Morocco: Second Review Under the Precautionary and Liquidity Line Arrangement

EXECUTIVE SUMMARY The economy is recovering and the outlook is favorable but still subject to significant risks. After slowing to below 2½ percent in 2014, growth is expected to be close to 5 percent in 2015, boosted by a strong agricultural output and a gradual acceleration of activity in other sectors. Fiscal policy is on track to achieve the annual deficit objective of 4.3 percent of GDP. The external position has improved rapidly, benefiting from lower oil prices and strong export performance. Inflation remains low. However, more remains to be done to reduce unemployment, especially among the youth. Assuming steadfast implementation of reforms, growth should gradually accelerate over the medium term. However, the outlook remains subject to the risks of a structurally weak growth in key advanced economies, tighter or more volatile global financial conditions, and increased volatility of energy prices. Important progress has been made on key reforms; sustaining these efforts will be important to foster higher and more inclusive growth. Significant progress was made in reforming the subsidy system, thereby reducing its costs and associated fiscal risks. At the same time, social programs on health and education were expanded. The adoption of the new organic budget law in May 2015 was a crucial step in improving the fiscal framework, while progress has also been made in upgrading the financial policy framework. Timely reform of the pension system is needed to ensure its viability while extending its coverage. Sustaining efforts to improve the business environment, competition, governance and transparency, as well as the functioning of the job market and the quality of education and vocational training, will also be important for increasing competitiveness, growth, and employment. The program remains on track and Morocco continues to meet the PLL qualification criteria. Both March 2015 quantitative indicative targets were met comfortably. Morocco continues to perform strongly in three out of the five PLL qualification areas, while not substantially underperforming in the fiscal and external areas. Staff recommends the completion of the second review under the arrangement.

Abstract

EXECUTIVE SUMMARY The economy is recovering and the outlook is favorable but still subject to significant risks. After slowing to below 2½ percent in 2014, growth is expected to be close to 5 percent in 2015, boosted by a strong agricultural output and a gradual acceleration of activity in other sectors. Fiscal policy is on track to achieve the annual deficit objective of 4.3 percent of GDP. The external position has improved rapidly, benefiting from lower oil prices and strong export performance. Inflation remains low. However, more remains to be done to reduce unemployment, especially among the youth. Assuming steadfast implementation of reforms, growth should gradually accelerate over the medium term. However, the outlook remains subject to the risks of a structurally weak growth in key advanced economies, tighter or more volatile global financial conditions, and increased volatility of energy prices. Important progress has been made on key reforms; sustaining these efforts will be important to foster higher and more inclusive growth. Significant progress was made in reforming the subsidy system, thereby reducing its costs and associated fiscal risks. At the same time, social programs on health and education were expanded. The adoption of the new organic budget law in May 2015 was a crucial step in improving the fiscal framework, while progress has also been made in upgrading the financial policy framework. Timely reform of the pension system is needed to ensure its viability while extending its coverage. Sustaining efforts to improve the business environment, competition, governance and transparency, as well as the functioning of the job market and the quality of education and vocational training, will also be important for increasing competitiveness, growth, and employment. The program remains on track and Morocco continues to meet the PLL qualification criteria. Both March 2015 quantitative indicative targets were met comfortably. Morocco continues to perform strongly in three out of the five PLL qualification areas, while not substantially underperforming in the fiscal and external areas. Staff recommends the completion of the second review under the arrangement.

Context and Recent Developments

1. The Executive Board concluded the 2014 Article IV consultation with Morocco and the first PLL review on February 6, 2015. The Board approved a 24-month PLL arrangement in July 2014 in the amount of SDR 3.2351 billion or 550 percent of quota, of which 500 percent of quota was available in the first year of the arrangement, and an additional 50 percent will be made available upon completion of this second review. The arrangement supports the authorities’ program to rebuild fiscal and external buffers and promote higher and more inclusive growth. The authorities have treated the arrangement as precautionary.

