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Morocco: Staff Report for the 2005 Article IV Consultation

Author(s):
International Monetary Fund
Published Date:
November 2005
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I. Background

1. Morocco’s political situation remains stable. The current coalition government took power after the September 2002 parliamentary elections and the next parliamentary elections are scheduled for September 2007. The authorities believe that poverty, unemployment, and social exclusion are the root causes of Islamic extremism, which is a major political concern. Achieving social development is therefore at the top of the government’s agenda. To this end, the authorities are putting more emphasis on access to education, health care, housing, and basic infrastructure, and on rural development. New family and labor codes were recently passed reflecting their commitment to promote social cohesion and stability.

2. As noted in previous staff reports,1 Morocco has achieved macroeconomic stability since the early 1990s, but growth has been volatile and insufficient to reduce significantly unemployment and poverty. Real growth averaged 3 percent over the last decade, and urban unemployment was 18 percent in 2004. Poverty,2 which is particularly pervasive in rural areas, is estimated at 15 percent of the population, and the economically vulnerable reaches 40 percent. Overall real GDP growth has been volatile because cereal production, which accounts for a large share of Moroccan agriculture, is highly sensitive to droughts. Growth improved during 2001–04 because agriculture benefited from good weather conditions, while nonagricultural output growth accelerated (Table 1).3

Table 1.Morocco: Selected Economic and Financial Indicators, 2000–05Quota: SDR 588.20 millionPopulation: 29.8 millionPer capita income: US$ 1,677 (2004)
200020012002200320042005
Prel.Proj.
(Annual percentage change; unless otherwise indicated)
Production and income
Nominal GDP2.58.23.85.55.82.8
Real GDP1.06.33.25.54.21.0
Real nonagricultural GDP3.63.62.83.54.74.0
GDP deflator1.51.80.6-0.11.51.8
Consumer price index (CPI), average1.90.62.81.21.52.0
(In billions of U.S. dollars; unless otherwise indicated)
External sector
Exports of goods, f.o.b.7.47.17.88.89.710.2
Exports of goods, f.o.b. (percent change)-1.2-3.79.811.811.24.6
Imports of goods, f.o.b.10.710.210.913.116.218.7
Imports of goods, f.o.b. (percent change)7.0-4.67.220.123.915.2
Oil imports f.o.b.1.41.31.21.01.62.2
Net services and income0.31.11.21.82.73.0
Net transfers2.53.63.34.14.95.1
Current account (in percent of GDP)-1.44.84.13.62.2-0.9
Overall balance (deficit -)-0.43.80.61.61.80.2
(In percent of GDP)
Central government
Revenue, excluding grants and privatization26.225.024.724.525.126.4
Total expenditure (including Fonds Hassan II)32.431.129.930.330.932.4
Overall balance 1/-6.4-5.7-4.7-5.3-4.9-5.5
Privatization and GSM receipts0.06.10.22.92.32.6
Overall balance, incl. privatization 1/-6.40.4-4.5-2.5-2.6-2.9
(Annual percentage change; unless otherwise indicated)
Money and credit
Broad money8.414.26.38.67.55.8
Interest rate (Avg, money market rate, in percent)5.44.43.03.22.4
Official reserves
Gross official reserves (in billions of US$, end-period)4.88.410.113.916.316.0
In months of imports of goods and services4.68.29.110.410.08.6
Debt (short, medium and long term)
Total external debt (in billions of US$)18.015.915.716.816.616.0
Total external debt (in percent of GDP)55.047.840.935.130.830.2
Domestic government debt (in percent of GDP) 2/47.345.848.150.149.955.2
Total government debt (in percent of GDP) 2/81.574.771.468.565.869.9
Memorandum items:
GDP at current prices (in billions of DH)354.2383.2397.8419.5443.7456.0
GDP at current prices (in billions of US$)33.333.936.143.850.0
Exchange rate: dirham/US$ (average period)10.6311.3011.029.578.87
Real effective exchange rate (appreciation +)2.84.1-0.3-1.3-0.6
Terms of trade (deterioration -)-7.77.6-7.35.7-10.8-3.1
Excluding oil-2.47.9-8.68.5-10.3-0.5
Unemployment rate (in percent)13.712.812.511.410.8
Urban21.520.318.019.318.4
Rural5.24.26.23.43.1
Sources: Data provided by the Moroccan authorities; and Fund staff projections.

3. The balance of payments remains strong despite low export growth. After rising steadily between 1993 and 2001, export growth slowed since 2001 even though the dirham was devalued by 5 percent in 2001 (Figure 1). However, because of a surge in workers’ remittances and tourism receipts, the current account deficit turned into a surplus and national savings increased significantly. Balances on services, income, and transfers more than covered the trade deficit. The overall balance of payments remained in surplus, and international reserves increased to about 10 months of imports. As a result, Morocco’s foreign currency debt rating, although below investment grade, saw its outlook upgraded from stable to positive and secondary market spreads declined significantly (Figure 2).

Figure 1.Morocco: Nominal and Real Effective Exchange Rates, 1995–2005

(1990=100)

Source: Internaional Monetary Fund, Information Notice System.

Figure 2.Morocco: Emerging Markets Bond Index Spread (EMBI), 1998–2005

(Basis points)

Source: JP Morgan (EMBI).

4. In an attempt to spur growth in the late 1990s, the authorities ran an expansionary fiscal policy with increases in wage expenditures and tax and import tariff exemptions, which eventually triggered more wage increases and exemption demands. The fiscal deficits (including Fond Hassan II expenditures and excluding privatization receipts) increased from an annual average of 3.6 percent of GDP in 1996–99 to 5.5 percent in 2000–04, putting the fiscal position on a potentially unsustainable path.4 However, the debt-to-GDP ratio declined by about 15 percentage points during 2000–04 mainly because privatization receipts helped finance fiscal deficits and the authorities reduced debt through debt/equity swaps. In the absence of these operations, the debt-to-GDP ratio would have increased by about 6 percentage points.

5. In recent years, the authorities have taken measures in line with Fund policy recommendations (see Box 1 for details). Although progress has been slow in some areas, the authorities accelerated their reform agenda starting from 2002.

II. Recent Developments and Short-Term Outlook

6. In 2004, macroeconomic and financial conditions remained stable and nonagricultural GDP growth picked up. While overall GDP growth slowed down to 4.2 percent on account of a decline in growth in the primary sector, nonagricultural GDP growth picked up because of a dynamic tertiary sector and a recovery in mining and energy. On the external side, the trade deficit widened with the decline in agricultural exports due to supply constraints, the stagnation in textiles exports, and the increase in the petroleum import bill (Table 2). Nevertheless, the current account remained in surplus reflecting strong tourism and remittance inflows. With increased foreign direct investment and privatization receipts, gross official reserves increased further. The balance of payments surplus in the context of the pegged exchange rate continued to result in abundant liquidity in the banking system and led to a decline in interbank interest rates. The central bank allowed interest rates to decline given the very low inflation rate and moderate domestic demand.

Table 2.Morocco: Balance of Payments, 2001–05(In millions of U.S. dollars; unless otherwise indicated)
Est.Proj.
20012002200320042005
Current account1,6111,4771,5911,109-455
Trade balance-3,022-3,061-4,334-6,489-8,505
Exports, f.o.b.7,1427,8398,7629,73910,191
Agriculture1,4771,6481,8251,5321,633
Phosphates and derived products1,1711,1601,2411,6251,819
Imports, f.o.b.-10,164-10,900-13,095-16,228-18,696
Petroleum1,2821,1679631,6392,157
Capital goods2,0422,3783,1313,8814,189
Food products1,3631,3741,1941,5342,461
Services1,9101,9462,6173,3883,724
Tourism receipts2,5832,6463,2253,9204,267
Income-832-738-790-651-740
Transfers3,5553,3304,0984,8615,066
Private transfers (net)3,5353,2234,0174,7294,957
Workers’ remittances3,2612,8773,6124,2184,459
Official grants (net)2010781132109
Capital account9184-10-8-6
Financial account2,011-644374982680
Direct investment 1/2,7274522,3028221,316
Privatization2,06801,47101,442
Portfolio investment 2/-7-885299
Other-709-1,089-1,936-370-645
private 3/370205-798781-220
Public medium- and long-term loans (net)-1,079-1,294-1,139-1,151-425
Disbursements6286611,4099251,338
Amortization-1,707-1,956-2,548-2,076-1,763
Reserve asset accumulation (-increase)-3,848-638-1,643-1,835-220
Errors and omissions131-297-341-2680
Memorandum items:
Exports of goods’ volume (percentage change)5.711.1-6.95.72.1
Imports of goods’ volume (percentage change)11.61.05.95.79.2
Trade balance (in percent of GDP)-8.9-8.5-9.9-13.0-16.0
Current account balance (in percent of GDP)4.84.13.62.2-0.9
Excluding official grants (in percent of GDP)4.73.83.42.0-1.1
Terms of trade (percentage change)7.6-7.35.7-10.8-3.1
Excluding oil7.9-8.68.5-10.3-0.5
Impact of US$1 increase in oil prices (US$, mlns)52.746.833.343.445.5
Gross official reserves 4/8,43110,10713,85816,34616,021
(In months of imports of goods and nonfactor services)8.29.110.410.08.6
Debt service as percentage of export of goods, nonfactor services and MRE 5/16.316.418.012.810.6
External public and publicly guaranteed14.113.914.414.013.6
In percent of GDP42.236.330.126.025.7
DHs per US$, period average11.3011.029.578.87
DHs per US$, period end11.5110.388.758.22
Oil price (US$/barrel)24.325.028.937.847.4
Sources: Ministry of Finance; Office des Changes; and Fund staff estimates and projections.

7. The fiscal deficit declined in 2004, but some budgetary policies did not support fiscal consolidation. The fiscal deficit declined by 0.4 percentage point to 4.9 percent of GDP and was much lower than envisaged in the 2004 budget (Table 3). This development mainly reflected good revenue performance. Expenditures were higher than envisaged because of increases in: (a) investment following an acceleration in project executions; (b) the wage bill following new salary increases; and (c) subsidies because the food subsidy reform was postponed and the petroleum price adjustment mechanism was not fully implemented. The authorities were able to prevent further expenditure increases related to the El-Hoceima earthquake and a locust invasion by reallocating budgetary appropriations. Public debt declined to 66 percent of GDP because privatization receipts helped finance the deficit.

