Statement by Mohammed Daïri, Alternate Executive Director for Morocco August 3, 2012

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.


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.


On behalf of my Moroccan authorities, I would like to thank staff for the hard work and constructive dialogue during the PLL discussions, as well as the quality of their analysis and assessment, which my authorities broadly share. I also thank management for their efforts toward successful conclusion of these discussions. Morocco’s request for a PLL arrangement is the first such a request following the November 2011 reform of the Fund’s toolkit, which established this facility to help members with sound policies protect their economies against exogenous shocks under current circumstances of high uncertainties and interconnectedness. The Board’s approval of the authorities’ request—for which they would be also grateful—would be a further demonstration of the IMF’s commitment, as announced by the Managing Director, to support the historic transformation process of the Arab Spring countries, which are determined to meet the legitimate aspirations of their people to dignity, social justice, equal opportunities, and employment.

Political and economic developments in 2011

To maintain social stability and move the reform process decisively forward, the authorities announced a vast program of political transformation, as early as March 2011, and developed an ambitious plan to support employment and incomes, which helped maintain confidence. The political reform agenda included a new constitution approved in July 2011, which consecrated human and political rights, and principles of social justice, equal opportunities and good governance. Free and fair elections followed, leading to a new coalition government headed by the party with the largest number of seats, as required under the new constitution.

Supportive budgetary and monetary policies helped mitigate the impact of the high oil prices and weak international environment, including from the euro area crisis, as well as the effects of the severe drought. As a result of its strong political and economic fundamentals, and the authorities’ judicious mix of supportive policies while preserving macroeconomic stability, in accordance with the principle enshrined by the new constitution, Morocco has demonstrated strong resilience to social unrest and the unfavorable external environment. As staff indicates, economic performance in 2011 was satisfactory, with the highest growth rate and the lowest inflation in the region, unemployment stabilizing at around 9 percent, and reserves remaining at a comfortable level.

Government economic program

The Government’s program presented to Parliament in January 2012 aims at increasing the growth rate over the medium term by 1 percentage point to reach 5.5 percent, maintaining inflation at 2 percent, and reducing unemployment to 8 percent. To achieve these objectives, the main reforms include: improvement in the business climate and in competitiveness by strengthening governance and the rule of law, reforming the judiciary, enhancing transparency and accountability, fighting corruption and rent-seeking behavior, strengthening infrastructure, including through public-private partnerships, improving education and health, and modernizing administration to enhance productivity and service delivery, and facilitate personnel redeployment under the Advanced Regionalization.. The Government will also develop active labor market policies, and promote SMEs and reduce informality. Sectoral policies will target high value-added and high job-content sectors, where Morocco has already made significant inroads, and revitalize other key sectors through performance contracts. The program also aims at reducing inequalities in incomes and opportunities, both broadly and across regions and genders, and strengthening social service delivery and social protection.

Fiscal deficit under the Government’s program should be reduced to 3 percent of GDP by 2016. This involves, on the revenue side, a tax reform to broaden the base, lower the rates, while enhancing equity and reducing exemptions, as well as measures to improve revenue from government property and public property use. On the expenditure side, in addition to the planned subsidy reform (see below), reforms will focus on: modernizing the budget legal framework and enhancing spending efficiency, including through strengthening the procurement law to ensure greater competition and reduce costs, and reform of investment incentives. The program also includes a review of the public sector compensation system to link it to productivity, which will be conducted in coordination with a reform of the pension system to ensure its long-term sustainability and reduce risks to the budget. Improvement in governance and monitoring of performance of public enterprises should strengthen their investment capacity and help prepare the non-strategic ones for privatization. To further improve data quality and credibility and better inform decisions, independence of the government unit in charge of statistics will be enhanced by transforming it into an autonomous agency.

Fiscal policy in 2012

The worsening of the euro area crisis and the drought have impacted growth and fiscal performance in 2012, with GDP growth now projected at around 3 percent, as against an earlier projection of some 4 percent. Together with continued increase in oil prices in the first months of the year, this has had a significant impact on the budget. While maintaining support to the economy, including through higher appropriations for infrastructure spending, the government took a number of measures to reduce the deficit. As indicated in the report, these include new tax measures, improvement in tax and nontax revenue collection, reduction in nonessential recurrent spending, in subsidies (see below), and in transfers to public enterprises, without hindering their investment program. Along with the impact of delayed approval of the budget, these measures should reduce the deficit by 2 percent of GDP, compared to what it would have been otherwise.