2. Growth in 2014 was slower than anticipated, but it is recovering. Growth in 2014 was 2.4 percent against a projection of 2.9 percent. Agricultural output contracted while a slow recovery in manufacturing and construction hampered non-agricultural growth. Nonetheless, conjunctural indicators point to an acceleration of activity in recent months. The unemployment rate remained broadly stable at 9.9 percent in the first quarter of 2015, remaining particularly high among the youth at 21.3 percent.

3. Fiscal developments have been broadly positive through May 2015. The authorities met their March fiscal deficit indicative target by a comfortable margin, as the deficit including grants was 0.9 percent of GDP against a projection of 1.6 percent. Furthermore, the fiscal outturn through May was consistent with the expected annual reduction in the deficit. Relative to the same period last year, the fiscal deficit was about 40 percent lower. Shortfalls in foreign grants and value-added tax (VAT) revenue on imported goods were offset by higher nontax receipts.1 At the same time, spending was significantly lower than during the same period last year, on account of lower outlays on wages and subsidies.2

Recent Fiscal Developments

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Sources: Authorities’ data, and IMF staff estimates.

4. The current account and reserve position continued to improve.3 During January-May 2015—and relative to the same period last year—exports of goods and services grew by 5.5 percent in dirham terms, driven by a recovery in phosphate exports and sustained growth in automobile exports. Imports of goods and services contracted by 8.7 percent, reflecting lower imports of fuel (-32.8 percent) as a result of the drop in world prices and lower food imports. Remittances grew by a solid 5.4 percent, but tourism revenue declined by 6.4 percent. These developments, along with sustained capital inflows (strong FDI growth and issuance of a US$1 billion eurobond by the state-owned phosphate company in April 2015) strengthened reserves, which are now approaching six months of imports. At end-March 2015, reserves exceeded their adjusted indicative target by 10 percent.

5. The financial sector has remained well capitalized and profitable. Bank lending decelerated to 2.5 percent in April 2015 from 3.8 percent in the previous month, reflecting weaker demand from the business sector while household demand increased, especially for real estate loans. At end 2014, the overall capital-adequacy ratio remained well above the Basel III requirement. According to preliminary data, the new regulatory capital-to-risk weighted assets ratio slightly increased to 13.8 in December 2014 from 13.5 in June 2014. Bank’s profitability remained adequate, despite slow lending activity. Reflecting the weaker economic activity, non-performing loans (NPLs) continued to increase reaching 7.2 percent of total loans in April 2015, but remained adequately provisioned.

6. Inflation has remained low. Headline inflation rose to 2 percent year-on-year in May 2015 from 1.6 percent in December 2014, mostly reflecting higher food price inflation. Excluding food, inflation slightly decreased to 1.2 percent in May from 1.6 percent in December. Bank Al-Maghrib (BAM) has kept its policy rate unchanged at 2.5 percent since December 2014 considering the expected improvement in economic activity and bank lending and the moderate inflation forecast, while noting that the outlook remains subject to uncertainties about oil prices. Liquidity pressures have abated, helped by the March 2014 cut in the reserve requirement ratio and the improved foreign reserves position.

7. Progress continued on structural reforms but pension reform has faced headwinds. The update on the status of key reforms is as follows:

  • Organic budget law (OBL). A revised OBL, addressing technical comments by the Constitutional Council on a previous version, was adopted by parliament on April 28, 2015, validated by the Constitutional Council on May 18, and subsequently published. Its implementation decree was adopted on July 2. The law remains substantially unchanged from the earlier version and will significantly strengthen the fiscal framework.4 It is expected to be implemented gradually over a period of five years starting with the 2016 budget as planned.

  • Subsidies. The government announced that the prices of liquid petroleum products—for which subsidies were eliminated at the beginning of the year—will be fully liberalized on November 30, 2015.

