Morocco
Request for an Arrangement Under the Precautionary and Liquidity Line: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Morocco.
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar Close
Publication Date:
13 Aug 2012
eISBN:
9781475506174
Language:
English
Keywords:
ISCR; CR; liquidity line; line; price; track record; government; oil price; exchange rate; balance of payments; medium term; core inflation; Oil prices
Download PDF (2.2 MB)

Morocco’s track record of sound economic policies helped it withstand the recent economic crisis and regional social events. High oil prices have contributed to a build-up of fiscal and external pressures, but the government has taken action to address these vulnerabilities and are committed to continuing implementation of sound policies. Morocco has sound economic fundamentals and institutional policy frameworks, and performs strongly on three of the five Precautionary and Liquidity Line (PLL) qualification areas. A precautionary arrangement would support the policies by providing a financing buffer against exogenous shocks.

Abstract

Morocco’s track record of sound economic policies helped it withstand the recent economic crisis and regional social events. High oil prices have contributed to a build-up of fiscal and external pressures, but the government has taken action to address these vulnerabilities and are committed to continuing implementation of sound policies. Morocco has sound economic fundamentals and institutional policy frameworks, and performs strongly on three of the five Precautionary and Liquidity Line (PLL) qualification areas. A precautionary arrangement would support the policies by providing a financing buffer against exogenous shocks.

I. Recent Economic and Political Developments

1. A political reform process was initiated in March in 2011 in response to the “February 20”social protest movement. A new constitution was adopted by referendum on July 1, 2011, elections were held in November 2011, and the head of the Justice and Development Party, which received the highest number of votes during the elections formed a new coalition government in January 2012. Local elections will follow the adoption of the planned new regionalization and budget organic laws.

2. The new constitution paves the way for broad-ranging political changes and reforms. These include strengthening the role of parliament through greater oversight powers over the executive; elevating the status of the prime minister to that of head of government; enhancing the independence of the judiciary; respecting universally recognized human rights; establishing important institutions, including the National Council for Human Rights, the Competition Council, and the National Authority for Integrity and for the Prevention and Fight against Corruption; and establishing advanced regionalization as a democratic and decentralized system of governance. While these political reforms are important steps in addressing social demands, pressures persist for further reforms to address, among other issues, still-high youth unemployment, income inequalities, and governance.

3. Despite sluggish growth in Europe and regional tensions, real GDP growth accelerated from 3.7 percent in 2010 to 4.9 percent in 2011, the highest rate in the MENA region (Figure 1). The negative impact of weak external demand was more than offset by strong investment in manufacturing and construction, as well as robust private consumption supported by an increase in real wages, low inflation, and an acceleration of private-sector credit growth. Unemployment declined slightly from 9.1 percent in 2010 to 8.9 percent in 2011, but remained high among the youth at 17.9 percent.

Figure 1.
Figure 1.

Morocco: Real and External Developments

Citation: IMF Staff Country Reports 2012, 239; 10.5089/9781475506174.002.A001

Sources: Moroccan authorities; and IMF staff estimates.

4. Average inflation declined to about one percent, the lowest rate in MENA (Figure 2). The absence of significant demand pressures and a decline in food prices contributed to reduce inflation to 0.9 percent in 2011. Period-average core inflation, excluding food and energy items, also remained moderate at 0.7 percent. Following the increases in several domestic energy prices, inflation increased to 1.9 percent (year-on-year) in June, while core inflation remained low at 0.6 percent.

Figure 2.
Figure 2.

Morocco: Monetary and Financial Sector Developments

Citation: IMF Staff Country Reports 2012, 239; 10.5089/9781475506174.002.A001

Sources: Moroccan authorities; and IMF Global Financial Stability Report.

5. Rising oil prices led to a widening of the current account deficit from 4.3 percent of GDP in 2010 to about 8 percent in 2011, despite strong export performance, and high growth of remittances and tourism (Figure 1). Notwithstanding a 50 percent increase in net FDI, the financial account also weakened somewhat, resulting in a decline of gross international reserves from $23.6 billion (equivalent to 5.7 months of imports of goods and services) in 2010 to $20.6 billion in 2011 (equivalent to about 5 months of imports). The dirham depreciated by 1.9 percent in real effective terms, remaining broadly in line with fundamentals (Figure 1).1 A high energy import bill associated with high international oil prices, delays in disbursement of official financing, and a deceleration of remittances and tourism receipts resulted in a further decline in gross international reserves of about $3½ billion in the first six months of 2012.

6. Higher oil prices also contributed to a widening of the fiscal deficit from 4.4 percent of GDP in 2010 to 6.9 percent in 2011 (Figure 3). While an increase in the wage bill in response to pressing social demands was offset by a reduction in nonessential current spending, higher oil prices translated into higher subsidy outlays and a widening of the fiscal deficit. As a result, government debt increased from 51 percent of GDP in 2010 to about 54 percent in 2011. However, the cyclically-adjusted balance (net of subsidies spending) improved from -0.1 percent of GDP in 2010 to 1.1 percent of GDP in 2011, reflecting a significant decrease in non-subsidy discretionary spending. During the first five months of 2012, expenditure and revenue were on track to meet budget targets. While the subsidy bill reached about 50 percent of the annual budget projections due to high international oil prices, this was offset by lowered investment and other expenditure.

Figure 3.
Figure 3.

Morocco: Fiscal and Financial Market Developments

Citation: IMF Staff Country Reports 2012, 239; 10.5089/9781475506174.002.A001

Sources: Moroccan authorities; and IMF staff estimates.

7. Monetary and financial conditions remained broadly supportive of growth (Figure 2). The financial system continued to be an important driver of economic growth, and remained resilient to the financial turmoil in Europe. Despite a slight decline in liquidity associated with higher money in circulation and lower international reserves, the growth of credit to the economy accelerated from 7.4 percent in 2010 to about 10 percent in 2011, driven by high housing and private consumption credit. However, credit growth decelerated from 10 percent at end-2011 to 7 percent at end-March 2012. To mitigate the decline in structural liquidity, the central bank expanded its money market intervention, increased its refinancing to banks to 5 percent of bank deposits at the end of July 2010, and progressively lowered reserve requirements to 6 percent while withdrawing passbook savings accounts from the reserve base. Interbank and short-term government yields stayed close to the policy rate. Long-term government bond yields also remained stable at about 4.2 percent—0.3 percent lower than at the time of the last international bond issuance in September 2010.