Table 3.Morocco: Central Government Finance, 2001–05 1/
BudgetEst.BudgetProj.
2001200220032004200420052005
(In billions of dirhams)
Revenue 2/95.898.3102.9103.4111.3110.9120.6
Tax revenue 2/87.491.094.295.3100.8101.7110.4
Direct taxes28.430.433.133.236.537.239.5
Indirect taxes39.240.141.942.643.944.947.8
Import taxes14.014.212.612.113.311.916.1
Other tax revenues5.86.46.67.47.17.77.0
Nontax revenue (excl. privatization)8.47.28.68.110.69.210.2
Expenditures and net lending (excl. Fonds Hassan II)119.3117.9125.4128.8135.5136.0144.2
Current expenditures90.490.797.5100.4105.0107.0115.0
Wages48.048.653.255.456.660.861.5
Food and petroleum subsidies 3/5.14.04.93.47.83.48.8
Interest18.817.617.417.517.417.317.2
Other current spending18.520.522.124.123.225.527.5
Capital expenditures (budget) 4/20.419.318.618.220.517.917.9
Road fund0.91.01.12.11.62.21.5
Transfers to local governments 5/7.07.27.88.28.79.09.8
Net lending0.6-0.30.20.0-0.30.00.0
Balance of other special treasury accounts2.11.81.90.03.60.02.0
Overall balance (commitment basis, excl. Fonds Hassan II)-21.4-17.8-20.6-25.4-20.6-25.1-21.6
Fonds Hassan II expenditures0.60.91.84.41.22.03.6
Overall balance (commitment basis, incl. Fonds Hassan II)-22.0-18.6-22.4-29.8-21.9-27.1-25.2
Grants0.30.30.41.41.30.70.7
Privatization and GSM revenues23.40.612.012.010.412.012.0
Change in arrears-11.0-0.2-2.10.02.0-13.8-14.1
Overall balance (cash basis, incl. Fonds Hassan II, grants & privatization)-9.3-18.0-12.1-16.3-8.2-28.2-26.6
Financing9.318.012.116.38.228.226.6
Domestic financing19.429.721.322.815.931.630.1
External financing 5/-10.1-11.7-9.2-6.4-7.7-3.4-3.4
Memorandum items:
Current balance5.47.65.33.16.33.95.6
Primary balance-3.2-1.0-5.1-12.3-4.5-9.8-8.0
Primary balance (incl. grants and privatization)20.4-0.17.31.27.22.94.7
Total central government debt (end period) 6/286.2284.0287.3303.6292.1331.3318.7
Domestic 6/175.6191.2210.3233.1221.60.0
External110.692.877.070.670.50.0
GDP in billions of dirhams383.2397.8419.5443.7443.7456.0456.0
Est.BudgetEst.BudgetProj.
2001200220032004200420052005
(In percent of GDP)
Revenue 2/25.024.724.523.325.124.326.4
Tax revenue 2/22.822.922.521.522.722.324.2
Direct taxes7.47.67.97.58.28.28.7
Indirect taxes10.210.110.09.69.99.910.5
Import taxes3.73.63.02.73.02.63.5
Other tax revenues1.51.61.61.71.61.71.5
Nontax revenue (excl. privatization)2.21.82.11.82.42.02.2
Expenditures and net lending (excl. Fonds Hassan II)31.129.629.929.030.529.831.6
Current expenditures23.622.823.322.623.723.525.2
Wages12.512.51212.712.512.813.313.5
Food and petroleum subsidies 3/1.31.01.20.81.80.71.9
Interest4.94.44.13.93.93.83.8
Other current spending4.85.15.35.45.25.66.0
Capital expenditures (budget) 4/5.34.84.44.14.63.93.9
Road fund0.20.20.30.50.40.50.3
Transfers to local governments 5/1.81.81.91.82.02.02.2
Net lending0.2-0.10.10.0-0.10.00.0
Balance of other special treasury accounts0.50.50.50.00.80.00.4
Overall balance (commitment basis, excl. Fonds Hassan II)-5.6-4.5-4.9-5.7-4.6-5.5-4.7
Fonds Hassan II expenditures0.20.20.41.00.30.40.8
Overall balance (commitment basis, incl. Fonds Hassan II)-5.7-4.7-5.3-6.7-4.9-5.9-5.5
Grants0.10.10.10.30.30.20.2
Privatization and GSM revenues6.10.22.92.72.32.62.6
Change in arrears-2.9-0.1-0.50.00.4-3.0-3.1
Overall balance (cash basis, incl. Fonds Hassan II, grants & privatization)-2.4-4.5-2.9-3.7-1.8-6.2-5.8
Financing2.44.52.93.71.86.25.8
Domestic financing5.17.55.15.13.66.96.6
External financing-2.6-2.9-2.2-1.5-1.7-0.8-0.8
Memorandum items
Current balance1.41.91.30.71.40.91.2
Primary balance-0.8-0.3-1.2-2.8-1.0-2.1-1.8
Primary balance (incl. grants and privatization)5.30.01.70.31.60.61.0
Total Central Government debt (end period) 6/74.771.468.568.465.872.769.9
Domestic 6/45.848.150.152.549.9
External28.923.318.415.915.9
Sources: Ministry of Finance; and Fund staff estimates and projections.

Box 1.Past Fund Surveillance

Over the past five years, Fund surveillance has focused on policies aimed at maintaining macroeconomic stability, achieving fiscal consolidation, and accelerating growth to reduce unemployment and poverty. The staff recommended (a) tax and expenditure reforms to lower the fiscal deficit and debt-to-GDP ratios, dispel the risk of future tax increases and higher interest rates, and create fiscal space; (b) an exchange rate policy that would reverse the real effective exchange rate appreciation that took place in the 1990s; and (c) structural reforms to foster private investment, productivity, and the efficient allocation of resources.

The authorities have taken steps along the lines of the Fund’s recommendations but progress has been slow in some areas.

Macroeconomic stability has been preserved but fiscal consolidation has not yet been achieved. The authorities have implemented a no net new hiring policy, but the wage bill ratio increased further because of ad hoc salary increases and promotions. The authorities eliminated edible oil subsidies, but flour and sugar continue to be subsidized and the automatic petroleum price adjustment mechanism has not been fully operating. On the revenue side, the authorities made progress in modernizing tax administration, but the provision of tax exemptions rendered the tax system more complex and its administration more difficult.

The authorities devalued the dirham by 5 percent in 2001, partly reversing its real appreciation during the 1990s, and the real effective exchange rate has depreciated further since then. Fund surveillance has recently focused on the desirability of moving gradually to a more flexible exchange rate regime. The authorities have entered into a dialogue with the staff on this issue.

The authorities accelerated structural reform. Trade liberalization is proceeding both at multilateral and bilateral levels. The authorities reduced the number and level of tariff rates, eliminated reference import prices, implemented customs reform, and have signed trade agreements with their major trading partners. Financial sector reform is proceeding in line with the Financial Sector Assessment Program (FSAP) recommendations. Major public enterprises have been privatized, the remaining ones are being reformed, and steps have been taken to put pension funds on a sounder footing. A new labor code has been promulgated. Progress in reforming the judicial system, improving contract enforcement, and rendering the public services more efficient are needed to further improve the business environment.

8. A decline in agricultural output, petroleum price increases, and the abolition of textile quotas will affect economic developments in 2005. The primary sector will contract sharply and some agro industries will be adversely affected because of bad weather earlier this year. Growth in the manufacturing sector is expected to slow down, reflecting the difficulties in the textile sector (see Box 2). Strong performance in tourism and construction sectors and remittance inflows are expected to continue. Consequently, overall GDP growth is projected to decline to about 1 percent and non agricultural GDP growth is expected to slow down. The external current account is projected to register a small deficit because of higher oil prices and food imports, and weak textile exports. The overall balance of payments position is expected to continue to register a surplus, even if the effects of privatization are excluded. With delayed implementation of domestic petroleum price adjustments, the impact of higher international petroleum prices on growth and inflation will be limited, and the budget will bear the subsidy cost (estimated at 0.8 percent of GDP). A recently announced policy package, which will reallocate budget appropriations, should help alleviate the impact of the poor harvest on rural areas.

Box 2.Recent Developments in the Textiles and Clothing Sector

In 2004, the textiles and clothing sector accounted for 17 percent of manufacturing value added, 50 percent of manufacturing employment and 32.5 percent of merchandise exports. Therefore, the worldwide abolition of quantitative restrictions on exports of textile and clothing that came into effect on January 1, 2005 will have important consequences for Morocco.

During the first four months of 2005, Moroccan exports of clothing declined by 16.1 percent and exports of hosiery by 21 percent in local currency value compared with the first four months of 2004. These two product categories together accounted for 30.6 percent of Moroccan merchandise exports in 2004.

It is not clear yet to what extent the early adjustments following the abolition of the quota system are indicative of longer term trends. However, a study by the United Nations using the Global Trade Analysis Project (GTAP) computable general equilibrium model suggests that Morocco could experience a long-term reduction in textiles and clothing exports of respectively 11 and 18 percent as a result of the quota phase-out.1 This would correspond to a loss of 0.22 percent of GDP. Using an alternative GTAP specification, a recent World Bank study2 obtains similar results. In addition, it estimates the labor market impact of the quota removal. The findings suggest that 15 to 16 percent of unskilled workers in Morocco’s textiles and clothing sector could lose their job.

To avert these looming losses of employment and income, Moroccan policy makers have taken measures to accelerate the current transition of the sector towards higher value-added production and increased vertical integration. The recently concluded free trade agreement with Turkey—a large and diversified producer of textiles’is an important component of that strategy, since it will enable Moroccan firms to source textiles production in Turkey while respecting the rules of origin requirements of the European Union. The free-trade agreement with the US could also benefit the sector, since the US is currently a virtually untapped market.

1/ See UNECA (United Nations Economic Commission for Africa), “Comment Sauver le Textile Maghrebin?”, 2005, paper presented at the UMA/CEA conference in Tunis (February 14–15, 2005).2/ See Manole, V., “Winner or Loser? Effects of Quota Abolition in World Markets for Textile and Apparel,” 2005, World Bank Working Paper.

9. Current policies are expected to lead to a deterioration in the fiscal deficit to about 5.5 percent of GDP in 2005, despite a continued favorable revenue performance. Expenditures would significantly increase taking into account the repercussions on wage payments of the 2004 wage negotiations, the voluntary retirement program, the new universal health insurance program, the delay of the food (wheat and sugar) subsidy reform, and the partial adjustment in mid-May of domestic petroleum prices. Excluding the cost of the early retirement program and other one-off wage related payments, the 2005 fiscal deficit is projected at 4.5 percent of GDP. The authorities intend to eliminate outstanding arrears (0.7 percent of GDP), which have been used to partly finance subsidies in 2004 and early 2005. Large privatization receipts from the sale of government shares in Maroc Telecom will again help finance the deficit. At end-2005, the debt-to-GDP ratio is projected to increase to 70 percent of GDP, taking into account the issuance of debt to cover old pension fund arrears (2.4 percent of GDP).

III. Report on Policy Discussions

10. Policy discussions focused on gaining a common understanding of the economic environment and drawing an integrated strategy to address the growth and unemployment challenges. Meeting these challenges will require putting conditions in place to foster investment and productivity growth.

A. The Economic Environment and Key Challenges

11. The Moroccan economy remains characterized by three key features: (a) output growth has been volatile and insufficient to significantly reduce unemployment and poverty (Figure 3); (b) the country is facing increased competition from abroad; and (c) the macroeconomic environment has been stable despite relatively high fiscal deficits.

Figure 3.Real GDP Growth

(In percent)

Source: Moroccan authorities and IMF Staff estimates.

12. Morocco’s growth performance reflects extreme volatility of the agricultural sector and low nonagricultural growth. The share of the agricultural sector has fluctuated around 15 percent since 1991, but its growth has been extremely volatile. Indeed, the standard deviation of the agricultural sector growth rate for the period 1991–2004 has been 35 percent, while that of the nonagricultural sector has been only 1.3 percent. During the same period, growth of the nonagricultural sector has been low, averaging 3.2 percent per annum. An acceleration of growth in the nonagricultural sector, by increasing its share in total GDP, would therefore help reduce overall volatility over the medium term. Moreover, cross-country empirical evidence suggests that a reduction in output volatility could have growth-enhancing effects.5 To these ends, increases in investment and total factor productivity in the nonagricultural sector are needed.6 In addition, measures to attack some structural causes of agricultural output volatility, such as the plan announced by the authorities in May 2005 to encourage crop diversification over the next five years, would also help improve economic performance over the medium term.

