In a still unfavorable international environment, notably a weak economy in the euro area, the Moroccan authorities have been successful in maintaining macroeconomic stability and broadly satisfactory growth performance. This performance owes much to the economy’s strong fundamentals, the authorities’ sound fiscal, monetary and financial policies, and accelerated pace of implementation of their comprehensive structural reform agenda to provide an enabling environment for private sector development, strengthen and diversify the production and export base, further enhance the economy’s resilience, and promote stronger and more inclusive growth and higher job creation. While demonstrating unwavering commitment to their economic and financial program, they have also redoubled their efforts at strengthening the social safety net and reducing poverty and exclusion. Building on the gains achieved so far, the authorities are committed to staying the course of sound policies and structural reform. They broadly agree with staff assessment and recommendations and are grateful for the fruitful dialogue during the Article IV consultations. They also thank the Executive Board and management for their support.
Macroeconomic developments and outlook
GDP growth declined to about 3 percent in 2014 from 4.4 percent in 2013, mainly reflecting lower agricultural production compared to the 2013 bumper crop. However, nonagricultural GDP growth strengthened, reflecting a recovery in manufacturing, mining, and services with the exception of tourism which suffered from weak demand in Europe. Average inflation declined to 0.4 percent, notwithstanding the price hikes implemented under the subsidy reform, and should stabilize at 1.5-2.0 percent in 2015 and over the medium term. While growth is projected to reach 4.4 percent in 2015, reflecting continued strengthening in the nonagricultural sector, the recent declines in world oil prices could boost consumption and growth since, with the elimination of subsidies on liquid petroleum products and the indexation of their prices to international prices, these declines will be passed on to the consumer, even though they will be partly offset by the appreciation of the US dollar. Favorable rainfall so far also augurs for improving agricultural production. Therefore, it is likely that growth in 2015 would be stronger than projected.
Morocco’s medium-term outlook is favorable, underpinned by political and social stability, a strong institutional framework, and sound economic and financial policies. Growth is currently projected to accelerate over the medium term to 5.5 percent, but the authorities intend to reassess the growth outlook to take into account the impact of the fall in commodity prices. After declining to 5.8 percent of GDP in 2014, down from 7.6 percent of GDP in 2013, the current account deficit is projected to fall further to reach 3.3 percent of GDP in 2015 and stabilize at around 3 percent thereafter, financed in full by FDI. Sustained implementation of structural reforms, together with sizable investment in infrastructure and renewable energy, bodes well for future growth and the economy’s capacity to attract higher FDI and generate increased employment opportunities.
Fiscal developments and policies
Fiscal developments through end-December 2014 were in line with the PLL objective and the authorities’ medium term fiscal consolidation program of achieving a 3 percent of GDP deficit by 2017. The deficit fell from 5.2 percent of GDP in 2013 to 4.9 percent in 2014. Compared to the original estimate of 5.5 percent of GDP for 2013 in the PLL request report, the decline is larger, amounting to 0.6 percentage points of GDP. Reflecting lower-than-projected GDP growth, revenue increased less than expected (by 3.7 percent), but growth in total expenditure was even lower (2.9 percent), mainly reflecting a sharp decline in fuel subsidies and a decline in the wage/GDP ratio. The composition of spending shifted significantly toward capital expenditures, including capital transfers, which increased by more than 8 percent, compared to a moderate increase of 1.8 percent for current expenditures.
The authorities are confident that their fiscal policy and related structural reforms will help achieve their medium-term objectives of reducing the fiscal deficit to 3 percent of GDP in 2017 and putting the debt-to-GDP ratio on a firm declining trend as of 2016. The increase in the debt-to-GDP ratio has already slowed down significantly, with the ratio stabilizing at less than 64 percent in 2014. The 2015 budget targets a further reduction of the fiscal deficit to 4.3 percent of GDP, mainly reflecting the full effect of the subsidy reform and continued wage moderation.
Table 3 in the staff report indicates a decline in total investment in 2015 compared to 2014. Part of this decline is due to the reclassification of some 0.22 percent of GDP of expenditure from the capital to the current budget, consistent with the new OBL. This reclassification also explains to a large extent the increase in goods and services spending between 2014 and 2015 referred to in ¶14 of the staff report. The reassessment of the impact of the decline in global commodity prices on growth and the budget outlook in 2015, along with efforts to strengthen revenue collection and control on non-priority spending, should help create additional space for investment spending, while achieving the deficit reduction target.
