Second Review of the Precautionary and Liquidity Line
On behalf of my Moroccan authorities, I thank staff for their hard work and the useful exchange during this second review of the PLL-supported program and for the clear and concise report. The authorities concur with staff assessment and recommendations, which are broadly in line with their own reform agenda and priorities. They also reiterate their deep appreciation for the useful technical assistance provided by the Fund’s MCM and RES departments, and thank management and Executive Directors for their support.
Performance under the program continues to be strong, despite weak recovery of the global economy and the Euro area in particular. Growth is projected to increase from a revised 2.4 percent in 2013 to 4.9 percent in 2015, reflecting the impact of more favorable weather conditions and a gradual recovery in non-agricultural GDP. However, it is still well below the pre-global crisis level and is not sufficient to reverse the recent increase in unemployment, which was close to 10 percent in 2014 and particularly high among the youth. Inflation has remained low at 2 percent in May on a year-to-year basis.
External sector developments are better than projected under the first review, despite lower tourism receipts linked to regional security incidents. The current account deficit is estimated to decline from 5.5 percent to 2.8 percent of GDP in 2015, reflecting lower oil and food imports but also continued strong performance of automobile exports and a recovery in exports of phosphates and derived products. With FDI remaining at 2.5 percent of GDP, gross reserves are projected to reach the equivalent of 6 months of imports or 147 percent of the Fund’s adjusted ARA metric at end-2015, and external debt-to-GDP ratio should decline to 32 percent of GDP in 2015 and continue falling thereafter. The March 2015 indicative target on reserves was met with a comfortable margin, leading to a significant upward revision of the September 2015 target.
Fiscal developments are also favorable. The overall deficit declined in the first 5 months of 2015 by close to 40 percent compared to last year. Revenue increased, underpinned by strong non-tax revenue, notwithstanding shortfalls in grants and VAT on imports. Expenditure declined, driven by lower subsidies and wage outlays, whereas investment spending remained broadly unchanged from 2014. The indicative fiscal target for end-March was also met with a wide margin. The authorities are confident that the 2015 fiscal deficit objective of 4.3 percent of GDP will be met, and will take additional measures if necessary to achieve it. Moreover, with binding constraints on non-interest recurrent spending, any revenue gains or savings on such spending will be used to support economic activity through accelerated investment execution, as indicated in the Written Communication (¶4).
The authorities are firmly determined to continue with their medium-term fiscal consolidation program and to resist spending pressures during the upcoming elections. They reiterate their intention to reduce the deficit further to 3.5 percent of GDP in 2016, consistent with their objective of 3 percent of GDP in 2017. This will be achieved through further progress under the tax reform to broaden the base and reduce exemptions and distortions, continued wage moderation, and improved public spending prioritization, transparency, and efficiency in line with the modernized budget and public financial management framework under the new OBL.
The authorities have reservations regarding the inclusion of short-term domestic debt at original maturity in gross financing needs (GFNs), which is the main reason for this indicator exceeding the 15 percent of GDP benchmark under the DSA. Indeed, with a large pool of domestic financial resources, mainly in non-banks, and in view of existing capital controls on outflows by residents, rollover risks of short-term domestic debt in Morocco are minimal. The authorities look forward to a review of the DSA framework to take similar circumstances into consideration in computing GFNs, as has been done in the adjusted ARA metric.
Monetary policy continues to aim at maintaining price stability while ensuring adequate financing of the economy to support the recovery. Bank liquidity has improved following the latest cut in the reserve requirement and the increase in foreign assets. The support systems established by BAM in favor of very small, small and medium-sized enterprises have been successful in significantly improving their access to credit. The revised draft central bank charter, which aims at strengthening its independence and broadening its mandate, is being finalized and will soon be presented to the cabinet for approval and submission to parliament.
BAM continues to strengthen its analytical and forecasting capacity to prepare for the transition to a new monetary framework and greater exchange rate flexibility. The authorities increased the weight of the US Dollar in the currency basket to which the Dirham is pegged to better reflect the currency composition of foreign flows. Drawing on Fund technical assistance, they are considering available options for more exchange rate flexibility, and are assessing in particular the degree of preparedness of businesses to operate in an environment characterized by greater interest rate and exchange rate volatility. They expect to be in a position to discuss these options and relevant issues with staff during the Article IV discussions later this year.
