Abstract
Morocco’s strong starting position, reflecting macroeconomic and structural reforms introduced over the last decade, has given the country greater room to maneuver in its policy response. The direct impact of the global crisis on Morocco has been limited, primarily affecting Morocco through real channels. Exports, tourism receipts, remittances, and foreign direct investment (FDI) have all declined primarily owing to the slowdown in Europe. In particular, Morocco has low public debt and low inflation, and the financial system is sound, with little exposure to international markets.
Impact of the global crisis and policy response
The Moroccan economy has weathered relatively well the impact of the global crisis. Limited integration to the international capital markets, with virtually no exposure to toxic assets and very low level of foreign indebtedness of the financial, corporate, and the household sectors, has significantly reduced the spillovers from the global financial crisis. However, given Morocco’s relatively open economy and its close ties to the EU, the deep and prolonged recession in this region was bound to have negative spillover effects on the Moroccan economy, affecting in particular exports, tourism receipts, worker remittances, and FDI.
Despite this exogenous shock, Morocco’s economic performance was remarkably strong in 2009, reflecting the economy’s strong fundamentals and resilience—including from the buffers built in recent years—an exceptionally good cereal crop, and the authorities’ prompt and appropriate policy response. Real GDP growth is estimated at 5 percent, with the nonagricultural sector growing by about 2½ percent, down from 4 percent in 2008; inflation fell to 1 percent; the current account deficit has declined; international reserves remained at a comfortable level; and the financial sector was resilient. Recent provisional data indicate that fiscal and external positions in 2009 will be better than estimated at the time of the Article IV discussions.
As outlined by staff and highlighted in previous consultation reports, the Moroccan economy has gained flexibility and resilience to exogenous shocks owing to several years of prudent macroeconomic policies and sustained implementation of structural reforms. Over the past five years, growth was higher on average than in previous periods, more broad-based, and less sensitive to volatile agricultural output. Significant advances in fiscal consolidation, including from strong revenue performance and expenditure restraint, created space to absorb the food and fuel price shocks in 2007-08 and face the global economic slowdown, while channeling increased resources to spending on social sectors and infrastructure. Monetary policy has gained increased credibility in maintaining inflation at very low levels, while helping achieve broad stability of the real exchange rate. Furthermore, Morocco’s strong and well-supervised financial system has provided an important element of resiliency and confidence. Key challenges remain, however, including further raising growth performance, addressing the severe youth unemployment, and achieving faster reduction in poverty and improvement in living standards.
The authorities’ policy response in dealing with the external shock has been prompt and well calibrated. The 2009 Budget included a number of measures aimed at providing support to the economy through a significant increase in public investment, a limited wage increase, and a reduction in personal income tax rates—as agreed with social partners—and other measures targeted at SMEs and exports. In early 2009, the Government set a high level joint public/private sector committee (Comité de Veille Stratégique), tasked with monitoring domestic and international developments, sharing information among participants, and agreeing on the necessary measures to assist sectors and enterprises most affected by the crisis. In this context, a number of enterprises benefited from temporary support to protect employment through job training and reduction in social security contributions, as well as from programs aimed at facilitating consolidation and restructuring. Efforts were also made toward attracting investment by Moroccans residing abroad and helping exporting companies in accessing new markets.
Soon after the onset of the global financial crisis, Bank Al-Maghrib (BAM) moved swiftly to strengthen monitoring of banks’ exposure and potential risks. BAM has also provided liquidity to ease tensions in the interbank money market. In response to lower inflation, BAM lowered its key policy rate and reduced the reserve requirements in three steps from 15 to 8 percent to help provide adequate financing to support economic activity. In this regard, even though credit growth moderated as a result of weaker nonagricultural sector activity, it remained at a healthy level. Moreover, the share of nonperforming loans (NPLs) has continued to decline, falling to 5.5 percent at end-2009, partly reflecting write-offs of fully provisioned loans, while the rate of provisioning has continued to increase, reaching 74 percent. BAM remains vigilant to preclude a potential resurgence of NPLs. While the financial sector remained largely insulated from the fallout of the crisis, the authorities strengthened macro-prudential supervision, based on stress tests, to stem potential risks emanating from second-round effects. BAM has also made significant progress in implementing Basle II recommendations. It raised the capital adequacy ratio requirement to 10 percent of risk-weighted assets at end-2008, and is contemplating raising it further for some banks on the basis of their risk profile, while avoiding pro-cyclicality.
Similarly, fiscal policy shifted to provide a measured support to the economy. After recording a surplus in 2008, reflecting strong revenue performance, partly due to one-off measures, the fiscal position is projected to turn to a deficit of about 2 percent of GDP in 2009, including the effect of a small fiscal stimulus estimated at some 1½ percent of GDP. Revenues are expected to decline by over 2 percentage points of GDP in response to lower nonagricultural sector activity, and as a result of the scheduled tax rate cuts and the one-off revenue gains achieved in 2008. Government spending has risen following implementation of the wage increase agreed with social partners in 2008, and as a result of higher investment expenditure in support of economic activity. The increase, however, has been partly offset by the decline in food and oil subsidies resulting from lower international prices. The limited loosening of fiscal policy in 2009 has not derailed the fiscal consolidation path, and public debt, which declined by 12 percentage points of GDP during 2005-08, remained unchanged at about 47 percent of GDP.
