Morocco
2007 Article IV Consultation-Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Morocco
Author: International Monetary Fund
Publication Date:
20 Sep 2007
eISBN:
9781451824803
Language:
English
Keywords:
ISCR; CR; year-on-year consumer-price inflation; capital account liberalization measure; debt; staff appraisal; Eurobond; per capita income; trade balance; debt ratio; sustainability analysis; inflation outlook; Inflation; Maghreb
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This 2007 Article IV Consultation highlights that macroeconomic conditions of Morocco remain strong. Average growth has reached 5.4 percent per year since 2001, 3.4 percentage points higher than in the 1990s, reflecting the ongoing diversification of the nonagricultural sector and its increased resilience to shocks. As a result, real per-capita income is on the rise and the unemployment rate has started to decline. The current account is expected to record its seventh consecutive surplus in 2007, thanks to strong remittances and tourism receipts. The public finance situation has also strengthened.

Abstract

This 2007 Article IV Consultation highlights that macroeconomic conditions of Morocco remain strong. Average growth has reached 5.4 percent per year since 2001, 3.4 percentage points higher than in the 1990s, reflecting the ongoing diversification of the nonagricultural sector and its increased resilience to shocks. As a result, real per-capita income is on the rise and the unemployment rate has started to decline. The current account is expected to record its seventh consecutive surplus in 2007, thanks to strong remittances and tourism receipts. The public finance situation has also strengthened.

I. Background and Main Issues

1. Morocco’s economic performance has been strong, with favorable effects on poverty and unemployment. Reflecting the pickup in growth since the turn of the century, job creation has accelerated, bringing the unemployment rate down to a thirty-year low, and real per capita income is on the rise after a decade-long stagnation. Nevertheless, poverty and unemployment remain major policy concerns, as one out of seven Moroccans lives below the national poverty line and 15 percent of the urban labor force is unemployed.

2. Higher productivity and increased resilience to shocks are the main drivers of the strong economic performance. The authorities have liberalized the transport, energy, and telecommunications sectors, strengthened the financial sector, and opened up the trade regime. Average growth has reached 5.4 percent per annum since 2001, 3.4 percentage points higher than in the 1990s. This reflects the ongoing diversification of the nonagricultural sector, and its increased resilience to shocks, both external and weather-related. However, bad crop years still impact the overall economic performance, as evidenced by the growth deceleration in 2007.

3. In the short term, the main issue is to avoid the buildup of demand pressures, which could jeopardize the sustainability of the recovery. Although the evidence is mixed, there are signs that the continued vigor of domestic demand, which has been the main engine of growth, may be stoking inflationary pressures. Increased net foreign direct investment could also provide additional stimulus to domestic demand. In the context of Morocco’s pegged exchange rate, preserving price stability is key to avoid unwarranted real exchange rate appreciation.

4. In the medium term, the challenge is to build upon Morocco’s recent achievements to further raise growth. The policy dialogue with the authorities has identified three areas that are key to strengthen the economic performance. First, by shoring up private-sector confidence, further fiscal consolidation will help foster an environment conducive to growth. Second, a more efficient financial sector will improve the mobilization of savings and ensure their efficient allocation, thereby contributing to growth. Third, deeper integration in the world economy would help Morocco harness the full benefits of globalization, allowing the external sector to become the second engine of growth.

5. Medium-term prospects are good. Steadfast implementation of macrostructural reforms would improve total factor productivity, and increase the external sector’s contribution to growth. As a result, nonagricultural GDP would grow by more than 5 percent on average over the next five years. Tourism and remittance flows, the main drivers of Morocco’s current account performance, are projected to remain strong, at about 10 percent and 8 percent of GDP on average during 2008-12, respectively. However, the pickup in economic activity is likely to bring the current account close to balance in the outer years. Despite rising capital outflows resulting from future capital account liberalization, strong foreign direct investment would help keep official reserves comfortably higher than the stock of external debt. The standard external debt sustainability analysis does not highlight significant external vulnerabilities; the fiscal sustainability analysis indicates that Morocco’s public debt is mostly sensitive to output shocks.

Medium-Term Projections 2005-12

(Percentage change from the previous period, unless otherwise indicated)

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Sources: Moroccan authorities; and Fund staff estimates.

In percent of GDP.