8. To address the increasing macroeconomic pressures, the authorities have taken action, through, among other measures, significant increases in several domestic energy prices in early June.2 The domestic energy price increases are part of a broader agenda to improve the targeting and effectiveness of social protection, and ensure fiscal sustainability. These fiscal measures, combined with the recent decline in international oil prices, are expected to help contain the current account deficit and maintain international reserves at a comfortable level.

II. Macroeconomic Outlook and Authorities’ Policies

A. Growth, Employment, and Inflation Outlook

9. Overall real GDP growth is projected to slow from 4.9 percent in 2011 to 2.9 percent in 2012, largely as a result of poor rainfall. Despite sluggish growth in advanced economy trading partners, nonagricultural GDP growth is projected to decline only slightly, from 5.0 percent in 2011 to 4.7 percent in 2012, as domestic demand will remain supported by an increase in government productive spending, and favorable monetary conditions. The nonagricultural output gap is projected to remain positive in 2012.

10. A stable macroeconomic environment and the authorities’ comprehensive structural reform agenda are expected to increase potential growth over the medium term (Box 1) (Attachment I, ¶ 5). The authorities’ program focuses on enhancing competitiveness, the business climate, and governance, while supporting sectors with high value added. As a result, potential growth is projected to increase from an average of 4.5 percent over the past decade to 5.6 percent by 2016. These reforms should also help support continued strong export performance and FDI inflows.

Morocco: Planned Structural Reforms to Increase Potential Growth

Potential growth is expected to increase by one percentage point over the medium term as a result of the implementation of current and planned policies, including:

  1. Further improvement of the business climate by removing remaining barriers to entry, simplifying the regulatory environment for doing business, strengthening administrative information sharing among all agencies interacting with firms, and reducing delays in payments to small and medium-size enterprises;

  2. Improvement of economic governance by increasing transparency and accountability, strengthening the efficiency of public-private partnerships, and improving independence of the judiciary system;

  3. Strengthening of the ongoing trade policy reform and trade facilitation by improving the regulatory framework for import standards, and strengthening tariff rationalization;

  4. Further development of highly productive economic sectors such as aeronautics, car manufacturing, and electronics;

  5. Development of access to alternative energy sources by investing in and developing renewable energy sources, notably solar energy;

  6. Reduction of the informal sector by improving business regulation, and reforming the tax treatment of SMEs; and

  7. Reduction of structural unemployment, and increase in labor force participation rates by strengthening the ongoing active labor market programs (IDMAJ, TAEHIL, and MOUKAWALATI), improving labor market flexibility, reducing hiring costs, and fostering employment outside of the main cities in the context of the regionalization reform.

11. The authorities have made job creation an important priority (Box 1) (Attachment I, ¶ 5). They aim at reducing unemployment from 8.9 percent in 2011 to 8 percent by 2016, and at increasing labor force participation rates, by strengthening ongoing active labor market programs (IDMAJ, TAEHIL, and MOUKAWALATI) and fostering employment outside the main cities in the context of the regionalization reform.

B. External Sector Outlook

12. The current account deficit is expected to decline from 8 percent of GDP in 2011 to 7.4 percent in 2012, and to improve further over the medium term. Recent measures to tighten fiscal policy, and a decline in international oil prices, combined with an increase in export volumes of phosphates and derived products, the production for exports of new industrial plants, and a pick-up in seasonal tourism receipts should contribute to stabilizing foreign exchange reserves in the second half of 2012, while the authorities’ expected international bond issue in the Fall could provide an extra cushion. Over the medium term, the further expansion of new industrial plants and the planned fiscal consolidation will contribute to a reduction of the current account deficit to GDP ratio by almost 3 percentage points over the next two years. FDI is also expected to increase with the implementation of several large- scale investment projects in the tourism, energy, automobile, and aeronautic sectors, highlighting Morocco’s welcoming environment for FDI.3

C. Monetary and Exchange Rate Policies

13. Monetary policy will continue to focus on controlling inflation, while being supportive of growth (Attachment I, ¶ 7). Headline inflation is expected to rise to 2½ percent in 2012 due to the recent measures to increase the pass-through of international energy prices, although core inflation will be more contained. Against a background of weakening growth prospects and moderate inflation pressures, the central bank decided to cut the policy rate from 3.25 percent to 3 percent in March 2012. In addition, new measures to boost bank lending to SMEs have recently been introduced. However, the central bank stands ready to act to counter possible second-round impact of domestic energy-related price increases.

14. The authorities envisage an eventual move to formal inflation targeting in conjunction with a more flexible exchange rate. While the central bank has a strong record of maintaining low and stable inflation, it is considering over the medium term a move to a more formal inflation-targeting framework in coordination with the planned subsidy reform. Although a more flexible exchange rate regime would be of limited effect in response to shocks affecting Morocco’s trading partners (such as an oil shock or a shock to the euro-zone), it would help protect international reserves and help strengthen Morocco’s competitiveness vis-à-vis its main competitors.

D. Financial Sector Policies

15. The authorities are also ensuring that banks have the necessary liquidity. Bank Al-Maghrib (BAM) will offer to banks a broader range of refinancing instruments to adjust their balance sheets, such as securitization and covered bonds. It will continue to monitor the implementation of refinancing plans adopted by some banks, in order to ensure that credit growth is supported by stable resources. It will also see that banks hold appropriate liquidity buffers on their balance sheets and adopt plans to deal with liquidity crises.