Near-and medium-term outlook and policies
GDP growth is projected to moderate to 3 ¼ percent in 2010, based on the return of agricultural production to its normal trend, which would more than offset higher nonagricultural sector activity, and to increase to about 5 percent over the medium term. The authorities consider, and staff agrees, that withdrawing the monetary and fiscal stimulus at this stage would not be appropriate. In this context, the 2010 budget includes a further moderate increase in investment spending, together with the implementation of the second phase of the scheduled tax rate cuts. This would bring the fiscal deficit close to 4 ½ percent of GDP. Although the public debt-to-GDP ratio is slated to remain virtually unchanged in 2010, the authorities are firmly committed to resuming fiscal consolidation, starting from 2011, with the objective of stabilizing the fiscal deficit at around 3 percent of GDP and the debt-to-GDP ratio at less than 50 percent over the medium term. In this regard, the authorities intend to continue strengthening the tax system through simplification, broadening of the base, and reducing exemptions; to improve budget control and monitoring; and to reduce budget rigidities and enhance expenditure efficiency, including by replacing the universal subsidy system with a well-targeted safety net and reforming the civil service, with World Bank assistance. The authorities are grateful to Fiscal Affairs Department’s staff for the excellent TA report on tax revenue developments and policies.
BAM will continue to monitor closely credit developments and bank liquidity in light of growth and inflation prospects. In its December 22 meeting, BAM’s Board decided to maintain its key policy rate unchanged, based on its assessment of declining inflationary risks and an inflation outlook that is consistent with the objective of price stability. BAM will continue to provide support to economic activity in 2010, while standing ready to address potential inflationary concerns.
The authorities attach high importance to maintaining a sustainable external position. They share staff’s view that the peg of the dirham to a basket of currencies has served the economy well. It is noteworthy that, unlike other countries with a pegged exchange rate, the system has not led to a build-up of risks in the financial, corporate, or household sectors in Morocco, as staff underscores, possibly reflecting a mitigating effect of remaining capital controls, although not all the possibilities offered by recent liberalization measures are being used. Moreover, the exchange rate is broadly in line with fundamentals. While the authorities see with some concern the recent deterioration in the trade balance and the current account, they consider that part of the deterioration is of a temporary nature, reflecting the weak activity and employment levels worldwide, and in Europe in particular, as well as the large, and potentially reversible, currency depreciations in many competitor countries. This being said, the authorities will continue to monitor external developments closely, and will rely primarily on structural reforms to achieve lasting improvements in competitiveness.
The authorities welcome the staff’s favorable assessment of the progress made in preparing for a possible move to greater exchange rate flexibility and adoption of inflation targeting. The strengthening of central bank’s independence and of its analytical capabilities and operational framework, and the improvement in the fiscal position and financial sector soundness and supervision are important achievements that would enhance efficiency of monetary policy under any framework. MCM Department’s continued assistance to BAM in this and other areas is appreciated. However, the authorities believe that further progress is needed in understanding inflation dynamics, including at the sector level, as well as the transmission mechanism of monetary policy; increasing budget flexibility to enhance the scope for countercyclical policies; and deepening the capital and foreign exchange markets. Potential risks associated with greater exchange rate flexibility should also be reduced through a well-designed intervention strategy and strengthening of banks’ and the business sector’s capacity to manage exchange rate risks, including through appropriate hedging instruments. Under the circumstances, and pending completion of all prerequisites, including adequate sequencing with prudent capital account liberalization, the authorities view the adoption of inflation targeting and greater exchange rate flexibility as a medium-term objective.
The authorities continue to implement their structural reform agenda aimed at enhancing productivity and competitiveness, improving the business environment, for which a high level monitoring committee has been established with assistance from the World Bank, and diversifying the sources of growth. Key reforms underway relate to education, health, and the judiciary, in addition to several sector strategies elaborated in association with the private sector aimed at increasing investment, production, exports, and employment in areas where Morocco has a comparative advantage. These and other initiatives targeted at the vulnerable and under-privileged income groups, including the “Initiative Nationale du Développement Humain”, should help Morocco sustain higher levels of growth and employment, improve social indicators, and raise the standards of living of the population.
The authorities are cognizant of the risks to the economy from delayed world recovery. However, they are confident that their objectives in terms of growth, inflation, and the fiscal and external positions are well within reach. They are moving ahead with their ambitious reform program, which should put the economy in a better position to benefit from the post-crisis global environment and lay the foundations for lasting improvement in its medium-term prospects.