite tangible progress in some countries; and payment systems in the process of being modernized but still largely cash-based in most countries.
Two key indicators provide some light on the degree of financial development and soundness of the financial sectors in the Maghreb region as shown in Table 2: the liquidity (M2/GDP) ratio is relatively low in most countries and exceeds 100 per cent only in Morocco and the NPLs ratio is very high, in four out of the five Maghreb countries.
All five Maghreb countries are well aware of the importance of modernizing their financial sectors and have been implementing reforms for some time, with encouraging results in some of them. Despite some progress and a number of successful reforms in some Maghreb countries – many of which ought to be implemented in the other countries of the region – several problems remain and need to be addressed.
First, there is a need to strengthen the soundness of the banking systems in most of the five countries. In particular it is important that the high level of NPLs be reduced, non-performing state-owned banks restructured or privatized where needed, and compliance with prudential rules secured in line with international standards.
Second, it is urgent to increase competition and openness in the banking system in most countries. Notably, extensive state ownership and restrictions on foreign bank entry in most of the countries stifle competition and financial deepening in the region. State banks saddled with high NPLs are also a burden on national budgets. It is thus encouraging that Tunisia has recently decided to carry out audits of public banks with the view of taking the necessary actions to improve their performance.
Third, there is a need to deepen the financial market in all the countries. The Maghreb financial systems are bank-dominated. Financial markets – money, interbank, foreign exchange, equity and securities markets – are at an infant stage or shallow in most countries, and non-bank financial institutions are generally underdeveloped.
Fourth, strengthening financial sector oversight is also critical. Despite reforms undertaken in recent years, prudential controls remain only partly effective in most Maghreb countries. The overall weakness of financial sector supervision is reflected in a low degree of observance of relevant international standards and codes, in some countries. Countries should also strive at implementing the Basel III rules as Morocco plans to do in the near future.
Fifth, there is also a need to upgrade financial sector infrastructure in most countries. In particular, accounting and auditing practices, transparency and governance, the legal and judicial frame-work, and the payment systems need to be strengthened.
Sixth, all Maghreb countries should double their efforts to improve access to financing and make it available to a larger part of the population and investors paying careful attention to reducing regional disparities.
Finally, Islamic finance has a significant potential in the region and should be promoted, but special attention should be paid to ensuring that prudential norms are respected.
Regional financial integration
So far, only limited actions and progress has been achieved within the Maghreb region toward financial integration. A 1991 agreement among the five central banks on payment systems has not been implemented by all the countries, although few bilateral agreements between central banks have been reached. More recently, a long-awaited decision was taken to start a Maghreb investment bank. The recent interest in reinvigorating regional cooperation is therefore very welcome and would benefit all the countries.
While there is no blueprint on how best to achieve regional integration, useful lessons can still be learned from other experiences, particularly that of the European Union (EU) and Gulf Cooperation Council (GCC) countries. These lessons would include: adopting a gradual approach; consolidating macroeconomic stability in all the countries; strengthening financial markets; harmonizing rules and regulations; improving regional coordination; and lifting restrictions on cross border flows of goods and services.
Among the key steps that need to be taken toward financial integration are the following: implementing the necessary reforms in each country, harmonizing regulatory and supervisory frameworks, harmonization of financial contracts and standardization of financial information would help financial deepening and financial integration, harmonizing payment systems, facilitating trade financing, and proceeding with the establishment of the Maghreb Bank for Investment and Foreign Trade (BMICE). The BMICE could serve as a catalyst to financial integration and promote trade and investment within the region.
In 2006 a high-level regional Maghreb conference held in Rabat focused on financial reforms and integration and adopted an action plan to promote regional integration along the above mentioned lines. However, so far only limited progress has been made. It is thus urgent for the Maghreb countries to revive, update and implement this action plan, which remains valid.
In conclusion, following the “Arab Spring”, the Maghreb region, like other parts of the Middle East and North Africa, still faces a daunting challenge: how to create enough jobs so as to reduce substantially the high unemployment rate, especially among the youth. Meeting this challenge will require achieving a significantly higher and more inclusive economic growth. To this end, the region will need to accelerate reforms that will bring about considerably higher productive investment. The reforms must include further financial development and deepening, as well as regional integration within the Maghreb Block.