  • Financial policy framework. The financial policy framework continued to be upgraded with the gradual implementation of Basel III norms, including the new regulatory capital-to-risk weighted asset ratio definition and the new liquidity coverage ratio, and the implementation of the new banking law. A draft revised central bank law, which appropriately aims to strengthen the central bank’s independence and extend its supervisory powers, was published for public consultation.

  • Exchange rate and monetary regimes. The preparation for a change in exchange rate and monetary regimes is progressing, with Fund technical assistance. On April 13, 2015, the authorities revised the weights of the euro and dollar in the basket against which the dirham is pegged (to 60 percent euro and 40 percent dollar, from 80 percent and 20 percent respectively) to align them with the current structure of external flows. The authorities have publicly stated that this change was a step toward a more flexible exchange rate regime.

  • Pension reform. The parametric reform of the main public pension system is technically ready. While the objective was to have the reform start being implemented in 2015, it is yet to be adopted. The authorities have reiterated their commitment to adopt it this year and implement it at the latest in early 2016.

  • Business environment and labor market. Progress has been made to further simplify administrative procedures, including for customs transactions, construction, and enterprise creation. A national strategy for employment—designed in consultation with social partners and business representatives—was adopted by the ad hoc steering committee in February 2015. It aims to enhance human capital by promoting reforms of the education and vocation training systems, improve the governance and functioning of the job markets—including by improving existing employment support programs—and increase the responsiveness of employment to growth.

Outlook and Risks

8. Economic growth is expected to accelerate to about 5 percent in 2015, bolstered by a strong agricultural output and a gradual acceleration of activity in other sectors. The overall growth projection for 2015 has been revised up slightly from the first PLL review on account of an agricultural season expected to be particularly good, following favorable rainfall. Owing to improved external demand and strengthened domestic confidence, non-agricultural activity is also expected to accelerate, but at a slower pace than projected at the time of the first PLL review. Some manufacturing industries are picking up but the recovery in the construction sector is sluggish and the outcome of the tourist season remains uncertain. Inflation is expected to remain low at about 1.5 percent because of low oil and food prices and a still-negative output gap. Over the medium term, the modernization of the agricultural sector, the continued expansion of Moroccan firms to new markets, the growing importance of newly developed sectors (e.g., automobile), and higher capital investment are expected to gradually lift potential growth above 5 percent, subject to an improvement in external conditions and a steadfast implementation of reforms.

9. The external sector outlook is positive. Oil prices are expected to remain low over the near and medium term, significantly reducing the oil import bill. The performance of newly developed industries is expected to remain strong, while external demand is also projected to continue its recovery. These developments will continue to reduce the current account deficit, which is expected to decline below 3 percent of GDP in 2015. As a consequence, external financing needs will be lower and external debt will stabilize in 2015 and decline over the medium term. Capital inflows are projected to remain strong, as Morocco remains an attractive destination for FDIs. Continued access to international financial markets by the sovereign and the private sectors would also strengthen reserves, which are projected above 6 months of imports.

10. However important risks remain. A structurally weak growth in key advanced economies, in particular the Euro area, would lower growth, export, FDI and remittances. Tighter or more volatile global financial conditions would directly, and indirectly, affect the current (via its impact on global growth) and financial accounts. While the risks associated with higher oil prices have fallen since the inception of the PLL, an increased volatility of energy prices would affect the current account. These external risk factors are summarized in the external stress index in Box 1. Domestically, local elections in 2015 and parliamentary elections in 2016 risk delaying reforms in a volatile regional environment. Sustaining the pace of reforms is necessary to avoid the risk that medium-term growth potential and employment outcome would be lower than targeted.

Figure 1.
Figure 1.

Morocco: Real and External Developments

Citation: IMF Staff Country Reports 2015, 209; 10.5089/9781513547749.002.A001

Sources: Moroccan authorities; and IMF staff estimates.Note: National accounts data rebased to 2007 by Moroccan authorities in May 2015.
Figure 2.
Figure 2.