Revision of National Accounts

The authorities have prepared new series of national accounts using the 1993 UN system of national accounts, and changing the base year from 1980 to 1998. A preliminary analysis using the new series suggests that:

  • In 2006, nominal GDP is 14 percent above its level in the previous series. This change comes mainly from an upward revision of the value added of the tertiary sector.

  • The share of the primary sector in real GDP is roughly unchanged in 2006 (14 percent of GDP). The 5 percentage point decrease in the share of the secondary sector (25 percent of GDP) has been offset by the equivalent increase in that of the tertiary sector.

Figure 1.
Figure 1.

FDI, Indebtedness, and Per Capita GDP

Citation: IMF Staff Country Reports 2007, 323; 10.5089/9781451824803.002.A001

Sources: Moroccan Authorities; World Economic Outlook; and IMF staff calculations.
Figure 2.
Figure 2.

Real Sector Developments 1/

Citation: IMF Staff Country Reports 2007, 323; 10.5089/9781451824803.002.A001

Sources: Moroccan authorities; and IMF staff calculations.1/ Calculations use the new national accounts. As the new series were revised back to 1998 only, data for 1990-98 were computed by splicing the old and new series, using the growth rates.

II. Report on the Discussions

A. Inflation Outlook and the Role of Monetary Policy

6. The authorities pointed to the preponderance of one-off factors in the 2006 increase in inflation. The adjustments in domestic fuel prices following the reinstatement of the price indexation mechanism and the increase in the price of some services, mainly in the transportation and communications sectors, did not seem to have a lasting impact on price dynamics. Bank Al-Maghrib’s (BAM) two-stage tightening of the monetary policy stance in 20061—first by using the 7-day deposit auctions instead of the overnight facility in April, then by increasing the rate on these auctions by 25 basis points to 2.75 percent in December—contributed to contain overall inflation. There is little evidence that the strong increase in credit to the private sector and associated fast-paced growth of broad money have fueled inflationary pressures, confirming BAM’s assessment that the link between monetary aggregates and inflation may have weakened in recent years.

7. BAM believes that the balance of inflationary risks for 2007 is tilted to the downside. The position of the economy in the cycle is difficult to gauge as the ongoing transformation of the Moroccan economy complicates the measurement of the output gap. The important liberalization efforts undertaken during the last decade may have shifted the production frontier outward, imparting a downward bias on trend-based measures of the output gap. BAM’s assessment is that output is now below its potential, and that the contraction in agricultural output and ensuing deceleration in overall growth expected in 2007 should further dampen domestic demand. The slowdown in inflation in the first few months of 2007 appears to bear this assessment out. Beyond changes in the international environment, notably in international oil prices, the high level of real balances remains one of the main risks to the inflation forecast. The substantial rise in real estate and financial asset prices and the concomitant fall in treasury bond yields point to the existence of pent-up liquidity. The possible acceleration of net capital inflows, which reflects for a large part the importance of foreign direct investment, could also stoke demand pressures. The authorities stressed that the envisaged gradual easing of remaining restrictions on capital account transactions by residents could significantly contribute to liquidity management.

8. BAM is committed to maintaining a prudent monetary stance. In line with the mandate conferred by its new statutes, which granted BAM its autonomy, the central bank’s main objective in 2007 is to continue to keep inflation under control. The interbank market rate has increased again in the first half of 2007, and is now close to the central bank’s key policy rate of 3.25 percent.

Figure 3.
Figure 3.

Inflation and Monetary Developments

Citation: IMF Staff Country Reports 2007, 323; 10.5089/9781451824803.002.A001

Sources: Moroccan authorities; and IMF staff calculations.

B. Fiscal Policy

9. The authorities have kept fiscal policy geared toward medium-term consolidation. As a result of strong revenue performance and tight expenditure control, they expect the 2007 deficit at 2.5 percent of GDP, broadly unchanged from its underlying 2006 level, excluding the impact of one-off factors.2 The debt-to-GDP ratio will remain on a downward trend.3

10. The improved public finance position demonstrates that the consolidation strategy is bearing fruit. On the revenue side, the authorities have started to simplify the tax system and increase its transparency, notably by presenting reports on tax expenditures with the 2006 and 2007 budgets, and by publishing a tax procedure code, as well as a tax assessment and collection manual. In addition, the favorable impact of the recovery, the strengthening of tax administration, and the widening of the tax base—particularly for the VAT—have significantly improved tax revenue performance, and offset the impact of lower external tariffs. On the expenditure side, the success of the 2005 early retirement program has generated substantial savings on the wage bill. The authorities have also taken important steps to reduce the cost of subsidies by returning to the indexation mechanism of retail domestic prices of petroleum products to international oil prices.