13. In the context of ongoing trade liberalization, the nonagricultural sector is subjected to increasing international competition. To maximize exports opportunities and better withstand competition from abroad in the domestic market, efforts to improve Morocco’s competitiveness will need to be accelerated. Such an environment would also foster investment. In the past few years, nongovernment investment has shown signs of revival, contributing significantly to domestic demand growth. However, domestic demand remains sluggish despite the abundance of national savings and low monetary policy interest rates, suggesting the existence of structural constraints to its dynamism.

14. Abundant liquidity, supported by a surge in remittance flows, has facilitated the financing of high fiscal deficits at low costs without crowding out private credit or undermining macroeconomic stability. Indeed, interest rates have been on a declining trend along the maturity spectrum. In the circumstances, the authorities did not accelerate fiscal consolidation. However, they took advantage of the situation to substitute domestic for external debt, develop a domestic debt market, and reduce external vulnerability.7 Nevertheless, if economic activity picked up, the balance of payments surplus disappeared, and/or the capital account opened up to resident outflows, the current fiscal policies could spur an increase in interest rates and become a binding constraint on growth.

15. In the above described context, policy discussions focused on two areas that could help achieve sustained growth to significantly reduce unemployment and poverty: (a) maintaining macroeconomic stability and reducing the fiscal deficit while creating fiscal flexibility for demand management and room for productive expenditures; and (b) accelerating structural reforms, including trade liberalization. Discussions were also held on the pros and cons of alternative exchange rate regimes as the economy undergoes structural transformation and faces greater international competition.

B. Fiscal Policy

16. The fiscal stance and the debt level do not pose a risk to macroeconomic stability in the short term in the present macroeconomic environment, but current policies would not put public finances on a sustainable path. If current policies continue, the debt-to-GDP ratio would be increasing, with no cushion to absorb shocks, especially output shocks (Table 5 and Figure 4). Standard debt dynamics suggest that a primary surplus of 0.8 percent of GDP would be required to stabilize the current debt-to-GDP level given Morocco’s growth experience and the average implicit interest rate on public debt, compared to the projected primary deficit of 1 percent of GDP in 2005, excluding exceptional expenditures. The debt ratio is sensitive not only to slower fiscal consolidation but also to slower growth. The fiscal deficit should therefore be reduced to at least 3 percent of GDP over the medium term (corresponding to a primary surplus of 1 percent of GDP) to lower the debt ratio on a sustained basis, and enhance fiscal flexibility and resilience to output shocks.

Table 4.Morocco: Selected Vulnerability Indicators, 2000–05
200020012002200320042005 1/Latest

observation
Key economic and market indicators
Real GDP growth (in percent)1.06.33.25.54.21.0Proj
CPI inflation (period average, in percent)1.90.62.81.21.52.0Proj
Short-term (ST) interest rate (in percent)5.44.63.03.22.431-Dec-04
EMBI secondary market spread (bps, end of period)58451839016017015930-May-05
Exchange rate NC/US$ (end of period)10.811.510.48.78.231-Dec-04
External sector
Exchange rate regime(Peg to a basket of currencies dominated by the Euro)
Current account balance (percent of GDP)-1.44.84.13.62.2-0.9Proj
Net FDI inflows (percent of GDP)1.18.01.35.31.62.5Proj
Exports (percentage change of US$ value, GNFS)-1.66.99.216.716.45.8Proj
Real effective exchange rate (1995= 100)108.2103.7103.4102.0101.4101.3Proj
Gross international reserves (GIR) in US$ billion4.88.410.113.916.316.0Proj
GIR in percent of ST debt at remaining maturity (RM)177.3291.6360.0626.8533.8512.5Proj
GIR in percent of ST debt at RM and banks’ FX deposits174.7286.1353.5599.6521.4500.4Proj
Net international reserves (NIR) in US$ billion4.68.39.913.616.115.8Proj
Total gross external debt (ED) in percent of GDP55.047.841.035.130.830.2Proj
o/w ST external debt (original maturity, in percent of total ED)5.35.85.60.87.87.4Proj
o/w ED of domestic private sector (in percent of total ED)10.711.611.314.215.614.9Proj
ED to foreign official sector (in percent of total ED)71.171.172.870.070.070.0Proj
Total gross external debt in percent of exports of GNFS171.9142.5128.8118.1100.391.1Proj
Gross external financing requirement (in US$ billion) 2/2.90.10.51.01.02.2Proj
Public Sector (PS) 3/
Overall balance (percent of GDP)-6.4-5.7-4.7-5.3-4.9-5.5Proj
Primary balance (percent of GDP)-1.1-0.8-0.3-1.2-1.0-1.8Proj
Debt-stabilizing primary balance (percent of GDP) 4/3.2-1.31.80.40.11.9Proj
Gross PS financing requirement (in percent of GDP) 5/17.422.618.424.020.221.9Proj
Public sector gross debt (PSGD, in percent of GDP)76.474.871.568.866.469.9Proj
o/w Exposed to rollover risk (in percent of total PSGD) 6/9.418.013.721.319.119.9Proj
o/w Exposed to exchange rate risk (in percent of total PSGD) 7/44.838.632.626.723.620.4Proj
o/w Exposed to interest rate risk (in percent of total PSGD) 8/13.622.619.227.322.923.1Proj
Public sector net debt (in percent of GDP) 11/81.574.771.468.565.869.9Proj
Financial Sector (FS) 9/
Capital adequacy ratio (in percent)12.812.612.29.310.2Dec-04
NPLs in percent of total loans17.516.817.218.119.4Dec-04
Provisions in percent of NPLs47.852.954.754.959.3Dec-04
Return on average assets (in percent)0.70.90.3-0.20.8Dec-04
Return on equity (in percent)8.110.21.9-2.110.9Dec-04
FX deposits held by residents (in percent of total deposits)0.20.30.20.30.2Dec-04
FX loans to residents (in percent of total loans)1.01.11.41.52.2Dec-04
Net open forex position (in percent of capital) 10/5.84.43.34.09.2
Government debt held by FS (percent of total FS assets)21.423.023.221.418.7Dec-04
Credit to private sector (percent change)7.94.03.88.37.29.1Proj.
Memorandum item:
Nominal GDP in billions of U.S. dollars33.333.936.143.850.0Dec-04
Sources: Moroccan authorities; and Fund staff estimates.
Table 5.Morocco: Public Sector Debt Sustainability Framework, 2000–10(In percent of GDP; unless otherwise indicated)
ActualProjections
20002001200220032004200520062007200820092010
I. Baseline ProjectionsDebt-stabilizing primary balance10/
Public sector debt 1/81.574.771.468.565.869.967.866.864.862.559.9-0.8
o/w foreign-currency denominated34.228.923.318.816.114.912.811.29.68.26.9
Change in public sector debt0.2-6.8-3.3-2.9-2.74.1-2.0-1.0-2.0-2.3-2.6
Identified debt-creating flows (4+7+12)7.3-4.6-1.1-4.9-2.60.3-2.0-1.0-2.0-2.3-2.6
Primary deficit1.10.80.21.10.71.6-0.4-0.5-1.2-1.5-1.8
Revenue and grants26.225.124.824.625.426.626.126.226.226.326.4
Primary (noninterest) expenditure27.325.825.025.726.128.225.725.625.024.824.6
Automatic debt dynamics 2/6.20.8-1.1-3.1-0.91.3-1.1-0.1-0.4-0.5-0.5
Contribution from interest rate/growth differential 3/3.3-1.31.70.40.22.0-1.1-0.1-0.4-0.5-0.5
Of which: contribution from real interest rate4.13.54.04.22.92.62.72.72.72.62.6
contribution from real GDP growth-0.8-4.7-2.3-3.7-2.7-0.6-3.8-2.8-3.1-3.1-3.1
Contribution from exchange rate depreciation 4/2.92.0-2.8-3.6-1.1-0.70.00.00.00.00.0
Other identified debt-creating flows0.0-6.1-0.2-2.9-2.4-2.6-0.6-0.4-0.4-0.3-0.3
Privatization receipts (negative)0.0-6.1-0.2-2.9-2.4-2.6-0.6-0.4-0.4-0.3-0.3
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes (2–3) and arrears flows-7.1-2.2-2.22.00.03.80.00.00.00.00.0
Public sector debt-to-revenue ratio 1/310.7297.8288.3278.1259.4262.7259.9255.4247.2237.8227.3
Gross financing need 5/22.621.621.022.520.521.219.819.719.018.417.6
in billions of U.S. dollars7.57.37.69.910.210-Year

Historical

Average
10-Year

Standard

Deviation
11.211.312.012.312.813.3
Key Macroeconomic and Fiscal AssumptionsProjected

Average
Real GDP growth (in percent)1.06.33.25.54.23.15.41.05.94.55.05.15.34.4
Average nominal interest rate on public debt (in percent) 6/6.76.56.26.16.16.50.35.96.36.46.46.56.56.3
Average real interest rate (nominal rate minus change in GDP deflator, in percent)5.14.75.66.24.64.72.24.14.34.44.44.54.54.4
Nominal appreciation (increase in US dollar value of local currency, in percent)-7.3-5.810.918.66.51.39.4
Inflation rate (GDP deflator, in percent)1.51.80.6-0.11.51.72.31.82.02.02.02.02.02.0
Growth of real primary spending (deflated by GDP deflator, in percent)13.40.6-0.48.85.74.76.79.2-3.44.02.64.14.33.4
Primary deficit1.10.80.21.10.7-0.51.61.6-0.4-0.5-1.2-1.5-1.8-0.6
II. Stress Tests for Public Debt RatioDebt-stabilizing

primary

balance 10/
A. Alternative Scenarios
A1. Key variables are at their historical averages in 2005–09 7/69.969.869.970.070.270.40.7
A2. No policy change (constant primary balance) in 2005–0969.970.071.272.072.773.5-0.9
B. Bound Tests
B1. Real interest rate is at historical average plus two standard deviations in 2005 and 200669.970.973.071.068.666.0-0.8
B2. Real GDP growth is at historical average minus two standard deviations in 2005 and 200669.981.598.5103.6108.2112.4-1.3
B3. Primary balance is at historical average minus two standard deviations in 2005 and 200669.970.973.271.268.866.2-0.8
B4. Combination of B1-B3 using one standard deviation shocks69.976.884.582.479.977.1-1.0
B5. One time 30 percent real depreciation in 2005 9/69.974.573.571.569.166.5-0.8
B6. 10 percent of GDP increase in other debt-creating flows in 200569.977.876.874.872.469.7-0.9
The implied change in other key variables under this scenario is discussed in the text.

Figure 4.Debt-to-GDP Ratio

(in percent)

Moroccan authorities; and IMF Staff estimates.

17. The authorities agree with the staff that fiscal consolidation is an essential part of the high growth strategy. They do not consider the current fiscal stance as unsustainable. However, they remain committed to reducing the fiscal deficit to 3 percent of GDP by 2009 (Table 6). The achievement of this objective and its compatibility with a high growth scenario will require actions on both the revenue and expenditure sides (Figure 5).