Subsidy policy

The authorities agree that the current untargeted subsidy system is costly and inefficient. The increase in international petroleum prices has been particularly challenging for a country that is almost entirely dependent on imports for its energy needs. Moreover, Morocco’s domestic petroleum prices are relatively high, by regional standards, including as a result of VAT and excises amounting to some 2.5 percent of GDP (half of subsidy costs). The authorities did not want to take the easy way of reducing subsidies by lowering energy taxation. In 2011 and early 2012, the economy was hit by a new spike in international energy prices which accounted for the bulk of the increase in the current account and the fiscal deficits. The pass through of the sharp increases in world prices was not politically feasible during a period of heightened social demands, and ongoing political transformation and change of government, in the context of a drought-related decline in agricultural production, and in the absence of a well-targeted social safety net. As a result, subsidy costs and the fiscal deficit increased by 2.5 percent of GDP in 2011 and were expected to increase further in 2012.

On June 1, the Government raised the prices of several petroleum products, at a time when world prices were declining, which will reduce the cost of subsidies by 0.65 percent of GDP (1 percent on an annual basis). Other measures will follow, including partial indexation of industrial fuel and reductions in subsidies for other large users. Moreover, a Social Cohesion Fund was created which will raise new taxes to help finance the subsidy reform. The authorities are committed to gradually reducing the subsidy bill, consistent with their medium-term fiscal consolidation objectives, including through the introduction of a well-targeted cash transfer system, in line with best international experiences. Preparations for the introduction of this system, in close consultation with the World Bank, are underway, with pilot projects expected to be rolled out in due course. The Government intends to consult with its economic partners and civil society by end-2012 to discuss options for effective targeting.

While the subsidy reform should promote efficient energy use, Morocco has embarked on large-scale projects in renewable energy, including a major solar program, which will help reduce energy dependency, protect the environment, and improve the external position. The Government also intends to establish a hedging system against oil price volatility, as indicated in the report.

Monetary and exchange rate policy and the financial sector

The central bank has succeeded in maintaining inflation well below its medium-term target while meeting banks’ liquidity needs. Improved governance and transparency of monetary policy have enhanced its credibility. Efforts are being made to strengthen the monetary policy framework, as indicated in the written communication. The authorities agree that the current peg to a euro/$ basket has helped price stability, and that the dirham is broadly in line with fundamentals. They continue to consider a gradual move to flexible exchange rate policy, along with implementation of inflation targeting and further liberalization of capital flows, once all the prerequisites are in place and the external environment is more stable. The financial system is sound and has demonstrated resilience to the global slowdown and the euro area crisis. Banks were able to meet the economy’ needs while preserving credit quality. The written communication describes the measures undertaken by the central bank to strengthen regulation and supervision, including implementation of Basel III.

PLL and foreign reserves

Morocco’s eligibility to the PLL is well established, as indicated in the report, including as a result of its strong fundamentals and the authorities’ track record of sound policy implementation, and their commitment to preserving macroeconomic and financial stability, enhancing growth and employment performance, and rebuilding fiscal and reserves buffers to absorb shocks. They have also demonstrated their resolve in starting to address the subsidy issue, the main area of fiscal and external vulnerability, despite the high political sensitivity. The 2-year duration of the requested facility, and the 700 percent of quota access level, of which 400 percent for the first year, are appropriate, in view of the risks from heightened euro area crisis and Morocco’s strong linkages with the area, and from a sharp increase in oil prices stemming from intensified geopolitical tensions.

As indicated in the report, the increase in oil prices was the main factor behind the deterioration in the fiscal and external deficits in 2011, even though exports, tourism, worker remittances, and FDI performed well. During the first half of 2012, the current account balance weakened, compared to the first half of 2011, largely as a result of worsening euro area crisis and higher oil prices, while FDI remained broadly unchanged. However, disbursements on public debt were much lower than usual, partly reflecting delays in investment budget execution and, as a consequence, and in view of the higher current account deficit, reserves declined significantly, while remaining at a comfortable level. With lower oil prices foreseen for the second half of the year, the usual seasonal recovery in tourism and remittances, the impact of the fiscal measures undertaken by the authorities, and higher drawings on public debt and grants, reserves are expected to stabilize by end-year 2012 at their current level.

The authorities intend to treat the PLL arrangement as precautionary and draw on the facility only in the event of an exogenous shock. They are also considering access to international markets, which should be at favorable terms in view of Morocco’s reconfirmed sovereign investment grade rating and the confidence effect of the PLL. Durable improvement in the euro area situation and a strengthening in the global economy should increase the chances of early exit.


As indicated in the written communication, the authorities are firmly committed to their reform agenda to achieve their objectives of high and more inclusive growth, and greater job creation, while preserving macroeconomic and financial stability. They are grateful to their international partners for their support. They will remain closely engaged with the Fund for successful implementation of their policies.

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