Morocco: Fiscal and Financial Market Developments

Citation: IMF Staff Country Reports 2015, 209; 10.5089/9781513547749.002.A001

Sources: Moroccan authorities; and IMF staff estimates.

Morocco: External Stress Index

Overall assessment. The external stress index for Morocco indicates that the external pressure faced by the country has abated in recent years. However, as shown in the downside scenario, external risks remain substantial for Morocco.

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Morocco - External Stress Indicator

Citation: IMF Staff Country Reports 2015, 209; 10.5089/9781513547749.002.A001

Background. The external stress index is an indicator of the evolution of the external environment faced by a particular country.1 The index is based on: (i) a consideration of the key external risks facing Morocco; (ii) the selection of proxy variables capturing these risks; and (iii) the choice of the weights to apply to each of these variables.

Risks. The main external risks for Morocco, as explained in detail in the 2014 PLL arrangement request and further updated according to the latest Global Risk Assessment Matrix (G-RAM), are (i) a structurally weak growth in key advanced economies, in particular the Euro area, resulting in lower exports, FDI, tourism and remittances; (ii) an increase in volatility of energy prices due to uncertainty about the persistence of the oil supply shock and the underlying drivers of the price decline; and (iii) tighter or more volatile global financial conditions.2

Variables. (i) Lower exports, FDI and remittances from Europe are captured by growth in the Euro area, the main trading partner of Morocco (representing more than 50 percent of trade, FDI and remittances); (ii) higher oil imports are captured by oil prices; and (iii) the impact of global financial volatility on Morocco are proxied by the emerging markets volatility index (VXEEM).

Weights. We used a data-based approach to determine the weight of each variable. Under this method, weights are determined by the economic size of the respective balance of payments items that are vulnerable to respective risks, relative to the overall size of the economy.

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Baseline scenario. The baseline projections are based on WEO baseline projections for growth in Europe and oil prices. The VXEEM is assumed unchanged from its level of April 14, 2015.

Downside scenario. The downside scenario is in line with those from the most recent IMF spillover reports. The 2013 spillover report estimates that a slowdown in the euro area could result in the GDP level in the euro area being 4 percent below baseline after four years. The 2014 spillover report estimates that geopolitical crises could result in oil prices being 25 percent above baseline.

1 See “The Review of The Flexible Credit Line, The Precautionary and Liquidity Line, And the Rapid Financing Instrument” at: http://www.imf.org/external/np/pp/eng/2014/043014.pdf.2 2014 PLL arrangement request: http://www.imf.org/external/pubs/cat/longres.aspx?sk=41818.0

PLL Qualification Areas

11. Morocco continues to qualify for a PLL arrangement. Morocco’s economic fundamentals and institutional policy framework are sound. The country has a track record of—and is implementing—sound policies. It has been adjusting to shocks and the authorities remain committed to sound policies in the future. Morocco continues to perform strongly in three out of the five PLL qualification areas and does not substantially underperform in the two other areas. The IMF Executive Board’s assessment in the context of the 2014 Article IV consultation, which it discussed in February 2015, was positive.

A. General Assessment

12. Supported by appropriate policy action, Morocco’s overall economic performance has been strong. Overall macroeconomic conditions have improved since 2012, despite a slowdown in activity in 2014. Policy action has contributed significantly to reducing fiscal and external vulnerabilities. The external and fiscal deficits have narrowed considerably from their 2012 peaks and are projected to continue to decline over the medium term. Substantial progress with subsidy reform has helped achieve a significant reduction in its cost and associated fiscal and external risks. Reserves have increased and are now approaching 6 months of imports. Inflation remains low and the financial sector has been stable. Over the medium term, growth is expected to remain relatively high and sustainable in a context of low inflation. Both public and external debts are considered sustainable.