Table 6.Morocco: Central Government Finance, 2004–10 1/
BudgetEst.BudgetProjections
200420042005200520062007200820092010
(In billions of dirhams)
Revenue 2/103.4111.3110.9120.6127.6136.3146.4157.5169.6
Tax revenue 2/95.3100.8101.7110.4117.7125.8135.2145.5156.7
Direct taxes33.236.537.239.542.745.548.752.256.1
Indirect taxes42.643.944.947.851.255.159.764.770.1
Import taxes12.113.311.917.1116.317.118.119.320.5
Other tax revenues7.47.17.77.07.68.18.79.310.0
Nontax revenue (excl. privatization)8.110.69.269.29.810.511.212.012.9
Expenditures and net lending (excl. Fonds Hassan II)128.8135.5136.0144.2146.3155.2162.8172.7183.4
Current expenditures100.4105.0107.0115.0112.4116.3119.4124.2129.2
Wages55.456.660.861.561.862.663.164.465.7
Food and petroleum subsidies 3/3.47.83.48.82.01.00.00.00.0
Interest17.517.417.31.22220.121.222.523.624.6
Other current spending24.123.225.527.528.631.533.736.138.8
Capital expenditures (budget) 4/18.220.517.917.921.725.829.333.237.6
Road fund2.11.62.21.51.71.81.92.12.2
Transfers to local governments 5/8.28.79.09.810.511.312.313.314.4
Net lending0.0-0.30.00.00.00.00.00.00.0
Balance of other special treasury accounts0.03.60.02.01.51.61.71.81.9
Overall balance (commitment basis, excl. Fonds Hassan II)-25.4-20.6-25.1-21.6-17.2-17.4-14.7-13.4-11.8
Fonds Hassan II expenditures4.41.22.03.62.02.02.02.02.0
Overall balance (commitment basis, incl. Fonds Hassan II)-29.8-21.9-27.1-25.2-19.2-19.4-16.7-15.4-13.8
Grants1.41.30.70.71.01.01.01.01.0
Privatization and GSM revenues12.010.412.012.03.02.02.02.02.0
Change in arrears0.02.0-13.8-14.10.00.00.00.00.0
Overall balance (cash basis, incl. Fonds Hassan II, grants & privatization)-16.3-8.2-28.2-26.6-15.2-16.4-13.7-12.4-10.8
Financing16.38.228.226.615.216.413.712.410.8
Domestic financing22.815.931.630.119.921.018.317.015.4
External financing 5/-6.4-7.7-3.4-3.4-4.6-4.6-4.6-4.6-4.6
Memorandum items:
Current balance3.16.33.95.615.219.927.133.340.5
Primary balance-12.3-4.5-9.8-8.00.81.95.88.210.8
Primary balance (incl. grants and privatization)1.27.22.94.74.84.98.811.213.8
Total Central Government debt (end period) 6/303.6292.1331.3318.7333.9350.3364.0376.4387.2
Domestic 6/233.1221.6
External70.670.5
GDP in billions of dirhams443.7443.7456.0456.0492.3524.6561.8602.5646.8
(In percent of GDP)
Revenue 2/23.325.124.326.425.926.026.126.126.2
Tax revenue 2/21.522.722.324.223.924.024.124.124.2
Direct taxes7.58.28.28.78.78.78.78.78.7
Indirect taxes9.69.99.910.510.410.510.610.710.8
Import taxes2.73.02.63.53.33.33.23.23.2
Other tax revenues1.71.61.71.51.51.51.51.51.5
Nontax revenue (excl. privatization)1.82.42.02.422.02.02.02.02.0
Expenditures and net lending (excl. Fonds Hassan II)29.030.529.831.629.729.629.028.728.3
Current expenditures22.623.723.525.222.822.6221.220.620.0
Wages12.512.813.313.512.511.911.210.710.2
Food and petroleum subsidies 3/0.81.80.71.90.40.20.00.00.0
Interest3.93.93.83.84.14.14.03.93.8
Other current spending5.45.25.866.05.86.06.06.06.0
Capital expenditures (budget) 4/4.14.63.93.94.44.95.25.55.8
Road fund0.50.40.50.30.30.30.30.30.3
Transfers to local governments 5/1.82.02.02.22.12.22.22.22.2
Net lending0.0-0.10.00.00.00.00.00.00.0
Balance of other special treasury accounts0.00.80.00.40.30.30.30.30.3
Overall balance (commitment basis, excl. Fonds Hassan II)-5.7-4.6-5.5-4.7-3.5-3.3-2.6-2.2-1.8
Fonds Hassan II expenditures1.00.30.40.80.40.40.40.30.3
Overall balance (commitment basis, incl. Fonds Hassan II)-6.7-4.9-5.9-5.5-3.9-3.7-3.0-2.6-2.1
Grants0.30.30.20.20.20.20.20.20.2
Privatization and GSM revenues2.72.32.62.60.60.40.40.30.3
Change in arrears0.00.4-3.0-3.10.00.00.00.00.0
Overall balance (cash basis, incl. Fonds Hassan II, grants & privatization)-3.7-1.8-6.2-5.8-3.1-3.1-2.4-2.1-1.7
Financing3.71.86.25.83.13.12.42.11.7
Domestic financing5.13.66.96.64.04.03.32.82.4
External financing-1.5-1.7-0.8-0.8-0.9-0.9-0.8-0.8-0.7
Memorandum items:
Current balance0.71.40.91.23.13.84.85.56.3
Primary balance-2.8-1.0-2.1-1.80.20.41.01.41.7
Primary balance (incl. grants and privatization)0.31.60.61.01.00.91.61.92.1
Total Central Government debt (end period) 6/68.465.872.769.967.866.864.862.559.9
Domestic 6/52.549.9
External15.915.9
Sources: Ministry of Finance; and Fund staff estimates and projections.

Figure 5.Fiscal Developments and Medium-Term Projections

(In percent of GDP)

Source: Moroccan Authorities and IMF staff estimates and projections.

18. The authorities and the staff agreed that a reform of the tax system, in line with the recommendations of recent FAD technical assistance missions, would widen the tax base, eliminate tax induced distortions, and ultimately allow a reduction in tax rates that would release resources to the private sector for their efficient allocation. Morocco’s tax revenue-to-GDP ratio and its distribution between direct and indirect taxes compare well with other countries (Table 7). However, the proliferation of tax exemptions over the years and a growing direct tax revenue-to-GDP ratio, suggest an increasing tax burden on a narrow tax base. The marginal personal income tax rate, at 44 percent, is high and the private sector blames it for higher wage demands of skilled workers. The VAT system with 5 tax rates and widespread exemptions is complex and difficult to administer. The corporate tax base is also eroded by exemptions and special tax treatments. In this context, the authorities intend to initiate tax reform, particularly of the VAT in 2006 and to present a tax expenditure report with the 2006 budget to raise awareness about the inefficiency of the tax system.

Table 7.Morocco: Revenue Structure and International Comparisons
1990199520002004
(In percent of GDP)
Total revenue24.023.926.225.1
Tax revenue21.822.024.122.7
Direct taxes5.55.77.68.2
Indirect taxes9.410.710.39.9
Customs duties4.74.24.73.0
Other taxes2.11.41.51.6
Nontax revenue2.11.92.12.4
(In percent of total revenue)
Total revenue100.0100.0100.0100.0
Tax revenue91.192.192.090.5
Direct taxes23.224.028.932.8
Indirect taxes39.344.739.539.4
Import taxes19.717.617.911.9
Other taxes8.95.85.76.4
Nontax revenue8.97.98.09.5
(Tax revenue comparisons in percent of GDP) 1/
Average 1997–2001OECDCentral EuropeRussia and CISAfricaLatin AmericaAsiaMiddle East
Tax Revenue:29.428.416.817.417.213.713.8
Direct taxes9.85.52.14.83.84.44.9
Indirect taxes10.011.88.24.87.25.33.9
Customs duties0.61.21.36.83.13.13.1
Other9.09.95.21.03.10.91.9
EgyptIranJordanLebanonTunisiaMorocco
199020001990200019902000199020001990200019902000
Tax Revenue16.716.06.211.614.415.99.216.619.526.021.824.1
Direct taxes4.46.02.43.84.34.51.32.93.35.65.57.6
Indirect taxes3.16.00.73.82.78.10.89.36.611.19.410.3
Sources: Moroccan authorities; and Fund staff estimates.

19. On the expenditure side, the authorities plan to reduce the wage bill ratio and improve the quality of expenditures. To reduce the wage bill ratio, they plan to contain the wage drift to 2–3 percent, continue their no net new hiring policy, and implement a modern human resource management and remuneration system. The voluntary departure/early retirement program8 will eliminate some 30,000 positions and will result in significant wage savings. The staff and the authorities agree that the implementation of these measures should allow a reduction of the wage bill ratio by 2 percent of GDP by 2009. The authorities also intend to eliminate gradually general food subsidies over three years, enhance targeted support to vulnerable groups, and privatize sugar companies, as well as reflect gradually international price developments on domestic petroleum product prices (except for butane gas). In addition, they intend to continue to reform pension funds to dispel the contingent risks to the budget.9

20. The staff agreed with the authorities that their planned expenditure policies are in line with their medium-term macroeconomic objectives. Staff noted that a lower wage bill ratio would enhance budget flexibility, including to dampen income and consumption volatilities, without compromising debt sustainability. Containment of salary increases would also limit increases in private sector wages. An overhaul of the food subsidy system and the elimination of petroleum price subsidies, which do not mainly benefit vulnerable groups, could release resources for more productive expenditures, including for rural infrastructure. The elimination of food subsidies and their replacement with targeted support to vulnerable groups should lead in the medium-to-long run to a diversification of agricultural production that is less dependent on weather vagaries. In addition, the planned implementation, in collaboration with the World Bank, of a medium-term budget framework and the continuation of the decentralization and performance budgeting program should render the public administration more efficient and transparent.

C. Structural Reforms

21. The authorities have a broad based structural reform agenda to increase productivity and promote private sector activity, and facilitate Morocco’s increasing integration into the world economy. Discussions focused on the following priority areas: (a) continued trade liberalization; (b) the promotion of an internationally competitive business environment; and (c) financial sector reforms.

Trade liberalization

22. The authorities view trade liberalization and integration into the world economy as essential to enhance export opportunities and foster the efficiency of the economy. In 2004, MFN tariffs were reduced to a maximum of 10 percent for goods freely traded with the European Union. Also, trade agreements were signed with the United States, Turkey and regional partners (Tunisia, Jordan, and Egypt) to complement the association agreement with the European Union. The trade agreement with the United States is expected to play a catalytic role in attracting foreign direct investment and in transforming Morocco into an export platform to Europe and the United States taking advantage of its geographical position and the soon to be completed Tanger-Med port complex. In addition, the authorities are keen to achieve trade liberalization at the regional level in order to establish a large regional market and attract foreign investment.

23. Staff noted that the proliferation of bilateral accords made the trade system complex and underscored the need to reduce the number, dispersion, and average level of tariffs.10 More specifically, the staff recommended an acceleration of tariff reduction and the elimination of variable import tariffs together with the elimination of food subsidies. The smaller than previously expected negative impact of trade liberalization on tax revenues provides room for an acceleration. The authorities noted that, if confirmed, the good import tax revenue performance would be a welcome development that could support faster trade liberalization.

Business environment

24. The authorities intend to keep improving the business environment to increase the economy’s growth potential. They have made significant progress in certain areas, notably with the liberalization of air transport that positively impacted tourism and of the telecommunications sector that is flourishing. Morocco’s business community feels that critical reforms aimed at improving the business environment in other areas have been initiated in recent years, but many of them remain to be effectively implemented. The new labor code, if fully implemented, should contribute to clarifying employer/employee relationships. The reform of the judicial system, which the authorities have been discussing with the World Bank, should also proceed faster. Access to land is difficult and the law on domestic competition remains to be effectively implemented. The authorities intend to continue reforming the transport sectors and the logistics chain, in particular port services, to improve the competitiveness of Moroccan enterprises and their logistical support. Privatization and public enterprise restructuring programs will also continue.