16. The central bank is progressively translating the norms of Basel III, particularly those related to capital and liquidity (Attachment I, ¶ 8). It has already increased the capital adequacy requirement to 12 percent and core capital requirements to 9 percent, effective June 2013. It will also bring up the liquidity ratio in line with international norms and strengthen rules for risk management. BAM will maintain its requirements for adequate funding of such loans. In addition, BAM will strengthen its micro-prudential surveillance in the context of the risk-based approach. In parallel, the Ministry of Finance, BAM, and other regulators will strengthen their coordination in order to preserve financial stability.

17. The authorities intend to further develop the financial system by expanding capital markets, while strengthening banks. Preparatory work for the development of Casablanca into a major regional financial center is on track, and banks and other large companies are now starting to finance themselves on the capital markets.

E. Fiscal Policy

18. The government increased the administered prices of several energy products in June to limit the impact of higher oil prices on subsidy outlays, and to help reduce the fiscal deficit from 6.9 percent of GDP in 2011 to 6.1 percent in 2012 (Table 3).4 The increase in energy prices has helped to reduce the fiscal deficit by 0.6 percent of GDP in 2012. The government intends to continue reducing the fiscal deficit to 5.3 percent in 2013, mainly on account of the full-year impact of these measures. Tax revenues are expected to remain broadly stable in percent of GDP, reflecting improved tax control and monitoring. Nonessential recurrent spending will continue to be reined in, offsetting an increase in the wage bill of about ¼ percent of GDP related to upgrading of the public workforce in the priority areas of health, education, security, and defense, and the full-year effect of the wage increase of May 2011. Starting in 2013, the compensation of employees as a share of GDP is expected to decline owing to a gradual moderation of the public payroll, reflecting the implementation of an improved payroll control and monitoring system, and a stabilization of the workforce. Public investment spending is also projected to increase by about ½ percent of GDP, in 2012 and 2013, to improve basic infrastructure, and will be complemented by a major investment effort of key public enterprises, thereby supporting domestic demand.

Table 3.

Morocco: Central Government Finance, 2010-17

(In percent of GDP)

article image
Sources: Ministry of Economy and Finance; and IMF staff estimates.

19. Over the medium term, the government intends to ensure better targeting and efficiency of the existing subsidy and social protection system, while limiting its cost (Box 2). The government strategy to reform the subsidy system will be finalized after broad consultations. The strategy is expected to be based on four pillars:

Morocco’s Social Protection System

Morocco’s current social protection system relies primarily on a generalized subsidy system, but also includes several more targeted initiatives. The government aims to introduce a more efficient system by gradually replacing universal subsidies with well-targeted assistance, building on the existing framework, including the National Initiative for Human Development, and the targeted pilot programs “RAMED” and “Tayssir.” The next steps involve better identification of vulnerable groups and developing a consensus on reform modalities and programs.

The generalized subsidy system—“compensation” system—currently comprises flour, sugar, and petroleum products, including fuel, butane gas, and diesel. While spending on subsidies has averaged 2.4 percent of GDP for the period 2000–10, it almost doubled in 2011 as a result of higher oil prices. Subsidies amounted to about 6.1 percent of GDP in 2011. Energy subsidies alone accounted for 84 percent of the total subsidy bill (or 5.1 percent of GDP) in 2011.

Subsidies are not well targeted, with limited benefits for the poor. Because the “compensation” subsidy system is universal, access to subsidies is open to the whole population. Studies based on household data published by Haut-Commissariat au Plan indicate that about 43 percent of total food and fuel subsidies go to the top quintile of the population. By contrast, the poorest quintile receives only 9 percent of all subsidies. Diesel and fuel subsidies are the most inequitable: only one percent of payments goes to the poorest segments of the population, while 75 percent goes to the top-earning groups.

The VAT and excise taxes levied on energy products partly offset the gross cost of subsidies. VAT tax receipts on energy products have averaged almost 0.75 percent of GDP since 2005. The government increased the VAT rate in 2010 from 7 percent to 10 percent. Excise tax receipts averaged 1.6 percent annually since 2005. While gross fuel subsidies were almost 2.5 percent on average since 2005, fuel subsidies net of tax receipts were close to 0.1 percent on average since then.

The National Initiative for Human Development is the first public program that attempts to comprehensively target vulnerable groups. The initiative was established in 2005 under the Ministry of the Interior. It currently adopts a dual geographic and social targeting approach against poverty in rural communities and specific urban areas. In the first phase (2005–10), 22,000 projects were initiated to benefit a total of 5 million citizens (approximately 15 percent of the population) in several areas (infrastructure, vocational training, improvement of living conditions, etc.).

Two pilot programs “RAMED” and “Tayssir” provide financial support to the poor in the areas of education and health. The program “Tayssir” is designed to prevent school dropout in five targeted geographical areas: l’Oriental, Marrakech-Tensift-Al Haouz, Meknes-Tafilalet, Souss-Massa-Draa and Tadla-Azilal. Scholarships are paid to students subject to compliance conditions (school absences fewer than four times per month). The number of student beneficiaries increased from 88,000 in 2009 to 450,000 in 2011. The program “RAMED” was introduced in 2008 as a pilot in the Tadla-Azilal region. Those eligible receive full or partial benefits for medical services related to hospitalization, surgery, and childbirth. The program is expected to be generalized to 8.5 million people in the country, including 4 million poor inhabitants and another 4.5 million who are vulnerable, in addition to 160,000 prisoners, homeless persons, and orphans.

i. A reduction of subsidies:

  • The recent pass-through in some domestic energy prices will reduce subsidy costs by 25 percent on a full year basis;

  • Further reduction of subsidies on some sectors has been implemented or is being contemplated. In July 2012, subsidies benefiting the fisheries sector were eliminated;

ii. Financing for the subsidies:

  • The creation of a solidarity fund, as legislated in the 2012 budget law: the fund is expected to be financed by: (i) taxes on tobacco and alcohol; (ii) taxes on public land purchases; and (iii) raising revenues from the more privileged, including through taxes on luxury cars;

iii. Targeting:

  • A fully targeted social protection system. The government is currently examining different targeting options, such as the creation of a list of beneficiaries on the basis of the RAMED system (Box 2), or using the scoring methodology, in consultation with the World Bank;

iv. Hedging mechanism:

  • The introduction of a hedging mechanism against oil price volatility, thereby containing the subsidy bill.