Further progress is being made in strengthening financial regulation and supervision, including through implementation of Basel III standards. The preliminary findings of the FSAP mission that visited Morocco late April are that banks are adequately capitalized and profitable, with stable funding sources, and that the banking system is resilient to severe adverse shocks and large deposit withdrawals. Moreover, while NPLs have increased recently, mainly reflecting a slowdown in some sectors, they are well provisioned. The mission also found that the risk from severe distress in Sub-Saharan Africa subsidiaries is marginal. The authorities thank the FSAP team for their high quality work and broadly concur with their conclusions. They look forward to further discussion with the team on some of their findings and recommendations so that the FSSA could be brought before the Board along with the Article IV consultations report.
The authorities are strongly committed to their structural reform agenda to achieve higher and more inclusive growth and reduce unemployment, while strengthening the social safety net to mitigate the impact of the reforms on the poor, and improving the scope and reach of various social support mechanisms to address the needs of the vulnerable population. Continued efforts are being made to improve the business climate, upgrade infrastructure, increase financial inclusion, strengthen competitiveness, and improve employment opportunities and labor productivity, including by reforming education and vocational training, enhancing the effectiveness of employment support mechanisms, and raising female participation in the labor force. The recently-announced National Employment Strategy will guide policies in this crucial area.
Following the successful reform of the subsidy system, the adoption of the new OBL is a milestone in strengthening and modernizing the fiscal framework, enhancing transparency and accountability, and reducing fiscal vulnerabilities. It will permanently address the weaknesses in budget implementation and monitoring which led to the 2012 expenditure overrun. With regard to pension reform, consultations with trade unions on the government’s proposals have taken more time than expected. While seeking to reach a consensus with social partners, the government is cognizant of the importance of this reform, and is firmly determined to move the process forward as soon as possible.
The authorities appreciate the support provided by the PLL. They welcome staff assessment that Morocco continues to meet PLL eligibility and exceptional access criteria. While they remain committed to their ambitious program, they attach high importance to maintaining social peace and cohesion and reducing regional, gender, and income disparities.
Ex Post Evaluation
The authorities welcome the Ex Post Evaluation of Exceptional Access (EPE) under the 2012-14 PLL and thank Mr. Geiregat and his team for the well-written report. As indicated in their response to the draft report, the authorities broadly concur with the conclusions of the EPE, in particular the usefulness of the PLL in providing an insurance against exogenous shocks in a weak and uncertain global environment, and the confirmation that Morocco met the PLL qualification standards and requirements under the exceptional access policy. The fact that despite social pressures and unfavorable external environment, the authorities succeeded in maintaining macroeconomic and financial stability, significantly reducing fiscal and external vulnerabilities, and strengthening policy buffers is a testament to their unwavering commitment to their program.
Important progress was also made on the structural reform agenda. In this regard, the delay in the adoption of the OBL was due to the broad consultation with interested parties and civil society, as well as with the IMF, in the finalization of the draft. It also resulted from the time needed to amend the law adopted in November 2014 in order to address the comments subsequently made by the Constitutional Council. Despite this delay, the 2016 budget will be prepared in accordance with the new OBL, as anticipated.
PLL exit was contingent on a significant improvement in the external environment and reduction in Morocco’s vulnerabilities. Vulnerabilities have declined significantly by mid-2014, in particular as a result of the subsidy reform, the strengthening of external buffers, and the administrative measures taken to prevent recurrence of the 2012 budget overruns pending the adoption of the OBL. However, the external environment deteriorated instead of improving, in particular in view of lower Euro area partners’ growth, which was three percentage points lower than projected by staff over 2012-14, affecting growth, the BOP, and fiscal revenue. Oil prices were also higher than projected, and the impact on the budget was compounded by the appreciation of the US Dollar against the Euro, as the latter accounted for 80 percent of the currency basket to which the Dirham is pegged. The decline in world demand and prices for phosphates and derived products also significantly impacted the BOP, while also affecting fiscal revenue through lower tax and dividend payments.
Notwithstanding these external headwinds, the authorities continued with implementation of their program. They borrowed from international capital markets to further build external buffers, keeping the PLL as an insurance against future risks and a signal to markets. By the end of the arrangement in mid-2014, and in view of the significant downside risks from the international environment and the remaining, albeit reduced vulnerabilities, the authorities decided to request a new PLL arrangement with lower access.
Staff views on the challenges that lie ahead and the way forward as summarized in ¶57 are fully in line with the authorities’ program. Ongoing improvement of the business climate, along with sound macroeconomic policies and further strengthening of the fiscal and monetary policy frameworks and the financial system, should help enhance competitiveness and private sector confidence and catalyze FDI, building on Morocco’s strong fundamentals and long-standing political and social stability.