25. The authorities are reviewing their industrial policy strategy and have sponsored a study by an international consulting firm to help them identify sectors with growth potential. The staff encouraged the authorities to promote a neutral and internationally competitive business environment and resist pressures for the provision of exemptions or special incentives in favor of specific sectors.

Financial sector reforms

26. The authorities intend to further strengthen the financial sector. Provisioning and capital adequacy ratios have recently improved. Nonperforming loans have stabilized but remain high (Table 8). High NPLs increase the cost of intermediation. Because of high costs of intermediation, the reduction in monetary policy interest rates, discussed below, has not led to significantly lower real lending interest rates, especially for SMEs. The cost of intermediation may also constrain other potentially desirable policies. Progress in reducing nonperforming loans and increasing the efficiency of domestic banks more generally will need to be achieved before significant capital account liberalization can be allowed for residents. On the other hand, gradual capital account liberalization could put competition pressures on banks and help the transfer of risk management technologies.

Table 8.Morocco: Financial Soundness Indicators, 1998–2004(In percent; unless otherwise indicated)
1998199920002001200220032004
Dec.Dec.Dec.Dec.Dec.Dec.Dec
Number of banks21212119181817
Capital adequacy
Regulatory capital to risk-weighted assets*12.612.6112.812.612.29.310.2
Commercial banks 1/13.113.014.715.315.313.013.5
Regulatory Tier I capital to risk-weighted assets*12.612.6112.812.612.29.313.4
Capital (net worth) to assets10.310.09.88.78.57.67.6
Asset composition and quality
Sectoral distribution of loans to total loans*
Agriculture13.412.711.710.79.910.59.2
Housing and Public Works19.319.512218.920.122.425.2
Industry17.615.515.615.817.719.618.8
Public administration4.94.33.83.54.13.53.9
Commerce9.69.99.99.48.48.37.7
Tourism3.53.22.83.64.54.83.7
Other31.734.937.038.135.430.931.5
Geographical distribution of loans to total loans
Casablanca62.964.856.756.756.354.157.9
Marrakech3.53.23.93.63.94.34.0
Rabat9.98.916.015.915.815.914.9
NPLs to gross loans*14.615.317.516.817.218.119.4
Commercial banks 1/8.99.19.110.711.212.312.4
NPLs net of provisions to capital*44.949.370.555.557.166.561.9
Commercial banks11.912.815.019.918.723.320.5
Provisioning ratio61.651.947.852.954.754.959.3
Commercial banks67.668.768.569.871.571.572.2
Large exposures to capital*159.0196.0212.0194.0149.4175.3
Earnings and profitability
ROA*0.90.70.70.90.3-0.20.8
Commercial banks1.11.11.11.10.60.50.9
ROE*9.58.28.110.21.9-2.110.9
Commercial banks12.412.513.012.76.46.410.7
Interest margin to gross income*15.073.480.077.882.082.480.7
Noninterest expenses to gross income*46.847.449.146.253.453.451.2
Personnel expenses to noninterest expenses29.027.526.026.822.519.820.0
Trading and fee income to total income13.614.518.120.617.718.220.7
Spread between reference loan and deposit rates5.55.35.14.84.54.2
Liquidity
Liquid assets to total assets*62.758.5123.1122.3120.8
Liquid assets to total short-term liabilities*24.122.920.422.726.930.528.9
Customer deposits to total (non-interbank) loans113.5112.0113.4120.3125.9127.8131.7
FX liabilities to total liabilities7.17.45.64.94.33.83.1
Average bid-ask spread in the securities market3.86.04.66.6
Average daily turnover in the securities market6.85.65.44.8
Sensitivity to market risk
Net position in FX to capital*2.15.84.43.34.09.2
Source: Moroccan authorities.

27. Bank Al-Maghrib (BAM) has made significant progress in the implementation of FSAP recommendations to strengthen banking supervision and improve banks’ risk management practices. The imminent promulgation of the new central bank and banking laws will further enhance the supervisory power and autonomy of BAM. To this end, steps have been taken to strengthen banking supervision capacity in BAM and it started to withdraw from both the capital and management of credit institutions. Progress was also made in the restructuring of specialized banks. The Crédit Immobilier et Hotelier is currently seeking an international partner and the Crédit Agricole du Maroc will no longer finance quasi-fiscal operations. The authorities indicated that they will not extend their exemptions from prudential regulations beyond June 2007. The staff recommended that all banks be brought to compliance with prudential regulations as early as possible, if necessary by new capital injections. The authorities intend to continue their efforts to implement FSAP recommendations. The World Bank is preparing a financial sector adjustment loan to accompany those efforts.

28. Limited access to and high cost of credit for small- and medium-size enterprises (SMEs), which represent the core of Morocco’s enterprise sector, is of major concern to the authorities. A World Bank survey found that problems related to the information system on enterprises, property rights, contract enforcement, and the lack of financial management skills in the enterprise sector were the main structural constraints. The staff underscored the importance of removing the above structural constraints to enhance the availability and reduce the cost of credit to SMEs. Moroccan banks are receiving assistance from the IFC to better assess credit to SMEs. The authorities intend to support SME financing through a guarantee fund that will have its own capital and be supported by donors to dispel contingent budget risks. Beneficiaries would need to adhere to minimum corporate governance and transparency requirements to access the guarantee fund.

D. Monetary and Exchange Rate Policies

29. Monetary policy is being implemented in a context of abundant liquidity and relatively weak domestic demand. BAM, while keeping its announced main policy rate at 3.25 percent, effectively reduced interbank interest rates to about 2.50 percent since 2004 (Figure 6) by limiting the volume of liquidity mopped up from the market. Banks deposit most of their remaining excess liquidity at the money market floor deposit facility rate of 2.25 percent because of the absence of unsatisfied credit demand. The authorities explained that they considered inappropriate to formally reduce their announced main policy rate to the observed interbank rate in a context characterized, in their view, by uncertainty on inflation, the absence of unsatisfied credit demand, and in view of the level of interest rates abroad. They also indicated that a further reduction in interest rates would mainly be reflected in deposit rather than lending rates, particularly SME lending rates (Table 9).

Figure 6.Morocco: Monetary Developments

Source: Moroccan authorities

1/ Interest rate for BAM’s 7-day advances.

Table 9.Morocco: Monetary Survey, 2001–05
Proj.
20012002200320042005
(In millions of dirhams)
Net foreign assets102,605111,269128,266146,163149,791
Monetary authorities99,920104,979123,156137,123140,751
Of which:
Gross reserves96,640101,760120,012134,001137,629
Net Fund position1,023974916899899
Deposit money banks2,6856,2905,1109,0409,040
Net domestic assets224,806236,931249,878260,448280,261
Domestic credit294,257305,944323,629334,166352,240
Net credit to the government85,61089,47089,09882,72577,799
Banking system78,34882,08681,41575,01570,015
Bank Al-Maghrib5,1875,1634,2922,982-2,018
o/w deposits 1/-10,806-11,322-13,801-15,484-15,484
Deposit money banks73,16176,92372,03372,03372,033
Treasury-IMF-1,023-974-916-899-899
Credit to the economy208,647216,474234,531251,441251,441
Other liabilities, net69,45169,01373,75173,71871,979
Money and quasi money327,411348,200378,144406,611430,052
Money243,117264,863290,784318,870337,253
Currency outside banks66,02569,55674,89079,43984,019
Demand deposits177,092195,307215,894239,431253,234
Quasi money84,29483,33787,36087,74192,799
(Annual percentage change)
Net foreign assets85.78.415.314.02.5
Net domestic assets-2.85.45.54.27.6
Domestic credit0.44.05.83.35.4
Net credit to the government-7.44.5-0.4-7.2-6.0
Credit to the economy4.03.88.37.29.1
Money and quasi money14.26.38.67.55.8
(In percent of broad money)
Net foreign assets16.52.64.94.70.9
Domestic credit0.43.65.12.84.4
Net credit to the government-2.41.2-0.1-1.7-1.2
Credit to the economy2.82.45.24.55.7
Other assets net-2.70.1-1.40.00.4
Memorandum items:
Velocity (GDP/M3)1.171.141.111.091.06
Velocity (nonagr. GDP/M3)0.990.960.920.920.91
Credit to economy/GDP (in percent)54.554.455.956.760.2
Credit to economy/nonagr. GDP (in percent)64.564.967.167.470.1
NPLs/Gross loans (in percent) 2/16.817.218.119.4
o/w commercial banks10.711.212.312.4
NPLs net of provisions/capital (in percent)55.557.166.561.9
o/w commercial banks19.918.723.320.5
Capital adequacy ratio (in percent)12.612.29.310.2
o/w commercial banks15.315.313.013.5
Liquid assets to total assets (in percent)123.1122.3120.8
Domestic nonbank debt/GDP (in percent)26.131.735.338.141.9
Credit to gov/dom debt (in percent)48.846.842.436.630.4
Lending interest rate (in percent)8.98.58.17.8
Deposit interest rate (in percent)5.04.53.83.6
Money market rates (in percent)4.43.03.22.4
DHs per US$, period end11.5110.388.758.22
Sources: Bank Al-Maghrib; and Fund staff estimates and projections.

30. In view of the very low inflation, the staff considered BAM’s effective reduction of monetary policy interest rates appropriate. The staff noted, however, that the differential between the announced policy rate and the effective money market rate affects the transparency of monetary policy, which has been enhanced by BAM’s recent simplification of its monetary policy instruments. Staff argued that a formal reduction of BAM’s main policy rate would be desirable, and pointed out that the use of the deposit facility, normally available at banks’ initiative on an exceptional basis to effectively reduce interest rates, does not foster interbank activity. Staff also noted that BAM’s directive to banks to provide information on loans granted at interest rates below reference rates could constrain competition, as some banks pointed out to the mission.

31. The authorities consider that the current fixed exchange rate regime has served Morocco well. The balance of payments is strong, inflation is low, the real effective exchange rate has depreciated since 2001, and equilibrium exchange rate estimates do not point to a misalignment (Figure 7). The staff shared the authorities’ views and noted that the current regime could be appropriate if Morocco’s historical characteristics (heavy reliance on trade with the Euro area, the low impact of terms of trade shocks on economic activity, and the relatively low level of capital flows) remained the same.11 However, staff argued that forward looking considerations favor a gradual transition to a flexible exchange rate regime. As the economy opens up and is potentially more vulnerable to external shocks, a flexible exchange rate regime would facilitate adjustment to those shocks. Structural reforms, by increasing productivity and efficiency, could justify a strong currency, but these may take time to materialize. Exchange rate uncertainty would be amplified by an opening of the capital account. A flexible exchange rate would also be necessary to maintain monetary independence if the capital account were opened up, and would be desirable to avoid providing implicit exchange rate guarantees.

Figure 7.REER vs. Balance of Payments Equilibrium Exchange Rate (BPEER) 1/

Source: IMF staff estimates.

1/ The model of the balance of payments equilibrium exchange rate (BPEER) was used to estimate Morocco’s equilibrium exchange rate. See SM/05/277, Supplement 1 for details.

32. The authorities noted the possibility of an appreciation of the dirham if the exchange rate regime became flexible in the context of balance of payments surpluses, which could hurt exports and investment. The staff argued that an appreciation of the dirham under a flexible exchange rate regime was possible but would lead to higher imports of consumption and investment goods, which would dampen the appreciation. Over time, however, it is difficult to know what the dynamics of a move to a more flexible exchange rate would look like.