13. The authorities are committed to maintaining sound policies, including ensuring medium-term fiscal sustainability. The authorities laid out a comprehensive medium-strategy in the written communications for the request of a new PLL arrangement and its first review, confirmed in the attached written communication (W-COM.) dated July 8, 2015.5 They are targeting a fiscal deficit of 3 percent of GDP by 2017. In addition to ensuring medium-fiscal sustainability, the authorities plan to implement structural reforms to promote higher and more inclusive growth. Their main objectives are to improve competitiveness and productivity, cut the unemployment rate to 8 percent over the medium term, and boost access to education and vocational training, health, and social protection.

14. The policy and institutional framework is sound and has been responsive to shocks. Morocco’s strong and flexible policy and institutional frameworks provided the basis for the authorities to implement difficult reforms in challenging circumstances. The fiscal framework is being strengthened through the implementation of the new OBL, which addresses structural weaknesses in this area. Indicators of the ability to undertake countercyclical policy in the event of shocks show that Morocco performs well in the implementation of fiscal policy.6 Morocco scores lower in terms of implementation of counter-cyclical monetary policy, but this particular indicator is less relevant in the case of Morocco given the fact that the dirham is pegged to the dollar and the euro.7 Lastly, Morocco performs within the 25–75 percentile range on anti-corruption and government effectiveness indicators of the World Bank.

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Distribution of Institutional Indicators in Emerging Markets

(Based on the average of 2007–12 for each country)

Citation: IMF Staff Country Reports 2015, 209; 10.5089/9781513547749.002.A001

Note: The bars represent the maximum, 75th percentile, median, 25th percentile, and minimum points in the distribution.Sources: WEO, WB WGI, and IMF Staff Calculations.

B. Assessment of the Specific Areas

15. Morocco continues to perform strongly in three out of the five areas, namely financial sector soundness and supervision, monetary policy, and data adequacy. The country does not substantially underperform in the two other areas, fiscal policy and external position and market access.

16. Morocco does not substantially underperform in the external position and market access area, an area of marked improvement in the recent period.

Criterion 1. Sustainable external position.

  • The external position has strengthened significantly. The current account deficit narrowed to 5.5 percent of GDP in 2014, down from its peak of 9.5 percent of GDP in 2012. It is expected to continue improving over the medium term, as exports rise, boosted by improving external demand and the expansion of newly developed export sectors, and the growth of imports remain moderated in an environment of low oil prices. Although it appreciated recently, the real effective exchange rate appears in line with fundamentals based on the most recent external balance assessment (EBA).8 The external debt-to GDP ratio has been rising but remains relatively low at 32.7 percent at end-2014. It is expected to decline to below 30 percent of GDP over the medium term. The debt-sustainability analysis shows the external debt to be sustainable and robust to standard stress tests.

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Morocco: Real and Nominal Effective Exchange Rates, 2004–15

(Index, 2010=100)

Citation: IMF Staff Country Reports 2015, 209; 10.5089/9781513547749.002.A001

Source: IMF staff estimates.

Criterion 2. A capital account position dominated by private flows.

  • Public flows continue to be sizable, but private flows now constitute the largest share of the capital account. Private flows remain dominated by FDI, which are relatively less volatile. Access to international financial markets by Moroccan nonfinancial corporations remains modest in size compared with other emerging markets, and private external debt is small (about 3 percent of GDP). Sovereign bond issuance and loans from development partners constitute the bulk of public flows.

Criterion 3. A track record of steady sovereign access to international capital markets at favorable terms.

  • Morocco’s market access was reconfirmed when it raised EUR 1 billion at favorable terms in June 2014. The National Phosphate Company (OCP) successfully tapped the international market with a US$1.85 billion eurobond in April and May 2014, and an additional US$1 billion in April 2015. The approval of a second PLL arrangement was perceived by investors as a sign of confidence.

Criterion 4. A reserve position that—notwithstanding potential BOP pressures that justify Fund assistance—remains relatively comfortable.