Progress continues to be made on implementation of fiscal structural reforms and strengthening the fiscal policy framework. In this regard, the authorities attach high priority to early adoption and effectiveness of the new Organic Budget Law (OBL). A revised draft, to comply with the Constitutional Council finding that some of the dispositions of the adopted law were unconstitutional, was approved by the Council of Ministers on January 29 and will be submitted to parliament shortly. The authorities are also working closely with social partners to reach agreement on the planned pension system reform.
Monetary, exchange rate, and financial policies
Monetary policy continues to aim at maintaining low inflation while ensuring the conditions for adequate financing of the economy. The new window for financing very small, small, and medium-sized enterprises has been successful in responding to the needs of this crucial segment of the economy. The ongoing reform of the central bank law should enhance its independence and effectiveness of monetary policy. The authorities agree with staff assessment that the exchange rate is in line with fundamentals. They are reassessing their exchange rate regime and options of reform, with Fund technical assistance, in order to help promote greater integration into the world economy, enhance export diversification, and better absorb external shocks. They intend to draw conclusions on available options after the FSAP mission scheduled in April. In the meantime, the central bank is strengthening its analytical and forecasting tools and capabilities to support the transition to a more flexible exchange rate regime and a new monetary framework.
The financial sector remains sound and resilient, and further progress has been made in strengthening the regulatory and supervisory framework, including gradual implementation of Basel III, as indicated in the Written Communication. The new banking law increases the supervisory role of the central bank and creates a framework for Charia-compliant (so-called Islamic) banks, which should increase financial inclusion. The revised central bank law will enhance its role in promoting financial stability. The central bank is closely monitoring the expansion of Moroccan banks in Sub-Saharan Africa, and is strengthening cross-border supervision in close cooperation with host supervisors.
The authorities’ bold and comprehensive structural reform agenda to raise potential growth, diversify the economy, and promote competitiveness—including by improving the business climate and the incentive structure for private investment and by developing infrastructure—is paying off, as evidenced by the improved Doing Business rating and the ongoing structural transformation of the economy. New high growth sectors, such as automobile, electronics, and aeronautics have taken over the position of phosphates and derivatives as the largest source of exports, but traditional exports have also recovered recently and are expected to continue to grow over the medium term. The authorities are committed to further improving the business climate, reforming the judiciary, and increasing efficiency of spending on education and vocational training.
The complete elimination of subsidies on liquid petroleum products ahead of schedule constitutes a major leap forward in significantly reducing one of the key vulnerabilities of the economy. It attests to the resolve of the authorities to strengthen macroeconomic stability and enhance the resilience of the economy by taking politically difficult measures even in a pre-election period. This reform is supported by continuous strengthening of resources earmarked for social assistance to the poor and vulnerable population under the conditional cash transfer programs of RAMED and TAYSSIR.
Implementation of the authorities’ ambitious program of diversification of energy sources toward renewable resources, in particular windmill and solar power generation, in order to protect the environment and reduce dependence on fossil fuel, is proceeding broadly as scheduled with private sector participation. In this regard, the share of solar and windmill energy in total power generation should increase from 4 percent in 2009 to 17 percent in 2015 and is projected to reach 28 percent in 2020.
Performance under the 2014 PLL was strong. The indicative target for Net International Reserves for September 2014 was met with a wide margin. The indicative target for the fiscal deficit was exceeded by 0.7 percent of GDP, reflecting the authorities’ decision to ease private sector liquidity constraints by accelerating VAT refunds and budgeted transfers to some public enterprises, with no impact on end-2014 fiscal deficit, which declined to 4.9 percent of GDP, as targeted. Reserves increased further both in terms of import coverage and in percent of the Fund’s reserve adequacy metrics. On the structural reform agenda, subsidy reform was ahead of schedule, the Banking Law was adopted, and significant progress was made on the OBL, the pension reform, and the revised central bank law.
The staff report reaffirms Morocco’s eligibility to the PLL. While it continued to perform strongly in the monetary policy, financial sector, and data areas, there was a significant progress in the two areas where vulnerabilities remained. External vulnerabilities declined, reflecting stronger current account and reserves position, as well as the return of the exchange rate to full alignment with fundamentals. Fiscal vulnerabilities also declined following the subsidy reform and the progress made on the OBL. Nevertheless, the exogenous risks faced by Morocco remain substantial, as reflected in the external stress index and, notwithstanding improved reserves position and continued progress in reducing vulnerabilities, the PLL will continue to play an important role in mitigating these risks. The authorities are committed to achieving the objectives of their economic and financial program supported by the PLL, which they will continue to treat as precautionary.