11. To bring the government debt-to-GDP ratio closer to the average for emerging-market OECD countries in the medium term, the authorities intend to:

  • Maintain the public wage bill around 10 percent of GDP by continuing the no-new-net-hiring policy in the civil service and redeploying civil servants in priority sectors;

  • Gradually reduce spending for food and energy subsidies, and replace them with direct subsidies targeted to the most vulnerable segments of the Moroccan population;

  • Accelerate the simplification of the tax system, particularly through the continuation of VAT reform and the reduction of exemptions; and

  • Continue to modernize tax administration, with a particular focus on strengthening the collection function.

Figure 4.
Figure 4.

Fiscal Sector Developments

Citation: IMF Staff Country Reports 2007, 323; 10.5089/9781451824803.002.A001

Sources: Moroccan authorities; and IMF staff calculations.

C. Financial Sector Reform

12. The recent surge in credit to the private sector demonstrates the success of the authorities’ policies to deepen financial intermediation. The implementation of stricter information requirements on credit, on both the demand and the supply sides, has contributed to improving risk assessment and hence to reducing its cost. The new privately managed credit bureau, expected to become operational in the first half of 2008, is also an important step forward and will be the first of its kind in the region.

13. Concurrently, important progress has been achieved in the area of financial supervision. Banking supervision reports are now published annually. In view of the fast growth of real estate and consumption credit, specific studies on these developments, as well as on interest rate-related risk, have recently been added to these reports. The preliminary conclusions of these studies indicate that the recent surge in credit has not deteriorated the quality of the banks’ portfolio. The implementation of the 2006 banking law has extended BAM’s supervisory mandate to previously unsupervised institutions, and the cooperation between entities supervising different segments of the financial system has been strengthened. Starting from June 2007, BAM has required banks to comply with Basel II prudential requirements. More generally, financial sector vulnerabilities have abated, with a drop in nonperforming loans and an increase in provisioning.

A01ufig01

Selected Financial Soundness Indicators, 2001–06

Citation: IMF Staff Country Reports 2007, 323; 10.5089/9781451824803.002.A001

14. The strengthened balance sheet of public sector pension funds will enhance financial sector stability. The consolidation of the different public sector funds should also increase the availability of long-term resources to finance economic activity. Finally, the ongoing study on the possible unification of the public loan guarantee system should help rationalize it and assess its possible impact of the system on the budget.

D. Deeper Integration in the World Economy

15. Morocco continues to make progress in the area of trade liberalization. The gradual elimination of tariffs under the Association Agreement with the European Union (EU) is proceeding according to schedule, and should be complete by 2012. The recent implementation of the Agadir agreement and the coming into effect in 2006 of the free-trade agreement with Turkey should stimulate trade both within the signing parties and with the EU, since it provides for diagonal cumulation of rules of origin. Efforts to deepen regional trade and financial integration in the Maghreb are also ongoing. The free-trade agreement with the United States (U.S.) has led to a significant increase in textile exports to the U.S. in 2006. Morocco recently cut the maximum MFN import tax rate on industrial products by 5 percentage points to 45 percent, with a view to minimizing trade diversion.

16. The authorities have taken measures to enhance the economy’s ability to adapt to a changing global environment. The strengthening of public infrastructure, particularly highways and ports, will continue to generate substantial productivity gains and to increase Morocco’s attractiveness to investors. The authorities are also implementing a number of sectoral reforms aiming at (a) supporting tourism; (b) modernizing existing industrial sectors such as textile; and (c) facilitating the expansion of new industrial sectors and service activities. The reforms are complemented by a broad range of incentives, including tax incentives and the outfitting of offshore zones. The positive change in export composition toward higher value added sectors indicates that these efforts are starting to bear fruit.

17. The authorities believe that their policies are consistent with external stability. Recent analysis suggests that the dirham is not misaligned. The increase in inflation, combined with the strength of the Euro vis-à-vis the U.S. dollar, contributed to a slight appreciation of the real effective exchange rate in 2006. However, the gap between the equilibrium exchange rate, as estimated both by the authorities and staff, and the observed rate remains statistically insignificant. As trade in goods and services continues to result in a deficit, the recent increase in the current account surplus mainly reflects strong remittances flows. Empirical evidence points to the stability of these flows.4 Further, the current account surplus is bound to dwindle under the impulse of the ongoing recovery, weakening the case for a possible undervaluation of the dirham. In spite of the large reserve accumulation, BAM has intervened during the year to provide banks with foreign exchange to the tune of MAD 2 billion (equivalent to $250 million) a month. To a large extent, the reserve accumulation reflects privatization revenue and long-standing regulatory measures, including partial surrender requirements for export proceeds and restrictions on capital outflows for residents.