20. Fiscal policy aims at reducing the fiscal deficit to 3 percent of GDP over the medium term to ensure fiscal sustainability, while enhancing potential growth (Attachment I, ¶ 6).5 The medium-term fiscal consolidation rests on: (i) moderating the wage bill through an introduction of performance-based compensation, and significant projected retirements; (ii) modernization of the social protection system, including a reduction of subsidies to 3 percent of GDP by 2016; (iii) a gradual moderation of the public payroll; (iv) rationalization of nonessential recurrent spending, including through an improved bidding process; and (v) more effective investment spending through multi-year programming and enhanced coordination of programs. The government also intends to reform the public pension fund to ensure its sustainability. Tax reform will continue to be supportive of growth while stabilizing revenue in percent of GDP through broadening the tax base, strengthening tax administration, and eliminating nonproductive tax exemptions.

III. Risks to the Outlook

21. Recent regional and domestic tensions have highlighted the importance of steadfast implementation of the planned social and economic reforms. While inclusive growth has been enhanced in the past decade (Box 3; Figure 4), resolute implementation of the planned governance, regionalization, and social reforms is necessary to respond to remaining unmet expectations. However, political risks, associated with the implementation of the subsidy reform and the related fiscal consolidation plan, remain.

Inclusive Growth in Morocco

Morocco’s social indicators have improved over the past decade. Higher economic growth, lower unemployment, better health and educational outcomes, easier access to basic infrastructure, and a marked reduction in poverty rates are tangible evidence of the remarkable progress made by the authorities in fostering inclusive growth. Additional efforts are, however, needed: to improve educational outcomes, and to further reduce the still high youth unemployment and inequality in the distribution of income and access to health care, particularly across regions.

Growth has accelerated remarkably. Real per capita growth has increased considerably over the past two decades, from an average of 1.2 percent per year during the period 1990–99 to 3.6 percent over the period 2000–09.

Unemployment rates have declined substantially. The overall unemployment rate in Morocco has declined from 13.4 percent in 2000 to 8.9 percent in 2011. Youth unemployment has also decreased, but remains relatively high at about 17.4 percent.

Poverty rates have markedly declined. Over the past decade, about 1.7 million people have moved out of poverty, resulting in a 40 percent decline in the poverty rate, which is relatively lower than in other countries in the region. In particular, on the basis of the national poverty line, the share of the population classified as “poor” has decreased from about 16 percent in 1999 to less than 9 percent in 2008.1 In addition, the reduction in poverty has been uniform between urban (about 50 percent) and rural areas (about 40 percent). However, a large share of the population remains at risk of being poor.

Access to infrastructure has improved. Owing to the launch of several programs, basic infrastructure has significantly improved over the past two decades, particularly in terms of access to drinkable water, electrification rates, and road access rates.

Illiteracy rates have decreased. In conjunction with a marked increase in primary completion rates, the adult illiteracy rate has decreased by 13 pps during the past decade, and remains very low compared to those of other countries. However, despite the marked decrease at the national level, illiteracy rates remain high in rural areas.

Health outcome indicators have recorded a significant improvement. Life expectancy at birth has increased by almost four years over the past two decades, and mortality rates have dropped by almost 30 percentage points. However, despite these significant improvements at the national level, health outcomes remain unequal across regions and social levels.

Income inequality has increased slightly. The substantial decline in poverty rate has not been matched by a similar improvement in inequality. Indeed, descriptive statistics of the GINI coefficient suggest that inequality has slightly increased over the past decade, and remains persistently high in both urban and rural areas. Similarly, the income share held by the poorest 20 percent of the population has not increased and remains relatively low.

Additional efforts are needed to strengthen inclusive growth. These should focus on improving educational outcomes, and on reducing youth unemployment and inequality in the distribution of income and access to health care, particularly across regions. The implementation of the authorities’ planned structural reforms, including the regionalization program, improvement of economic governance by increasing transparency and accountability, strengthening ongoing active labor market programs, and subsidy reform complemented by a better-targeted transfer mechanism and improved social protection, are important steps in this direction.

1/ Other poverty measures (poverty gaps and headcount ratios at $1.25 to $2 a day) also point to a significant reduction in poverty over the past decade.
Figure 4.
Figure 4.

Morocco: Selected Indicators of Inclusive Growth, 1990–2009

Citation: IMF Staff Country Reports 2012, 239; 10.5089/9781475506174.002.A001

Note: y-axis= cross-country kernel density estimates based on an unbalanced 169 countries; x-axis=variable; ------Morocco.Source: World Bank Development Indicators.

22. A marked deterioration of economic activity in the economies of advanced trading partners could have sizeable real spillovers on growth and the balance of payments (Box 4). However, with low inflation and strong domestic demand, nonagricultural growth is expected to remain resilient to limited shocks. In a severe adverse scenario where advanced economies experience a slowdown similar in magnitude to the one that occurred during the great recession, nonagricultural growth could drop by 2½ percentage points. Financial spillovers are, however, expected to remain limited. The authorities’ structural reform agenda to enhance potential growth should increase the economy’s resilience to external shocks in the medium term.

Advanced Economy Trading Partners

Sluggish growth performance in advanced economy trading partners is expected to hurt short-term growth and current account prospects. By contrast, financial spillovers are expected to be limited.

Real Spillovers are expected to be sizeable.

The deterioration of the economic situation of European trading partners is expected to reduce near-term growth. Staff estimates suggest that a decline of one percentage point in European real GDP growth would result in a decline of about 0.3 percentage point in Morocco’s nonagricultural GDP growth, with the effect materializing mainly in the first two quarters and rapidly subsiding afterwards.

A sharp decline in Europe’s demand for Moroccan exports is expected to widen the balance of payments. Staff estimates suggest that a one percentage point reduction in growth in Europe could reduce Morocco’s balance of payments by about 1.2 percentage points of GDP—0.7 percentage point through the trade balance, 0.3 percentage point through services, 0.1 percentage point through transfers, and 0.1 percentage point through lower FDI.

