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.
On July 24, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the second review of Morocco’s economic performance under a program supported by a two-year Precautionary and Liquidity line (PLL) arrangement and the Ex Post Evaluation of exceptional access (EPE) under the 2012–14 PLL arrangement.
The current PLL arrangement was approved in July 2014.
The PLL arrangement has provided insurance against external risks. The Moroccan authorities are treating the arrangement as precautionary, as they did with the 2012–14 PLL, and do not intend to draw under the arrangement unless Morocco experiences actual balance of payments needs from a significant deterioration of external conditions.
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Following the Executive Board discussion on Morocco, Mr. Min Zhu, IMF Deputy Managing Director and Acting Chair of the Board, made the following statement regarding the second review of the current arrangement:
“Morocco’s overall economic performance has been strong. Following a slowdown in 2014, growth is expected to pick up in 2015. Policy action has helped reduce fiscal and external vulnerabilities and significant progress has been achieved on reforms. In an environment that remains subject to important downside risks, sustaining the momentum will be important to reduce remaining vulnerabilities and achieve higher and more inclusive growth.
“The arrangement under the Fund’s Precautionary and Liquidity Line (PLL), which the authorities continue to treat as precautionary, has provided insurance against external risks. The program remains on track.
“Fiscal developments have been consistent with the authorities’ objective to reduce the deficit to 4.3 percent of GDP in 2015. Progress continued on the subsidy reform, while support to the most vulnerable has expanded. The recent adoption of a new organic budget strengthens the fiscal framework. The timely adoption of the pension reform will be key to ensure the viability of the system.
“Progress has also been made in upgrading the financial policy framework, including by moving to Basel III standards and implementing the new banking law. An important further step should be the timely adoption of a new central bank law. Ongoing work toward a more flexible exchange rate regime and a new monetary policy framework, in coordination with other macroeconomic and structural policies, is welcome.
“Morocco’s external position has continued to improve owing to strong export performance and lower oil prices. Further progress on structural reforms, including improving the business environment, governance, transparency and the job market will help strengthen competitiveness, growth and employment and enhance the economy’s resilience to shocks.”
Regarding the ex post evaluation of the first PLL arrangement, Executive Directors considered that the 2012–14 PLL arrangement appropriately provided temporary insurance against exogenous shocks and signaled Morocco’s sound economic fundamentals to meet potential balance-of-payments needs at a time of significant external risks. They agreed that the arrangement was consistent with the PLL qualification standards and requirements under the exceptional access policy, while commending the authorities for not drawing on the arrangement in spite of external economic headwinds. Directors concurred that the authorities’ policies helped reduce fiscal and external vulnerabilities, with subsidy reform as a major achievement. Directors noted that Morocco still faced a number of medium-term policy challenges at the end of the arrangement given external risks and remaining vulnerabilities. With the benefit of hindsight, Directors also noted some useful lessons learned with regard to program design and implementation.