33. The authorities intend to review the pros and cons of alternative exchange rate regimes, taking into account the characteristics of the Moroccan economy and their future policy intentions. They are open to the idea of a possible gradual move to a flexible exchange rate regime. At the request of the authorities, the staff prepared a paper on the exchange rate regime.12 The staff also discussed at the technical level operational and institutional issues that would be involved in a transition to a flexible regime, including a new monetary policy framework to provide a nominal anchor, the development of foreign exchange markets and risk management capacities in the financial sector, and the design of intervention policies. The authorities indicated that they would take the conclusions and recommendations of staff into consideration in their internal deliberations.

E. Medium-Term Framework and Risks

34. The staff, in consultation with the authorities, prepared a medium-term framework aimed at achieving the high growth objective. The framework assumes that, in the context of moderate export growth in an increasingly competitive international environment, the domestic market would continue to be the main source of growth. Structural reforms, public investment in infrastructure, and reduced output volatility would foster private investment. As the economy grows and tax burdens are reduced and shared among a widened tax base, a more stable and steadily increasing private consumption growth pattern would enhance private investor confidence. Also tied to fiscal consolidation and ongoing structural reforms, private investment and productivity are forecast to steadily increase and unemployment to steadily decline (Table 10). In this context, the staff noted that a gradual transition to a flexible exchange rate would ensure a proper balance between all sources of growth. Growth is expected to significantly rebound in 2006 following the negative agriculture shock in 2005, with a gradual increase in nonagricultural growth thereafter. The increase in nonagricultural growth is expected to come from higher private investment and productivity increase with the envisaged structural reforms.

Table 10.Morocco: Selected Macroeconomic Indicators, 2001–10
20002001200220032004200520062007200820092010
(Percentage change)
Real GDP growth1.06.33.25.54.21.05.94.55.05.15.3
Real nonagricultural GDP growth3.63.62.83.54.74.04.34.75.35.55.6
Inflation (CPI)1.90.62.80.621.52.02.02.02.02.02.0
Export growth in US$-1.66.99.216.716.45.86.76.77.27.47.6
ICOR 1/6.54.48.66.14.45.94.94.54.24.24.1
Employment growth0.30.92.54.63.61.04.53.13.33.43.4
(In percent of GDP)
Gross investment23.722.922.724.125.024.625.425.826.226.526.8
Government3.02.92.82.62.72.62.62.93.03.23.3
Private 2/20.720.019.921.422.422.022.822.923.223.423.5
of which: Stockbuilding0.6-0.20.10.5-0.20.10.10.10.10.1
National saving22.327.626.827.727.323.725.325.3225.124.724.3
Government0.70.91.91.31.41.23.13.84.85.56.2
Private 2/21.626.724.926.525.822.522.221.520.319.218.0
External saving
(=current account balance)-1.44.84.13.62.2-0.9-0.2-0.6-1.2-1.8-2.6
Total External debt 3/55.047.841.035.130.83.92227.725.823.922.220.7
GDP (in billions of U.S. dollars)33.333.936.143.850.053.057.060.865.169.975.1
Fiscal balance 4/-6.4-5.7-4.7-5.3-4.9-5.5-3.9-3.7-3.0-2.6-2.1
Primary balance-1.1-0.8-0.3-1.2-1.0-1.80.20.31.01.31.7
Borrowing requirement2.52.44.52.91.85.83.13.12.52.11.7
Government debt ratio 5/81.574.771.468.565.869.967.866.864.862.559.9
Privatization receipts0.06.10.22.92.32.60.60.40.40.30.3
Arrears3.9-2.9-0.1-0.50.4-3.10.00.00.00.00.0
Sources: Ministry of Finance; Bank Al-Maghrib; and Fund staff estimates and projections.

35. The macroeconomic framework forecasts a widening of the current account deficit as investment picks up (Table 11). The projected deficits would not pose a problem to the balance of payments since they would be financed by the private sector and existing national savings. Foreign exchange reserve accumulation would slow down over the medium term but reserves coverage would remain comfortable. Standard external debt sustainability analysis shows that Morocco’s external debt will remain sustainable over the medium term (Table 12). Moreover, the authorities believe that the deterioration in the trade balance would be less because of their optimism about petroleum prices and textile exports.

Table 11.Morocco: Balance of Payments, 2004–10(In millions of U.S. dollars; unless otherwise indicated)
Est.Projections
2004200520062007200820092010
Current account1,109-455-92-352-761-1,293-1,932
Trade balance-6,489-8,505-8,521-9,306-10,234-11,300-12,490
Exports, f.o.b.9,73910,19110,87011,53612,31913,18014,131
Agriculture1,5321,6331,7531,8511,9542,0642,204
Phosphates and derived products1,6251,8191,9121,9122,1182,2672,428
Imports, f.o.b.-16,228-18,696-19,391-20,842-22,553-24,480-26,621
Petroleum1,6392,1572,3012,3992,5202,6662,857
Capital goods3,8814,1894,4454,8885,3815,9346,531
Food products1,5342,4612,0242,0972,2052,3222,446
Services3,3883,7244,0974,4254,7725,1435,550
Tourism receipts3,9204,2674,5674,9465,3545,7966,283
Income-651-740-841-806-783-764-767
Transfers4861506651725335548456295776
Private transfers (net)4,7294,9575,0645,2265,3755,5205,667
Workers’ remittances4,2184,4594,5514,6954,8284,9585,090
Official grants (net)132109109109109109109
Capital account-8-6-6-6-6-6-6
Financial account9826801,9422,0362,2682,5182,790
Direct investment 1/8221,3161,2191,2211,3571,5091,679
Privatization01,442347232232232232
Portfolio investment 2/529988889
Other-370-6457148079031,0001,102
Private 3/781-2208739319981,0701,151
Public medium-and long-term loans (net)-1,151-425-159-125-95-70-48
Disbursements9251,3381,6211,6341,6461,6591,672
Amortization-2,076-1,763-1,780-1,758-1,741-1,729-1,720
Reserve asset accumulation (-increase)-1835-220-1844-1679-1501-1219-853
Errors and omissions-268000000
Memorandum items:
Exports of goods’ volume (percentage change)5.72.15.85.55.75.85.9
Imports of goods’ volume (percentage change)5.79.23.67.27.67.87.8
Trade balance (in percent of GDP)-13.0-16.0-14.9-15.3-15.7-16.2-16.6
Current account balance (in percent of GDP)2.2-0.9-0.2-0.6-1.2-1.9-2.6
Excluding official grants (in percent of GDP)2.0-1.1-0.4-0.8-1.3-2.0-2.7
Terms of trade (percentage change)-10.8-3.10.80.40.40.40.3
Excluding oil-10.3-0.50.8-0.1-0.10.00.0
Impact of US$1 increase in oil prices (US$, mlns)43.445.5
Gross official reserves 4/16,34616,02117,87819,56821,08222,31723,188
(In months of imports of goods and nonfactor services)10.08.69.39.59.49.28.8
Debt service as percentage of export of goods, nonfactor services and MRE 5/12.810.610.910.49.79.18.5
External public and publicly guaranteed debt (US$, blns)14.013.613.413.313.213.113.1
In percent of GDP26.025.723.521.920.318.817.5
DHs per US$, period average8.87
DHs per US$, period end8.22
Oil price (US$/barrel)37.847.447.546.345.044.043.5
Sources: Ministry of Finance; Office des Changes; and Fund staff estimates and projections.
Table 12.Morocco: External Debt Sustainability Framework, 2000–10(In percent of GDP; unless otherwise indicated)
ActualProjections
20002001200220032004200520062007200820092010
I. Baseline ProjectionsDebt-stabilizing

noninterest

current account 6/
External debt53.946.943.538.433.230.127.725.824.022.320.7-4.2
Change in external debt-2.2-7.0-3.4-5.1-5.2-3.1-2.4-1.9-1.8-1.7-1.6
Identified external debt-creating flows (4+8+9)3.5-13.7-8.2-16.6-8.6-3.5-4.1-3.2-2.6-1.9-2.5
Current account deficit, excluding interest payments-1.5-7.3-6.2-5.3-3.5-0.2-0.9-0.50.20.91.7
Deficit in balance of goods and services6.33.33.13.96.29.07.88.08.48.89.2
Exports31.432.933.832.533.133.032.832.832.932.932.9
Imports37.636.236.936.439.342.140.640.941.241.742.1
Net nondebt creating capital inflows (negative)-1.1-8.0-1.3-5.3-1.6-2.5-2.1-2.0-2.1-2.2-3.6
Automatic debt dynamics 1/6.11.7-0.8-6.0-3.5-0.8-1.0-0.7-0.7-0.7-0.7
Contribution from nominal interest rate2.92.62.11.71.31.11.11.11.00.90.9
Contribution from real GDP growth-0.6-3.3-1.4-2.0-1.4-0.3-1.6-1.2-1.2-1.1-1.1
Contribution from price and exchange rate changes 2/3.82.4-1.4-5.7-3.3-1.6-0.5-0.6-0.5-0.5-0.5
Residual, incl. change in gross foreign assets (2–3)-5.76.74.811.43.50.41.71.30.80.20.9
External debt-to-exports ratio (in percent)171.9142.5128.8118.1100.391.184.478.672.967.762.8
Gross external financing need (In billions of US dollars) 3/3.31.11.41.81.13.53.23.53.94.45.0
In percent of GDP9.83.23.94.22.210-Year

Historical

Average
10-Year

Standard

Deviation
6.65.65.75.96.36.7
Key Macroeconomic AssumptionsProjected

Average
Real GDP growth (in percent)1.06.33.25.54.23.15.41.05.94.55.05.15.34.4
Exchange rate appreciation (US dollar value of local currency, change in percent)-7.7-6.02.615.18.00.67.73.2-0.50.10.10.10.10.5
GDP deflator in US dollars (change in percent)-6.3-4.33.215.09.52.48.55.01.52.12.12.12.12.5
Nominal external interest rate (in percent)4.94.94.74.63.85.10.83.43.84.04.24.24.34.0
Growth of exports (US dollar terms, in percent)-1.66.99.216.716.48.27.05.86.76.77.27.47.66.9
Growth of imports (US dollar terms, in percent)4.9-2.18.419.823.38.19.813.43.77.48.18.48.68.3
Current account balance, excluding interest payments1.57.36.25.33.53.72.10.20.90.5-0.2-0.9-1.7-0.2
Net nondebt creating capital inflows1.18.01.35.31.62.62.42.52.12.02.12.23.62.4
II. Stress Tests for External Debt RatioDebt-stabilizing

noninterest

current account 6/
A. Alternative Scenarios
A1. Key variables are at their historical averages in 2005–10 4/30.125520.414.98.93.7-2.6
A2. Country-specific shock in 2005, with reduction in GDP growth (relative to baseline) of one standard deviation 5/30.127.725.824.022320.7-4.2
A3. Selected variables are consistent with market forecast in 2005–1030.127.725.824.022320.7-4.2
B. Bound Tests
B1. Nominal interest rate is at historical average plus two standard deviations in 2005 and 200630.128.527.325.423.722.0-4.1
B2. Real GDP growth is at historical average minus two standard deviations in 2005 and 200630.131.933.731328.826.2-5.4
B3. Change in US dollar GDP deflator is at historical average minus two standard deviation in 2005 and 200630.133.137.034331528.6-5.9
B4. Noninterest current account is at historical average minus two standard deviations in 2005 and 200630.129.128.126.224.422.8-4.2
B5. Combination of B1-B4 using one standard deviation shocks30.132.635.032.530.228.0-5.7
B6. One time 30 percent nominal depreciation in 200530.139.837.334.631.728.8-5.9

36. There are risks to the medium-term framework. It is difficult to forecast the exact magnitude of the impact the envisaged policies will have on the growth performance as well as the lags that will be experienced in the process. Thus, higher nonagricultural growth may take longer to materialize and growth may be lower than projected in the near future. In addition, there are risks to the balance of payments outlook with the increased competition in textile exports. Studies by OECD and World Bank staff indicate that Maghreb countries are becoming more specialized in textile market segments that require quick product delivery, making their vertical integration and geographical proximity to Europe key comparative advantages. New investments are being made by international textile firms confirming this view. Nevertheless, difficulties are ahead for textiles in Morocco, but the strong external position can withstand shocks to the textile industry.