Financial Spillovers are expected to be limited.

Direct financial spillover risks are low. Gross reserves in excess of eight times foreign wholesale funding should help mitigate the negative impact of a possible drop in foreign wholesale funding. Moreover, deposits with European bank subsidiaries represent only 19 percent of total deposits, and are mostly in local currency and not convertible. In the extreme case of a run on European subsidiaries, the central bank could provide enough local currency liquidity to maintain stability. Furthermore, the non-convertibility of the Dirham significantly reduces the risks of a run on the currency.

Indirect financial spillover risks are also limited. A prolonged recession in advanced economy trading partners may lead to an increase in NPLs. Staff estimates suggest that, on average, a fall of one percent in GDP growth of advanced economy trading partners may increase NPLs by about 0.2 percent due to domestic demand.

23. Morocco is vulnerable to a spike in international oil prices. An increase of $10 per barrel would result in an increase in the energy import bill of about $0.7 billion (0.6 percent of GDP). Higher oil prices would also hurt Morocco’s trading partners, further increasing the current account deficit and reducing growth. Morocco is planning to diversify energy sources, through sizeable investments in renewable energies to reduce its oil dependency in the medium term. It is also considering adopting a hedging strategy against oil price fluctuations.

IV. Precautionary and Liquidity Line

A. Role of PLL

24. A precautionary PLL arrangement will support the authorities’ policies by providing insurance against exogenous shocks. The authorities are implementing policies to address external and fiscal vulnerabilities linked to potential adverse developments in Morocco’s trading partners and in international oil prices. However, it will take time to rebuild fiscal and external buffers. In this context, a PLL arrangement will provide access to additional financing in the event that actual balance of payments needs arise from risks materializing in the short-term. A PLL arrangement would also strengthen investors’ confidence and facilitate international market access by signaling that Morocco’s current policies are sound, and that the authorities have adequate resources to draw upon if needed.

B. Qualification Criteria

25. Morocco has sound economic fundamentals and institutional frameworks, a track record of implementing strong policies; the authorities are committed to maintaining sound policies in the future. The Executive Board positively assessed Morocco’s policies at the most recent Article IV consultation.6 Thanks to several years of sound macroeconomic policies, Morocco was well equipped to withstand the 2008 international crisis and to respond to the social demands that have emerged during the Arab Spring. The authorities are committed to maintaining sound policies in the future: these include ensuring medium-term fiscal sustainability, strengthening the resilience of the financial sector, and implementing an ambitious agenda to boost employment and inclusive growth.

26. Morocco performs strongly in three out of the five areas for PLL qualification (financial sector and supervision, monetary policy, data adequacy) while underperforming moderately in the other two areas (fiscal policy, external position and market access). While recent increases in the fiscal deficit have resulted in an assessment of moderate underperformance of fiscal policy, the government is committed to a consolidation path consistent with debt sustainability, and has recently taken significant action to reduce subsidies. The moderate underperformance of the external position is related to the recent widening of the current account deficit, which is largely due to exogenous international oil price shocks.

Fiscal policy area (Figure 7).

Figure 7.
Figure 7.

Morocco: Public Sector, 2006–11

Citation: IMF Staff Country Reports 2012, 239; 10.5089/9781475506174.002.A001

Sources: IMF World Economic Outlook, April 2012; and IMF staff estimates.

27. Morocco has a record of sound public finances over a prolonged period. In the past five years (2007–11), fiscal policy has been prudent. The overall fiscal balance and the cyclically-adjusted balance have averaged 2.6 and 2.7 percent of GDP, respectively. The primary budget over the same period has been fully balanced and lower than the debt-stabilizing levels. Public debt was on a declining trend until 2011, when rising international oil prices resulted in a significant increase in the fiscal deficit.

28. The authorities are committed to restoring medium-term fiscal sustainability. In response to the significant increase in the fiscal deficit, and in line with the macroeconomic stability principle included in the new constitution, the authorities are committed to reducing the deficit and ensuring medium-term sustainability. In particular, fiscal projections for 2012 and 2013 envisage an annual reduction of 0.8 percentage point in the deficit, as a first step toward reducing the fiscal deficit to 3 percent of GDP by 2017, partly reflecting a reduction of subsidies to 3 percent of GDP by 2016. This consolidation effort would steadily lower public debt as a percent of GDP, and strengthen medium-term sustainability.7

External position and market access area (Figures 8 and 9).

Figure 8.
Figure 8.

Morocco: External Sector, 2006–11

Citation: IMF Staff Country Reports 2012, 239; 10.5089/9781475506174.002.A001

Sources: IMF World Economic Outlook, April 2012; and IMF staff estimates.
Figure 9.
Figure 9.

Morocco: Reserve Coverage in International Perspective, 2011

Citation: IMF Staff Country Reports 2012, 239; 10.5089/9781475506174.002.A001

Sources: IMF World Economic Outlook, April 2012; and IMF staff estimates.

29. Morocco has experienced an extended period of moderate external vulnerability. Current account deficits averaged 4.6 percent of GDP over 2007–11, and reserves steadily increased until 2011. While reserves remain at a comfortable level,8 recent increases in oil prices have led to a widening of the current account deficit and downward pressures on reserves.

30. The authorities are implementing policies to strengthen private external flows and reduce external risks. Recent measures to tighten fiscal policy, and export production of new industrial plants should contribute to stabilizing foreign exchange reserves in the second half of 2012. Over the medium term, Morocco’s welcoming business environment makes it well placed to continue attracting large-scale FDI projects in high-value-added sectors. In addition, the authorities’ ongoing efforts to improve competitiveness and reduce dependence on oil imports—through diversification of its energy sources and investment in renewable energy—will further reduce external vulnerabilities.

31. Morocco’s exchange rate regime is consistent with the fiscal-monetary policy mix. While the peg to a currency basket has helped to enhance price stability and insulate the economy from nominal shocks, fiscal and monetary policy have supported robust domestic demand within an environment of stable and low inflation. While the deterioration in fiscal and external positions, including continued loss of reserves, has weakened the appropriateness of the exchange rate regime in relation to the fiscal-monetary policy mix, the authorities have taken actions to restore the fiscal sustainability and consistency of the policy mix.