A01ufig02

Nominal Effective Exchange Rates Observed and Purchasing Parity Values, Jan. 1995–Dec. 2006 (2000=100)

Citation: IMF Staff Country Reports 2007, 323; 10.5089/9781451824803.002.A001

A01ufig03

Real Effective Exchange Rate (REER) and Equilibrium REER, 1993Q1-2006Q4 (in logarithms) 1/

Citation: IMF Staff Country Reports 2007, 323; 10.5089/9781451824803.002.A001

1/ The equilibrium exchange rate of the dirham are estimated as the exchange rate consistent with balance of payment equilibrium. For details, see Country Report No 05/418.
Figure 5.
Figure 5.

External Sector Developments

Citation: IMF Staff Country Reports 2007, 323; 10.5089/9781451824803.002.A001

Sources: Moroccan authorities; and IMF staff calculations.

18. In this context, the authorities have started to consider options for a gradual opening of the capital account to facilitate liquidity management, and intend to take concrete steps in this direction in the near future. The progressive elimination of remaining restrictions on operations carried out by residents will also help deepen the foreign exchange market and improve economy wide risk management. The authorities have requested the Fund’s assistance in drawing a road map toward global convertibility, including reshaping the roles for monetary and exchange rate policies.

19. Concurrently, BAM is preparing the transition to a more flexible exchange rate regime and the possible adoption of an inflation-targeting framework. To this effect, the central bank continues to strengthen its analytical capacity, and has already fleshed out its analytical toolkit, including its understanding of the monetary policy transmission mechanism. The publication of its first two monetary policy reports demonstrates the progress achieved in modernizing BAM’s analytical and forecasting framework. The strengthening of its communication strategy has helped increase the transparency of monetary policy and contributed to better anchoring inflation expectations.

III. Staff Appraisal

20. Achievements: Morocco’s steady economic progress in recent years demonstrates the benefits of broad-based economic reforms. Per capita income has risen continuously since the beginning of the century; overall growth has become less dependent on climatic vagaries; and the recent employment gains have started to make a dent in the stubbornly high urban unemployment rate. The authorities’ broad reform agenda and sound macroeconomic policies have buttressed private sector confidence, and both foreign and private domestic investments have surged.

21. Challenges: Morocco needs to sustain and possibly improve its recent strong economic performance to bring per capita income closer to that of the emerging-market OECD countries, further lessen the economy’s dependence on agriculture, and further reduce unemployment and poverty.

22. Risks: In the short term, the pickup in domestic demand could ignite inflationary pressures that could destabilize the recovery. In the medium term, strong and durable growth cannot rely only on the contribution of domestic demand. If the external sector does not emerge as an additional growth engine, the recovery may reveal difficult to sustain.

23. Inflation and monetary policy: Monetary policy has so far succeeded in containing inflationary pressures, but new challenges lay forward. The inflation outlook remains mixed. On the one hand, the decline in both headline and underlying inflation in the first five months of the year, and the likely impact of this year’s bad crop on consumption suggest that inflation may remain subdued in 2007. On the other hand, the rapid growth of domestic credit to the private sector, the surge in foreign direct investment, and soaring asset prices heighten the inflation risks. Under these circumstances, the current monetary stance appears appropriate, but a tightening would be warranted in the event that inflation rises.

24. Fiscal policy: The authorities’ fiscal consolidation efforts have paid handsome dividends, but need to continue. The recent declines in the government debt-to-GDP ratio, the drop in the wage-bill burden, and the strong revenue performance have no doubt contributed to heighten private sector confidence. Continued fiscal discipline will also help contain inflationary pressures and further improve the investment climate. The likely deficit outcome for 2007 (2.5 percent of GDP) is in line with the objective of bringing down the government debt-to-GDP ratio. Looking forward, the authorities’ success will depend crucially on their ability to keep the growth of the wage bill under check, reform the food and energy subsidy systems, and further pursue tax reform.