  • Reserves have continued to increase. They are projected to reach 6 months of imports at end-2015. At end-2014, they represented 95 percent of the Fund’s metric to assess reserve adequacy (ARA metric) for financial deepening markets and would represent 105.1 percent of the metric at end-2015. Considering existing controls on capital outflows of residents that partially insulate them from capital account vulnerabilities, the ARA metric should be revised to lower the weight of broad money (reflecting lower risk of capital flight by residents).9 The 2014 and projected 2015 reserves represent 131.8 percent and 146.7 percent, respectively, of the adjusted ARA metric. However, reserves are sensitive to the volatility of oil prices, since oil imports still represent more than 20 percent of total imports. The end-March 2015 indicative target on net international reserves was met by a large margin.

17. Morocco does not substantially underperform in the fiscal area.

Criterion 5. Sound public finance, including a sustainable public debt position.

  • Morocco remains committed to a sustainable fiscal path and has a track record of sound public finances. The authorities have taken commendable actions to strengthen Morocco’s fiscal position and address the weaknesses identified in their fiscal framework in 2012, thereby reducing vulnerabilities in that area. Consistent with their medium-term target of a fiscal deficit of 3 percent by 2017, the authorities reduced the fiscal deficit to 4.9 percent of GDP in 2014 as envisaged.

  • Continuing on the path to the medium-term anchor, the 2015 budget is aiming at a deficit of 4.3 percent of GDP (W-COM.-¶4). Fiscal developments so far this year are on track for the authorities to meet their annual deficit objective. Lower receipts from VAT on oil imports, resulting from lower international energy prices than assumed in the budget, are being offset by savings on butane subsidies and transfers.10 The cyclically-adjusted primary balance is projected to improve by ½ percent of GDP in 2015. The end-March 2015 fiscal deficit target was met by a comfortable margin.

  • The pace of fiscal reform has picked up since end 2013. Significant progress was made on subsidy reform, as noted, thereby reducing the fiscal costs and risks associated with the subsidy system, while extending social programs to support the poor (W-COM.-¶6). The 2015 budget continues to implement the reform of the tax system introduced in 2013, with a view toward making it more equitable and supportive of competitiveness (W-COM.-¶5). Despite headwinds ahead of union and local elections (in June and early fall 2015, respectively), the authorities remain still committed to adopting the reform of the main public service pension fund in 2015 (W-COM.-¶9).

  • The promulgation of a new OBL is a milestone in the efforts to strengthen and modernize the fiscal framework (W-COM.-¶8). The new law significantly improves the previous 1998 organic law. The new provisions of the OBL are expected to be gradually implemented until 2020, starting with the 2016 budget, as scheduled.

  • Public sector debt remains sustainable based on a rigorous and systematic debt analysis (Annex II). Public debt is expected to peak at about 64 percent of GDP in 2016, and progressively fall below 60 percent of GDP in the medium term, as a result of the continued fiscal adjustment. The level of debt is generally resilient to various shocks, and vulnerabilities linked to the profile of the debt are either low or moderate. However, there are risks linked to gross financing needs. The debt remains sustainable under a stress test involving the same shock that would generate the potential financing need under the current PLL arrangement.

18. Morocco performs strongly in the area of monetary policy.

Criterion 6. Low and stable inflation, in the context of a sound monetary and exchange rate policy framework.

  • Morocco continues to maintain low and stable inflation in the context of the current monetary and exchange rate policy framework. Inflation was 2 percent year-on-year at end-May 2015 and is expected to remain low in the medium term. Inflation expectations, as reflected in BAM’s surveys, remain well anchored. BAM maintained the policy rate at 2.5 percent in June 2015, following the two cuts of 25 basis points each in September and December 2014. In staff’s view, the current monetary policy stance is appropriate within the existing monetary and pegged exchange rate frameworks.