32. Morocco has a successful record of access to sovereign international capital markets. Morocco issued a euro 1 billion bond in September 2010 at 4.5 percent interest rate. Long-term government bond yields have remained stable at about 4.2 percent–0.3 percent lower than at the time of the 2010 issuance. International bond spreads have increased moderately and remain low compared to other emerging economies (Figure 3). Morocco is considering further issuance of international bonds in Fall 2012.

Monetary policy area (Figure 10).

Figure 10.
Figure 10.

Morocco: Monetary and Financial Sector, 2006–11

Citation: IMF Staff Country Reports 2012, 239; 10.5089/9781475506174.002.A001

Sources: IMF World Economic Outlook, April 2012; and IMF staff estimates.

33. Monetary policy is credible and transparent, and has a strong record of maintaining low and stable inflation. Monetary policy has kept inflation at 1.8 percent on average over 2007–11, in line with the objectives set by BAM. BAM affects inflation and inflation expectations by influencing the overnight interest rate (operational target) and the reserve requirement rate, while maintaining a fixed exchange rate against a basket of currencies. Moreover, lending rates and treasury rates have regularly responded to changes in policy rates, suggesting a well-operating monetary transmission mechanism. Detailed information on monetary statistics, policy instruments, and monetary policy decisions is widely accessible to the public, including from the website of the BAM.

Financial sector soundness and supervision area

34. The financial sector is sound and has been resilient to the financial turmoil in Europe. The policy of strengthening core capital has been generally successful: (i) the capital adequacy ratio has increased from 11.2 percent in 2009 to 11.7 percent in 2011; (ii) NPLs have steadily declined from 6.1 percent of total loans in 2008 to 4.8 percent in 2011.

35. The banking sector is the largest in the region, exceeding 110 percent of GDP, and has been supportive of growth. Furthermore, the authorities are taking steps to promote access to banking and saving services, particularly in rural areas, and to support deposit mobilization. The establishment of the Casablanca Stock Exchange—already one of the most capitalized and diversified in Africa—as a regional and international financial center will also contribute to financial deepening, and will enhance growth and job creation.

Data adequacy area

36. Morocco subscribes to the Special Data Dissemination Standard (SDDS). Data provision has been appropriate in all sectors.

Approval Criteria

37. Morocco does not face any of the circumstances under which the Fund may not approve a PLL:

  • It does not have sustained inability to access international capital markets: it successfully accessed international bond markets in 2010, and bond spreads have remained broadly stable;

  • There is no need to undertake a large macroeconomic or structural policy adjustment;

  • The public debt position is sustainable in the medium term, with a high probability: the DSA results show moderate risk of debt distress;

  • There are no widespread bank insolvencies: financial soundness indicators confirm banking sector stability.

C. Access

38. The authorities have requested a two-year precautionary arrangement with access of 400 percent of quota in the first year (SDR 2.35 billion) and an additional 300 percent of quota in the second year (SDR 1.77 billion). They believe a two-year arrangement is appropriate in light of the persistence of external risks. Access of 400 percent of quota (SDR 2.35 billion) for the first year is justified by the potentially severe shocks relating to a European sovereign debt crisis and oil prices. An additional 300 percent of quota (SDR 1.77 billion) would provide a buffer against a scenario of persistent shocks (Box 5). The requested access is near the median and below the average access for recent exceptional cases (Table 12). Morocco meets the criteria for exceptional access (Box 6).

Access Level

Staff prepared a stress case scenario based on a combined oil price and EU growth shock. The proposed access level of 400 percent of quota in the first year of the arrangement, and an additional 300 percent in the second year, would broadly cover the financing needs arising in such a scenario (Table 13).

Table 13.

Morocco: External Financing Requirements

(millions of U.S. dollars unless specified otherwise)

article image
Source:: IMF staff estimates and projections.

The adverse scenario assumes: (1) an oil price increase of at 10$/bbl for the first year (T+1) and 8$/bbl for the second year (T+2); (2) a decrease of grow thin Europe of 4 pps for the first year and 2.5 ppsfor the second year.

Includes capital account balance and net errors and omissions.

The reserve adequacy metric is computed as 30% of short-term debt (at remaining maturity) + 15% of portfolio liabilities + 10% of broad money + 10% of exports.

The scenario assumes:

  • an increase of oil prices by US$10 during the first year of the program, and by about US$8 during the second year. This increase can be decomposed into: (i) a negative oil supply shock which increases oil prices by about US$25—equivalent to one standard deviation of the last ten-year average annual change in oil (Brent) price—during the first year of the program, and by US$18—equivalent to ¾ of the standard deviation of the average annual change—for the second year of the program; and (ii) a reduction in oil prices of US$15 for the first year, and US$10 for the second year, due to lower growth in Europe;

  • a reduction in Morocco’s advanced economy trading partners’ GDP by 4 percentage points during the first year of the program, and 2.5 percentage points during the second year. This shock can be decomposed into: (i) a negative shock to the EU, which reduces advanced economy trading partners’ GDP by 3 percentage points during the first year, compared to the WEO baseline, and 2 percentage points during the second year1; and (ii) a negative oil-driven growth shock of 1 percentage point during the first year, and 0.5 percentage point for the second year.

Under this scenario, higher oil prices would increase energy imports and widen Morocco’s trade deficit; lower growth in the advanced economy trading partners would widen Morocco’s current account deficit and reduce FDI; and, spillovers from the EU would negatively affect Morocco’s nonagricultural GDP growth, which in turn would partially offset the direct negative effect on the trade balance.

This scenario does not include potential additional financing commitments from bilateral and multilateral sources because they have not been identified at this stage.