F. Other Issues

37. A fiscal ROSC was conducted in May 2004 and found that the authorities complied with most fiscal transparency requirements. Main recommendations to improve transparency, which the authorities are already implementing, were to: (a) put in place a medium-term budget framework and performance budgeting system; (b) evaluate government contingent liabilities; (c) extend budget coverage to local governments and nonmarket public enterprises, including Fonds Hassan II; and (d) increase accountability through timely reporting and audit of budget execution. The authorities plan to publish the fiscal ROSC.

38. Morocco’s statistical database is appropriate for surveillance. A STA mission overlapped with the Article IV consultations to review the authorities’ progress towards meeting SDDS subscription. The STA mission concluded that Morocco could subscribe to the SDDS by October 2005 if the agreed action plan is fully implemented, which the mission determined was within reach.

IV. Staff Appraisal

39. Macroeconomic conditions remain stable in Morocco. In recent years, the external current account has remained in surplus and gross official reserves have increased. The balance of payments surpluses have contributed to abundant liquidity in the financial system and a decline in interest rates, which were appropriately accommodated given the low inflation rate. This has facilitated the financing of high fiscal deficits at low costs without constraining private credit and undermining macroeconomic stability. With additional privatization receipts and debt/equity swaps, the public debt-to-GDP ratio continued to decline.

40. Growth continues to be volatile and insufficient to reduce unemployment and poverty. Overall growth has been volatile because agriculture is dominated by cereal production which is highly vulnerable to droughts. In recent years, private domestic demand supported by strong remittances flows and declining interest rates has been the primary source of growth.

41. Shifting the Moroccan economy to a sustainable higher growth path remains the key challenge. A set of mutually reinforcing policies could help meet this challenge in the context of Morocco’s increasing integration into the world economy. First, macroeconomic stability should be maintained and the fiscal position should be put on a sustainable path. Second, structural reforms should be accelerated to render the business environment internationally competitive and foster productivity and private investment. Finally, a gradual transition to a flexible exchange rate regime would be desirable to support the economy as it goes through structural transformation, faces greater international competition, and integrates financially. However, it is difficult to forecast precisely the magnitude and the timing of the impact of these policies on the growth performance. Thus, sustained high rates of growth may not be achieved for some time.

42. Fiscal consolidation is essential in the medium term. Although the current fiscal stance and public debt level do not pose a risk to macroeconomic stability in the short term, current policies would not place public finances on a sustainable path. Therefore, the staff welcomes the authorities’ objective of reducing the deficit to 3 percent of GDP by 2009. The achievement of this objective and its compatibility with a high growth scenario will require: (a) a reform of the tax system that will widen the tax base and allow a reduction in tax rates; (b) a containment of public salary increases, which affect private sector wages and the competitivity of Moroccan producers, and a reduction in the wage bill-to-GDP ratio, which will enhance the flexibility of the budget including to dampen income and consumption volatilities; (c) an overhaul of the food subsidy system and its replacement by targeted support to vulnerable groups, which should lead to a diversification of agricultural production and more stable income and consumption levels in rural areas; and (d) the implementation of the petroleum price adjustment mechanism, which will release resources to be channeled to more productive investments. In order to buttress private sector confidence in the maintenance of macroeconomic stability, it is important to avoid slippages in fiscal consolidation.

43. The authorities have recently made commendable progress in implementing structural reforms, most importantly related to trade liberalization, the financial sector, public enterprises, and the labor market. However, much remains to be done to strengthen private activity and enhance productivity. Therefore, it is encouraging that the authorities are determined to move expeditiously with a broad-based structural reform agenda.

44. The authorities intend to fully exploit the benefits of trade integration. To this end, the staff encourages the authorities to simplify the tariff structure, reduce tariffs, and eliminate variable tariff rates in parallel with the reform of the food subsidy system. The authorities’ efforts to liberalize trade at the regional level should help establish a large regional market and attract foreign investment.

45. Improving the business environment should increase the growth potential. To this end, the authorities have initiated important reforms. The staff encourages effective implementation of the new labor code and the law on domestic competition, and speedy progress with reform of the judicial system. In an effort to improve the business environment, provision of exemptions or special incentives in favor of specific sectors should be avoided.

46. The financial system remains sound, but needs to be further strengthened. Non performing loans, although stabilized, remain high. Progress was made in the restructuring of specialized banks, but it is imperative that all banks be brought to comply with prudential regulations as early as possible. Significant progress was made in the implementation of FSAP recommendations to strengthen banking supervision. The promulgation of the new central bank and banking laws will further enhance the supervisory power of BAM. The authorities’ intentions to implement the remaining FSAP recommendations and further reform the financial sector with an adjustment loan from the World Bank are welcomed. It is also essential to remove the structural constraints to enhance the availability and reduce the cost of credit to SMEs, which represent the core of Morocco’s enterprise sector.

47. The current fixed exchange rate regime has served Morocco well and there are no signs of misalignment of the dirham. However, forward-looking considerations, in particular the increasing opening of the Moroccan economy and the envisaged structural reforms to increase efficiency and productivity, favor a gradual transition to a flexible exchange rate. The review the authorities are undertaking of the pros and cons of alternative regimes is very timely. The staff welcomes the openness of the authorities to the idea of a possible gradual move to a flexible exchange rate regime.

48. Morocco’s economic data base is sufficient for conducting effective surveillance. Authorities have made important progress toward meeting SDDS standards. The staff encourages the authorities to implement the agreed action plan expeditiously to enable Morocco to subscribe to the SDDS by October 2005.

49. It is recommended that the next Article IV consultation be conducted on the standard 12-month cycle.

APPENDIX I Morocco—Fund Relations

As of April 30, 2005

I. Membership Status: Joined: April 25, 1958; Article VIII

II. General Resources Account:

SDR Million%Quota
Quota588.20100.00
Fund holdings of currency517.7688.02
Reserve position in Fund70.4411.98
Holdings exchange rate

III. SDR Department:

SDR Million%Allocation
Net cumulative allocation85.69100.00
Holdings67.7579.07

IV. Outstanding Purchases and Loans: None

V. Latest Financial Arrangements:

TypeApproval

Date
Expiration

Date
Amount Approved

(SDR Million)
Amount Drawn

(SDR Million)
Stand-byJan 31, 1992Mar 31, 199391.9818.40
Stand-byJul 20, 1990Mar 31, 1991100.0048.00
Stand-byAug 30, 1988Dec 31, 1989210.00210.00

VI. Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):

Forthcoming
20052006200720082009
Principal
Charges/Interest Total0.310.450.450.450.45
Total0.310.450.450.450.45

VII. Implementation of HIPC Initiative: Not Applicable

Exchange System

Morocco maintains an exchange system that is free of restrictions on the making of payments and transfers on current international transactions. However, Morocco maintains restrictions for security reasons against Iraq and the Federal Republic of Yugoslavia (Serbia and Montenegro), pursuant to relevant UN Security Council resolutions. The exchange rate is freely determined in the interbank foreign exchange market which was created in 1996. Bank Al-Maghrib (BAM) intervenes in the market to maintain the exchange rate within its target range, defined around a fixed central rate. Morocco has a conventional peg arrangement. The central exchange rate of the Moroccan dirham is pegged to a basket of currencies representing Morocco’s principal trading partners. During 2001, the authorities changed the basket of currencies by increasing the weight of the Euro to better reflect the weight of external trade with EU countries. BAM fixes daily rates for the rated currencies on the basis of variations in the value of the basket. Rates for most currencies quoted in Morocco are established on the basis of the daily dirham-euro rate and the cross rates for those currencies in relation to the euro in the international exchange markets. In January 2005, the SDR/dirham exchange rate was SDR 1 = DH 13.09.

Article IV consultation

Morocco is on the 12-month cycle. The last consultation discussions took place in Rabat during February 12–23, 2004, and were concluded by the Executive Board on May 5, 2004.

Technical assistance

February 16–29, 2000: STA—following up on government finance statistics improvement

November 7–22, 2000: FAD—advising on improving the design of the tax system and its administration

January 16–30, 2002: STA—ROSC Data Module Mission

February 9–20, 2004: MFD—Monetary Framework

May 17–24, 2004: FAD—Modernizing the tax system and its administration.

June 28–July 7, 2004: FAD—ROSC Fiscal Module.

2004: MFD—Peripatetic visits—internal credit rating system.

Resident representative: None

APPENDIX II MOROCCO: Financial Relations with the World Bank

(As of March 31, 2005)

The Bank FY05 portfolio in Morocco (measured in number of active Loans and TFs and in commitment value as of today) consist of 16 operations (10 IBRD loans and 6 Trust Funds) with total commitments of US$325 million approximately. Disbursements for investment projects amounted to US$26.3 million in FY04 compared to US$34.2 million (projected) in FY05. Key indicators of disbursement compared with Bank averages leave room for improvement. Indeed, the Disbursement Ratio for the Morocco portfolio fell from 15.5% in FY02 to 10.3% in FY04 and currently stands at 8.1 % in FY05, well below the Bank wide and the region average.

Despite the fact that the quality of the portfolio has improved over the last five years, institutional capacity for project implementation needs to be further strengthened. A participatory Country Portfolio Performance Review (CPPR) took place in June 2002 and a follow-up CPPR in February 2003. A new CPPR is scheduled for May 2005 to tackle this issue through ongoing participatory monitoring and capacity building activities. It will be followed by periodic reviews in order to address the issue of low disbursement and to reassess progress made on key actions agreed upon to improve project and portfolio management.

From FY99 to FY01, the Bank has provided extensive technical assistance through its various lending operations for projects, as well as through its sectoral adjustment loans (SAD). Three SAD were approved, amounting to US$416 million, to support the Government in establishing a sound macroeconomic framework and in implementing a broad reform program covering public sector reform, private sector development, poverty reduction and human resource development and telecommunications regulatory framework. This FY, the Bank has approved an innovative operation in the education sector amounting US$80 million, adopting a Sector Wide Approach (SWAp), to be implemented as a pooled-financed investment operation. This operation is the first SWAp project in the MENA region. This approach uses the Borrower’s fiduciary and technical systems and procedures.

In addition, investment and learning and innovative loans (LIL) were approved during FY99–03, amounting respectively to US$89 million, US$7.5 million, US$32.6 million, US$5 million and US$30.9 million. They include assistance to: legal and judicial development (US$5.3 million), Sustainable Coastal Tourism Development project (US$2.2 million), Irrigation Based Community Development (US$32.6 million), Support to Social Development Agency project (US$5 million), Adult Literacy (US$4.1 million) and Rainfed Agriculture Development (US$26.8 million) and are mostly designed with participatory and community driven approaches.