  • The authorities are preparing for a gradual shift in exchange rate and monetary regimes (W-COM.-¶13). The authorities noted that the revision of the dirham’s currency basket weights in April was a first step toward a more flexible exchange rate regime. The authorities have received significant Fund technical assistance to prepare for a move toward a more flexible exchange rate regime and for monetary policy to provide a new nominal anchor (inflation targeting). Stress tests conducted in the recent Financial Sector Assessment Program (FSAP) found the financial system to be resilient to exchange rate shocks. Before finalizing their plans on the next steps in the transition, the authorities will take stock in the fall of the preparatory work and the conditions for a change in regime, with the support of the Fund.

19. Morocco performs strongly in the area of financial sector soundness and supervision.

Criterion 7. The financial system remains sound and there is no solvency problem that may threaten systemic stability.

  • An FSAP update mission in April 2015 confirmed that Moroccan banks are well capitalized and profitable, with stable funding and low NPLs.11 Tier 1 capital makes up 83 percent of total capital. Interest rate margins are comfortable, operating costs remain low, and fees and commissions are rising, while bank funding relies mainly on domestic deposits. Liquidity pressures have receded, helped by the March 2014 cut in the reserve requirement ratio and the improved foreign reserves position. At about 7 percent, the NPL ratio is not high by middle-income country standards and provisioning is high. However, NPLs have risen since 2012 due to weak economic activity. Risks could rise with intensifying liquidity difficulties faced by some companies exposed to certain sectors, such as construction and real estate development. While these strains are unlikely to affect financial stability, close-monitoring of risky loans (watch list) is warranted. Comprehensive stress tests conducted in the recent FSAP show that the banking system would be able to withstand severe adverse shocks associated with a prolonged weak growth in advanced economies and greater global financial market volatility.

Criterion 8. Effective financial sector supervision.

  • The April 2015 FSAP mission assessed that bank supervision is effective and has been improving. New definitions of prudential capital and short-term liquidity ratio, adopted in 2013, are being implemented (W-COM.-¶12). The new banking law adopted in November 2014 strengthens the regulatory, supervisory, and macroprudential frameworks of the central bank. It introduces a formal crisis resolution framework, defines the regulatory and supervisory frameworks for participatory (Islamic) banks, strengthens banks’ governance by aligning the definition of “financial conglomerate” with international standards, improves the management of the deposit insurance system, and introduces a framework governing domestic systemically important financial institutions (SIFIs) in line with Basel standards. Most regulations to implement the new banking law are expected to be in place by end-2015 and those related to financial conglomerates and recovery plans for SIFIs by 2016. A new central bank law is under preparation, which aims to further strengthen BAM’s independence and its role in financial stability. The period for public consultation of the revised law has now ended and the draft is being finalized before being tabled for adoption by cabinet and sent to parliament. BAM is monitoring risks linked to the expansion of Moroccan banks in sub-Saharan Africa, and reinforcing the coordination and exchange of information with supervisory and regulatory agencies in host countries, including through consolidated supervision of groups and on-site visits. Other recent reforms include the creation of new independent supervision authorities for insurance and pensions, and for capital markets. These new authorities will become operational once their management bodies are nominated.

20. Morocco performs strongly in the area of data transparency and integrity.

Criterion 9. Data transparency and integrity.

  • Morocco subscribes to the Special Data Dissemination Standard, and its data are adequate for surveillance and program monitoring. The authorities are committed to further improving data quality and access, notably through participating in the OpenData Platform (ODP).

Other Program Issues

21. Morocco continues to meet the four criteria to qualify for exceptional access.

  • Criterion 1. Morocco does not face actual balance of payment pressures, but could experience such pressures if the risks it currently faces were to materialize. Since the inception of the program, Morocco has faced lower oil prices and a gradual recovery of economic conditions in the euro area, which helped rebuild external buffers. However, the risks of structurally weak growth in key advanced economies including the Euro area, increased volatility of energy prices, and tighter or more volatile global financial conditions, could give rise to exceptional balance of payment pressures should they materialize, even accounting for the use of reserves buffers. Such pressures could result in a need for Fund financing that could not be met within normal access limits.