25. Financial sector reform: The authorities’ efforts to increase the transparency of the financial information available to potential lenders have improved the efficiency of financial market intermediation. The resulting increased access to credit for small and medium enterprises is particularly welcome, but requires continued strengthening of financial supervision to ensure that the quality of banks’ loan portfolios does not deteriorate. In this sense, the recent drop in the share of nonperforming loans in total banking loans is encouraging. The ongoing reform of various guarantee funds, in addition to facilitate access to credit, should also help identify their fiscal costs.

26. Deepening Morocco’s integration into the world economy. Staff welcomes the authorities’ decision to gradually liberalize the external capital account. Staff and the authorities agree that, while there are no indications of exchange rate misalignment, opening up the capital account heightens the need to prepare for exiting the current peg of the dirham. In addition to helping the successful integration of Morocco in the global economy, a flexible exchange rate regime would help fight inflationary pressures, preserve a role for monetary policy under full convertibility, and avoid implicit exchange-rate guarantees. In this perspective, BAM has taken important steps toward improving its operational and forecasting capacity with a view to eventually adopt an inflation-targeting framework. Further progress toward MFN-based trade liberalization is needed to maximize the benefits from bilateral and regional liberalization efforts. Staff welcomes Morocco’s active participation in the efforts to enhance trade and financial integration in the Maghreb in collaboration with the Fund.

27. Staff welcomes the adoption and the publication of anti-money laundering legislation, and the ongoing efforts to set up a financial intelligence unit.

28. It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

Table 1.

Selected Economic Indicators, 2002–08 1/

(Quota: SDR 588.20 million)

(Population: 30.4 million; 2006)

(Per capita GDP: $2,165; 2006)

(Poverty rate: 15 percent; 2004)

(Main exports: textiles, phosphates; 2006)

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Sources: Moroccan authorities; and Fund staff estimates and projections.

Reflecting revised national account data.

Excluding Fonds Hassan II.

Excluding Fonds Hassan II and including the balance on special treasury accounts.

Excludes the net position with the central bank outside statutory advances. Projections are based on the balance excluding Fonds Hassan II. Historical debt series have been revised upward to reflect the inclusion of twenty-year old liabilities to the central bank (1 percent of 2006 GDP).

Table 2.

Balance of Payments, 2003–12

(In millions of U.S. dollars; unless otherwise indicated)

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Sources: Ministry of finance; Office des changes; and Fund staff estimates and projections.

In 2005, a nonresident company (Vivendi) sold part of its shares in Maroc Télécom to a resident company.

The increase in 2004 is due to a sale of government shares of Maroc Télécom in the Casablanca and Paris stock exchange.

Includes the loans that Moroccan banks gave in 2003 and will give in 2005 to the company (Vivendi) that bought part of Maroc Telecom in 2003 and additional shares in 2005.

Excluding the reserve position in the Fund.

Public and publicly guaranteed debt.

Table 3.

Central Government Finance, 2003–12

(In billions of dirhams)

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Sources: Ministry of finance and privatization; and Fund staff estimates.

Includes tariffs earmarked for food subsidies (équivalents tarifaires) and revenues of the road fund (Fonds Routier).

Includes food subsidies financed from earmarked tariffs (équivalents tarifaires).

Budgetary capital expenditures excluding Fonds Routier and investment spending by the Fonds Hassan II.

Corresponds to 30 percent of VAT revenue.

Excludes the net position with the central bank outside statutory advances. Projections are based on the balance excluding Fonds Hassan II. Historical debt series have been revised upward to reflect the inclusion of twenty-year old liabilities to the central bank (1 percent of 2006 GDP).

Table 4.

Central Government Finance, 2003–12

(In percent of GDP)

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Sources: Ministry of finance and privatization; and Fund staff estimates.

Includes tariffs earmarked for food subsidies (équivalents tarifaires) and revenues of the road fund (Fonds Routier).

Includes food subsidies financed from earmarked tariffs (équivalents tarifaires).

Budgetary capital expenditures excluding Fonds Routier and investment spending by the Fonds Hassan II.

Corresponds to 30 percent of VAT revenue.

Excludes the net position with the central bank outside statutory advances. Projections are based on the balance excluding Fonds Hassan II. Historical debt series have been revised upward to reflect the inclusion of twenty-year old liabilities to the central bank (1 percent of 2006 GDP).

Table 5.

Monetary Survey, 2002–07

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Sources: Bank Al-Maghrib; and Fund staff estimates.

Includes Fonds Hassan II.