Also, to move the reform agenda forward in areas where agreement was reached with Government, we have developed intermediary products such as narrowly targeted, small budget support operations. To that extent, the Board approved last June an operation to improve Government’s management of real assets held by social sector ministries (Asset Management Reform Loan, US$45 million).

As prospects for lending have been reduced, due to large privatization receipts (telecom license and privatization) and a deterioration of the fiscal stance, our program has increasingly turned toward knowledge transfer through participatory approaches. After a number of policy notes on sectoral issues such as education, administration and the financial sector, and related long-term prospects were prepared, the Bank has provided strong analytical and institutional support to budget and public administration reform to the Moroccan Government. Participatory approaches (Programmatic Economic and Sector Work-PESW) have been developed in the area of public sector and price policy reforms. Continued support through PESW is foreseen in the budgetary and public administration reform, agriculture reform, tertiary education and decentralization and municipal development areas.

Due to improved economic performance in 2002 and 2003, and plans to reduce the fiscal deficit to 3% by 2007, the country economic management appears to be on a fiscally sustainable path. As a result of this, Morocco is now in a position to engage in structural reform loans, as envisioned in the enhanced base case scenario of the CAS. Such Bank’s support (adjustment lending) has been requested by the Moroccan authorities for reform formulation and implementation in the areas of public reform, financial, education, agriculture and housing sectors.

Two projects are scheduled to be negotiated shortly and be presented to the Board of Directors before the end of this FY: a Financial Sector Development Policy Loan (tentatively US$200 million) and a Housing Sector Development Policy Loan (tentatively US$100 million).

Morocco: Financial Relations with the World Bank(As of March 31, 2005)
Total Net

Commitments
Undisbursed

Balance
(In millions of U.S. dollars)
IBRD lending operations
128 loans closed 1/7,268
10 active loans
- Sewerage & Water Reuse II28.07.5
- Fès Medina Rehabilitation9.65.1
- Health Management45.744.0
- Irrigation Based Community Devt.32.631.1
- Social Devt. Agency5.06.2
- Adult Literacy4.14.6
- Asset Management45.026.6
- Rainfed Agriculture Devt.26.831.2
- Rural Roads36.937.6
- Basic Education Reform Support80.078.3
Total active loans313.7272.2
Repayments 2/5,714.5
Debt outstanding 2/2,442.9
19992000200120022003200420052/
Net lending by the World Bank (by fiscal year)3/
Commitments4407.597.6575.936.9180
Disbursements411.4106.8115.852.758.7112.3119.1
Debt service514.6533.9425.5427.5420.5443.8444.6
Principal298.6333.3246.3270.2283.9328.4381.3
Interest4/216200.6179.2157.3136.6115.463.3
Net transfer5/-103.2-426.5-309.7-374.8-361.8-331.5-321.8
APPENDIX III Morocco: Statistical Issues

Available economic and financial data have been provided to the staff on a regular basis and most of these data are also published or made available on publicly accessible web sites. Data provision is adequate for surveillance purposes.

A data ROSC mission, which took place in January 2002, carried out a review of Morocco’s data dissemination practices according to the GDDS, as well as an in-depth assessment of the compilation of national accounts, CPI, PPI, government finance, monetary, and balance of payments statistics. As the authorities maintain a strong interest in subscribing to the SDDS, the mission also identified areas to be strengthened to meet the SDDS requirements. A subsequent mission (April-May 2005) noted that the authorities have made important progress toward meeting SDDS requirements. Morocco meets most of the SDDS requirements in terms of coverage, periodicity, and timeliness. The mission proposed an action plan to address the remaining issues. If implemented, it would enable Morocco to subscribe to the SDDS by October 2005.

Real sector

The Statistical Office is working on rebasing national accounts from 1980 to 1998 and on bringing it in conformity with the System of National Accounts 1993. This reform program has made good progress and the first series of accounts for 1998–2000 has been finalized. The new series of accounts covering the period 1998–2004 will be released during 2005 once the work on the years 2001–2004 is completed. The revision of the consumer price index is also planned to be completed during 2005, with the update of weights based on the results of the 2001 household budget survey. A consistent monthly time series for the producer price index based on the 1995 industrial register’s weights has been released since 1997. With respect to SDDS subscription, the authorities need to produce an index of wages/earnings, and improve the timeliness of gross domestic product statistics. They intend to avail themselves of a flexibility option for the industrial production index.

Government finance

Central government finance data are generally available to MED with a few months lag. GFS data reported by Morocco for publication in the GFS Yearbook are not timely (no data have been submitted for the past three years), and their coverage is limited to the budgetary central government, the Moroccan pension fund, and the National Social Security Fund. No data for the central government on a monthly or quarterly basis are reported to STA for publication in IFS. A technical assistance STA mission in February 1999 and a follow-up mission in February 2000 advised on further improvements in the compilation of both central and local government statistics and assisted the government in establishing appropriate consolidation procedures for a presentation of general government data. Substantial progress has been made by the Accounting Office for the compilation of local government data and their consolidation with central government budgetary data. The actual use of those new rich source data for general government compilation may require further clarification of responsibilities between various directorates. Regarding the monthly Treasury’s expenditure and revenue table, the ROSC data module recommended some reclassifications (transfers, privatization), to maintain the Fonds Hassan II within the coverage of the table, and, for dissemination purposes, to complement the table with more details and data on financing and improve the format of dissemination. The ROSC mission generally recommended various actions to improve dissemination formats and practices towards meeting the SDDS GFS standards. The recent SDDS mission prepared an action plan for the production of data on the consolidated general government operations, envisaging completion by October 2005.

Monetary and financial statistics

Bank Al-Maghrib disseminates monetary and financial and other macroeconomic statistics to the general public primarily through its website (bkam.ma). The statistical part of the site includes web-based versions of the Bank’s weekly, monthly, quarterly, and annual publications. The timeliness of reporting of the accounts of the central bank and those of the banks (35–37 days lag) has improved recently, but remains lower than that prescribed under the SDDS (two-week lag). The degree of detail in the breakdown of financial assets and liabilities by resident institutional sector could be more extensive; at present, this problem is reflected in the lack of precision in some of the monetary aggregates, including credit indicators.

Balance of payments

The ROSC mission found that in general Morocco’s balance of payments statistics are in line with the concepts and definitions set out in the fifth edition of the Balance of Payments Manual (BPM5). However, further work is needed to implement certain recommendations on scope, classification, and basis for recording. Thus, recent measures to exclude the effects of changes in exchange rates from the valuation of transactions in reserve assets should be continued, and transactions in foreign currency assets and liabilities of intermediary banks at their correspondent banks should be excluded from transactions in reserve assets. Also, the Office des Changes (OC) is planning to treat operators in free trade zones as residents. Offshore banks located in Morocco should also be considered residents. The OC lacks a firm legal basis for compiling and disseminating balance of payments statistics, relying for the time being exclusively on customs and exchange control data. These data are gradually to become less available and too limited as liberalization proceeds and as participation of foreign investors in the Moroccan economy increases. The OC has initiated legislative measures that would give it access to statistical data collected directly from economic operators as needed among other things to record private foreign debt, and more generally of the international investment position. Furthermore, the ROSC mission recommended the introduction of quarterly surveys of enterprises and other agencies to improve the scope, classification, and valuation of balance of payments transactions, in particular for goods for processing, transportation services, and financial transactions. Since May 1998, the OC has been publishing, in its new internet site, monthly statistics on trade, tourism, private transfers, and incoming foreign direct investment in accordance with the BPM5. The quality of balance of payments statistics will significantly improve with the planned inclusion of free trade zones and offshore banks located in Morocco in its economic territory.

The authorities are compiling the Data Template for International Reserves and Foreign Currency Liquidity (Reserves Template) in broad conformity with SDDS requirements. The SDDS mission suggested minor adjustment to the data available and the regular dissemination of the Reserves Template. The authorities also need to compile quarterly external debt data in order to subscribe to the SDDS; source data are available and this information should be regularly disseminated by the Ministry of Finance and Privatization starting October 2005. The international investment position data are disseminated annually with a timeliness within SDDS requirements.

Morocco meets or exceeds the GDDS recommendations in the external sector, except for the twice a year publication of the external debt service schedule and the quarterly publication of public and publicly-guaranteed external debt statistics. The quarterly publication of balance of payments statistics is in line with the SDDS recommendations, but the timelines exceeds the SDDS requirements with three months. To further comply with the SDDS requirements, the data template on international reserves and foreign currency liquidity should be used and disseminated.

The latest BOP and IIP information received from Morocco, and published in the IFS, relates to quarterly BOP data for 2003 and annual IIP data for 2002 and 2003 (which was reported for the first time in 2004). Furthermore, Morocco reports on a regular basis international liquidity data to STA for publication in the IFS.

MOROCCO: Table of Common Indicators Required for Surveillance

As of June 8, 2005

Date of latest observationDate receivedFrequency of Data6Frequency of Reporting6Frequency of publication6
Exchange Rates05/31/0505/31/05DDD
International Reserve Assets and Reserve Liabilities of the Monetary Authorities104/30/0505/31/05WWW
Reserve/Base Money04/30/0505/31/05MMM
Broad Money04/30/0505/31/05MMM
Central Bank Balance Sheet04/30/0505/31/05MMM
Consolidated Balance Sheet of the Banking System04/30/0505/31/05MMM
Interest Rates205/31/0505/31/05DDD
Consumer Price Index03/31/0505/31/05MMM
Revenue, Expenditure, Balance and Composition of Financing3 - General Government403/31/0505/31/05
Revenue, Expenditure, Balance and Composition of Financing3 - Central Government03/31/0505/31/05MMM
Stocks of Central Government and Central Government-Guaranteed Debt 503/31/0505/31/05AAA
External Current Account Balance03/31/0505/31/05MMM
Exports and Imports of Goods and Services03/31/0505/31/05MMM
GDP/GNP12/31/0405/31/05QQQ
Gross External Debt03/31/0505/31/05QQQ

See SM/04/121 and SM/03/119.

The national poverty line was at about US$350 per year per person in 1999.

See SM/05/277, Supplement 1 for more detailed analysis of Morocco’s growth performance.

A commonly accepted approach to assessing debt sustainability is to view fiscal policy as sustainable if it delivers a ratio of public debt-to-GDP that is stable, and then calculate the primary balance that would be required to achieve that. During 2000–04, the primary deficit averaged 1 percent of GDP, while the differential between growth and the implicit interest rate on public debt averaged a negative 1 percent, implying that a primary surplus would have been required to at least stabilize the debt-to-GDP ratio before privatization.

For details, see World Economic Outlook, April 2005, Chapter II.

For developments in total factor productivity, see SM/05/277, Supplement 1.

Indeed, high public debt has favorable maturity and currency composition (see Table 4 and SM/04/124, Supplement 1) with low exposure to exchange rate and interest rate risks. The maturity of domestic debt was further increased in 2004 and short-term debt represents only 20 percent of government debt.

The authorities estimate that the budgetary cost of the voluntary departure/early retirement program would amount to about 0.7 percent of GDP in 2005.

See SM/04/121, Box 1 on the financial situation of the main pension funds.

The average tariff rate was 26 percent in 2004. There are eight multilateral tariff lines, which vary from 0 to 50 percent for nonagricultural and nonfood products.

For more details, see Section C of the exchange rate regime paper (SM/05/277, Supplement 1).

See SM/05/277, Supplement 1.

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