  • Criterion 2. A rigorous and systemic analysis indicates that there is a high probability that public debt would remain sustainable over the medium term. Public debt is projected to start declining in 2017 and decrease to below 60 percent of GDP over the medium term. Public debt sustainability analysis shows the debt is resilient to various shocks and vulnerabilities linked to the level and profile of the debt, despite high gross financing needs mainly linked to the rollover of existing debt.

  • Criterion 3. Staff considers that Morocco could continue to access markets within the time frame when Fund resources would be outstanding, were Morocco to make purchases under the arrangement. Morocco has successfully tapped into international capital markets, most recently by issuing EUR 1 billion in June 2014. Each recent issuance benefited from low spreads and long maturities, reflecting the confidence placed in Morocco by market participants. Staff expects this confidence to remain over the medium term.

  • Criterion 4. Staff considers the authorities’ policy program to have reasonably strong prospects for success, including not only Morocco’s adjustment plans but also its institutional and political capacity to deliver that adjustment. Morocco has gradually rebuilt its external and fiscal buffers under the PLL, and the authorities have demonstrated their ability to undertake necessary reforms under difficult circumstances. Solid institutions, including an independent central bank, and the macroeconomic resilience observed in the face of a difficult international environment, give confidence for the continuation of sound policies and economic stability over the longer term.

22. Should Morocco draw on the entire amount available, it would have adequate capacity to repay the Fund while credit and liquidity risks to the Fund would remain low (Table 7).12 The authorities continue to treat the PLL arrangement as precautionary. However, were Morocco to withdraw the entire amount available, Fund credit would represent a modest share of Morocco’s low external debt, and the reserve coverage ratio would be comfortable. External debt service would increase moderately over the medium term but would remain manageable under staff’s medium-term macroeconomic projections.13 In addition, the impact of the PLL arrangement on the Fund’s liquidity and potential exposure continues to be moderate. The commitment to Morocco is modest and the PLL arrangement reduces the Fund’s forward commitment capacity only marginally.

Table 1.

Morocco: Selected Economic Indicators, 2012–20

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Sources: Moroccan authorities; and IMF staff estimates.

Refers to the macro framework for the 1st review of the PLL arrangement in CR/15/44, based on national accounts based in 1998 and BOP manual 5.

Revised macro framework, based on national accounts based in 2007 and BOP manual 6.

Includes credit to public enterprises.

Table 2.

Morocco: Budgetary Central Government Finance, 2012–20

(Billions of dirhams)

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

Refers to the macro framework for the 1st review of the PLL arrangement in CR/15/44, based on national accounts based in 1998.

Revised macro framework, based on national accounts based in 2007.

Includes capital transfers to public entities.

Table 3.

Morocco: Budgetary Central Government Finance, 2012–20

(Percent of GDP)

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

Refers to the macro framework for the 1st review of the PLL arrangement in CR/15/44, based on national accounts based in 1998.

Revised macro framework, based on national accounts based in 2007.

Includes capital transfers to public entities.

Table 4.

Morocco: Balance of Payments, 2012–20

(Billions of U.S. dollars, unless otherwise indicated)

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

Refers to the macro framework for the 1st review of the PLL arrangement in CR/15/44, based on national accounts based in 1998 and BOP manual 5.

Revised macro framework, based on national accounts based in 2007 and BOP manual 6.

Based on WEO data for actual and projections.

Excluding the reserve position in the Fund.

Public and publicly guaranteed debt.

Table 5.

Morocco: Monetary Survey, 2011–15

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

Refers to the macro framework for the 1st review of the PLL arrangement in CR/15/44, based on national accounts based in 1998.

Revised macro framework, based on national accounts based in 2007.