The financing gap is defined as the level of financial support needed to bring back gross international reserves to 85 percent of the Fund’s reserve metric, corresponding to the level under baseline projections, after the shock. The use of the 85 percent threshold for the reserve metric2 instead of 100 percent is justified by a lower weight for broad money, consistent with the non-convertibility of the Dirham and limited capital controls to residents on outflows. The scenario results in a potential access of SDR 2.35 billion for the first year, and an additional SDR 1.77 billion for the second year, which are in line with access under previous Fund arrangements (Table 12).

A financing gap of similar magnitude could be generated by considering two more extreme individual shocks: (i) an augmentation of oil prices equivalent to an increase of two standard deviations of the last ten-year average annual change in oil (Brent) price—as experienced between April 2010 and May 2011—during the first year of the program, and 1¾ of the standard deviation for the second year of the program; (ii) a drop in Morocco’s advanced-economy trading partners’ GDP by 5 percentage points during the first year of the program—in line with previous sovereign debt default events3—and 3 percentage points during the second year.

________________________

1 The magnitudes are in line with the stress case scenario presented in the IMF Spillover Report (July 2012). 2 The metric is defined as a combination of: (i) short-term debt (30 percent); (ii) medium- and long-term debt and equity liabilities (15 percent); (iii) broad money (10 percent); and (iv) exports of goods and services (10 percent). 3 Furceri, D., and A. Zdzienicka (2012). “How Costly Are Debt Crises?” Journal of International Money and Finance, 31(4), pp 726–742.

Exceptional Access Criteria

The authorities’ request for a PLL arrangement involves exceptional access and staff’s evaluation is that Morocco meets the four exceptional access criteria:

  • Criterion 1: The member is experiencing or has the potential to experience actual or potential exceptional balance of payments pressures on the current or capital account, resulting in a need for Fund financing that cannot be met within the normal limits. Morocco does not face actual balance of payments pressures. However, it is exposed to risks of increases in oil prices and economic disruptions in Europe. Staff is of the view that the realization of a stress scenario could give rise to financing needs beyond normal access limits.

  • Criterion 2: A rigorous and systematic analysis indicates that there is a high probability that the member’s public debt is sustainable in the medium term. However, in cases where there are significant uncertainties that make it difficult to state categorically that there is a high probability that debt is sustainable over this period, exceptional access would be justified if there is a high risk of international systemic spillovers. Staff analysis is that there is a high probability that the debt will remain sustainable in the medium term. Gross public debt is currently at 54.3 percent of GDP and would decrease based on the authorities’ medium-term fiscal strategy. Stress tests indicate that under the standard shocks, debt ratios would remain sustainable over the medium term.

  • Criterion 3: The member has prospects of gaining or regaining access to capital markets within the timeframe when Fund resources are outstanding. In 2010, Morocco issued a €1 billion Eurobond with a maturity of 10 years and an interest rate of 4.5 percent. Investor demand exceeded €2.3 billion, reflecting confidence in Morocco in the international monetary market. Currently, international bond spreads have increased moderately and remain low compared to other emerging economies (Figure 3). Staff is of the view that Morocco could re-issue Eurobonds at present with similar favorable terms.

  • Criterion 4: The policy program of the member provides a reasonably strong prospect of success, including not only the member’s adjustment plans but also its institutional and political capacity to deliver that adjustment. Staff judges that the authorities’ program has strong prospects of success, with respect to sound policy plans and also to the institutional and political capacity to deliver on those policy plans. Morocco’s economic program, based on fiscal restraint and a central bank committed to policies consistent with maintaining price stability, has strong prospects of success. The authorities’ track records of sound macroeconomic policies, supported by solid institutions, including an independent central bank, and the macroeconomic resilience observed during the recent global crisis and uprisings that have emerged across the MENA region since early 2011, give confidence in continued sound policies and stability over the longer term.

Table 12.

Morocco: Proposed Access

article image
Sources: Executive Board documents, MONA database, and IMF staff estimates.

High access cases include available data at approval and on augmentation for all the requests to the Board since 1997 which involved the use of the exceptional circumstances clause or SRF resources. Exceptional access augmentations are counted as separate observations. For the purpose of measuring access as a ratio of different metrics, access includes augmentations and previously approved and drawn amounts.

Correspond to quotas prior to 2008 Reform.

The data used to calculate ratios are the actual values for the year prior to approval for public, external, and short-term debt, and the projection at the time of program approval for the year in which the program was approved for all other variables (projections for 2012 were used).

Includes net private transfers.

Refers to net debt.

Refers to residual maturity.

D. Modalities

39. The conditionality under the PLL arrangement includes indicative targets that quantify government objectives regarding the fiscal deficit and net international reserves, and semi-annual reviews (Attachment I, Table 1). The fiscal target of the first year of the program is set in line with the 2012 and 2013 fiscal objectives, and the authorities’ objective of reducing the budget deficit to less than 3 percent of GDP in the medium term. The indicative target on net international reserves is consistent with maintaining gross international reserves at a comfortable level. Indicative targets for the third review will be proposed at the time of the second review. As required under the PLL decision, the PLL for Morocco includes standard performance criteria on trade and exchange restrictions, bilateral payments arrangements, multiple currency practice, and external arrears. Detailed information on government quantitative objectives and review dates is presented in Tables 1 and 2 of the authorities’ written communication, and in Attachment II.

Table 1.

Morocco: Selected Economic Indicators, 2010–17

article image
Sources: Moroccan authorities; and IMF staff estimates.

Includes changes in the balance of other special treasury accounts.

Includes credit to public enterprises.

Most recent data for 2012.

Starting in 2012, exports of goods growth reflects the export production of Renault.

Table 2.

Morocco: Central Government Finance, 2010-17

(In millions of dirhams)

article image
Sources: Ministry of Economy and Finance; and IMF staff estimates.

E. Exit

40. The authorities are committed to reducing external vulnerabilities in the near term. Notwithstanding Morocco’s sound institutional policy frameworks, uncertainty about the euro-zone and possible international oil supply disruptions are key risks to the near-term outlook, risks which are expected to be lowered by the end of the program horizon. To reduce vulnerabilities against these risks by the end of the PLL arrangement, the authorities are committed to: (i) increasing near-term growth prospects; (ii) developing access to alternative energy sources; (iii) adoption of a hedging strategy against oil price volatility; (iv) reducing the fiscal deficit by 1½ percent of GDP by 2014; and (v) strengthening reserves. buffer through international bond issuance. As risks from exogenous shocks are reduced, and as external buffers are built, the exit prospects are high.

V. Impact on Fund Finances, Risks and Safeguards

41. Access under the proposed PLL of 700 percent of quota (SDR 4.12 billion) is small relative to the Fund’s liquidity. The Fund’s liquidity is expected to remain adequate after approval of a PLL arrangement for Morocco, as discussed further in the supplement assessing the impact on the Fund’s finances and liquidity position (Supplement 1).

42. Risks to the Fund are relatively small. The authorities are not expected to draw upon the PLL, which is intended to be drawn upon only in the event of actual balance of payment needs arising from adverse shocks. In the event that Morocco were to draw the entire amount available, it would be well-positioned to repay the Fund. However, political and external risks to the program and capacity to repay remain (Supplement 1).

43. Morocco has agreed to undergo a safeguards assessment, as required under the PLL framework. The assessment has already been initiated. BAM regularly publishes its audited financial statement in its annual report.

VI. Staff Appraisal

44. Morocco’s track record of sound economic policies helped it withstand the recent economic crisis and regional social events. Thanks to several years of sound macroeconomic policies, Morocco was well equipped to address the 2008 international crisis and to respond to domestic social demands. The prudent fiscal stance of previous years created the fiscal space necessary to support the political reform process and ensure social cohesion. The exchange rate regime contributed to ensuring low and stable inflation, and in staff’s view there is no significant exchange rate misalignment. Staff considers BAM’s decision early this year to cut the policy rate by 25 basis points, against a background of weakening growth prospects and moderate inflation, to have been appropriate. The financial sector is sound and has been resilient to the financial turmoil in Europe. Although banks’ solvency appears strong by international standards, staff welcomes BAM’s efforts to reinforce banks’ core capital.

45. High oil prices have contributed to a build-up of fiscal and external pressures, but the authorities have taken action to address these vulnerabilities and are committed to continuing implementation of sound policies. Staff believes that the recent increase in domestic administered oil prices is a tangible signal of the authorities’ commitment to reform the subsidy system over the medium term. The subsidy reform is a key pillar of the authorities’ plan to reduce the fiscal deficit over the medium term and ensure fiscal sustainability. Staff also welcomes the authorities’ agenda of structural reforms to improve social indicators, reduce unemployment, boost competitiveness, and increase long-term potential growth.

46. Notwithstanding these positive prospects, Morocco faces external risks that could translate into balance of payments financing needs should an adverse scenario materialize. Morocco is an oil importer with a large concentration of exports in Europe, making it particularly vulnerable to continued uncertainty in the euro-zone and to possible international oil supply disruptions. These vulnerabilities will be reduced over the medium term by the authorities’ intention to: (i) increase potential growth; (ii) diversify energy sources; (iii) adopt a hedging strategy against oil price volatility; and (iv) strengthen reserves buffers through international bond issuance.

47. Staff assessment is that Morocco meets the PLL qualification criteria. It has sound economic fundamentals and institutional policy frameworks, and performs strongly on three of the five PLL qualification areas. In addition, Morocco does not substantially underperform on the remaining two qualification areas, fiscal policy and external position. Morocco does not face any of the circumstances under which the Fund may not approve a PLL arrangement. Given the potential size and persistence of oil prices and euro zone related economic uncertainties, staff believes that a two-year precautionary arrangement would be appropriate, with access equivalent to 400 percent of quota in the first year, and an additional 300 percent in the second.

48. A precautionary PLL arrangement would support the authorities’ policies by providing a financing buffer against exogenous shocks. While the authorities are not expected to draw upon the PLL unless Morocco experiences actual balance of payments needs arising from a significant deterioration in external conditions, the PLL would provide an important source of financing that could help preserve stability and reduce the need for contractionary adjustments in the event of temporary shocks. Moreover, the PLL arrangement should strengthen investor confidence and facilitate access to international capital markets. The level of access requested by the authorities is commensurate with a reasonable stress scenario.

49. Indicative targets on fiscal and external vulnerabilities are appropriate for Morocco’s circumstances. The fiscal target of the first year of the program is set in line with the 2012 and 2013 budget, and with the authorities’ objective of reducing the budget deficit to less than 3 percent of GDP in the medium term. The indicative target on net international reserves is consistent with maintaining gross international reserves at a comfortable level. In light of substantial recent measures to reduce subsidies and a strong commitment to implement policies consistent with these targets, as well as a strong track record of policy formulation and implementation for an extended period of time, staff believes indicative targets are sufficient to monitor implementation of the authorities’ policies.

Figure 5.
Figure 5.

Morocco: Public Debt Sustainability: Bound Tests 1/ (Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2012, 239; 10.5089/9781475506174.002.A001

Sources: IMF country desk data; and IMF staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2012, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).
Figure 6.
Figure 6.

Morocco: External Debt Sustainability: Bound Tests 1/ 2/ (External debt in percent of GDP)

Citation: IMF Staff Country Reports 2012, 239; 10.5089/9781475506174.002.A001

Sources: IMF country desk data; and IMF staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.4/ One-time real depreciation of 30 percent occurs in 2012.
Table 4.

Morocco: Central Government Balance Sheet, 2010-17 (GFS2001)

(In millions of dirhams)

article image

Data for the remaining instruments are currently not available.

Table 5.

Morocco: Central Government Finance, 2012 Monthly Projections

(In millions of dirhams)

article image
Sources: IMF staff estimates.
Table 6.

Morocco: Central Government Finance, 2012 Monthly Projections

(In percent of annual GDP)

article image
Sources: IMF staff estimates.
Table 7.

Morocco: Balance of Payments, 2010-17

(In billions of U.S. dollars, unless otherwise indicated)

article image
Sources: Ministry of Economy and Finance; Office des Changes; and IMF staff estimates and projections.