Annex I. Views of the Authorities
The Moroccan authorities are broadly in agreement with the conclusions of the Ex-Post Evaluation Report on the Precautionary and Liquidity Line (PLL) Arrangement of July 2012. The report duly underscored the suitability of the macroeconomic policies implemented in the period before and after the global economic crisis and their contribution to Morocco’s largely satisfactory economic performance, despite unfavorable conditions at the international and regional levels.
As the report indicates, the policies implemented with the support of the PLL contributed to the preservation of macroeconomic stability and a reduction in fiscal and external vulnerabilities, in spite of a challenging and uncertain external environment. The considerable reduction in fiscal and current account deficits, continued containment of inflation, and further strengthening of foreign exchange reserves have created an enabling environment for strong and sustainable growth. Thus, although there was no need to draw on the PLL arrangement, the arrangement effectively fulfilled Morocco’s needs during 2012–14, serving as an insurance policy against external risks and a signaling device to Moroccan economic agents, as well as to the country’s international partners and investors.
While in agreement with the report’s conclusions, the Moroccan authorities wish to make the following comments:
The element of political risk mentioned in the report, particularly with regard to its potential impact on the ability of authorities to implement reforms and, consequently, in terms of risks for the IMF’s own resources, reflects more the overall assessment of the prevailing socio-political conditions in some countries in the region rather than a specific analysis of the situation in Morocco. The fact that the Moroccan authorities succeeded in maintaining undisrupted its long-standing political stability and implemented significant political and economic reforms during a period of regional turbulence attests to the overestimation of this risk factor.
The 2012 fiscal slippage, rather than reflecting a weakening of the institutional and policy framework, is largely attributable to circumstantial factors arising during 2012, namely:
⚬ Delays in the adoption of the 2012 budget law resulting from the transition to a new government, a shift that gave rise to changes in the behavior of fiscal aggregates in relation to their usual profile and trends, and prevented accurate projections of budget execution, particularly with respect to the pace of investment budget execution;
⚬ An increase in oil prices in excess of the assumptions under the PLL arrangement, which led to an increase in subsidy expenditures amounting to one-third of the deficit overrun, despite the significant increases in domestic prices implemented mid-year;
⚬ Social pressures arising from regional developments that exerted significant impact on public financial management in 2011 and 2012, with earlier than expected implementation in 2012 of wage increases decided in 2011, thereby limiting capacity to contain the wage bill.
At the time it submitted its request for the PLL arrangement, the government was aware of the fiscal vulnerabilities stemming from the indicative nature of personnel expenditures and the carry forward of investment appropriations, and had already prepared a draft Organic Budget Law (OBL) with provisions aimed at reducing these vulnerabilities. Notwithstanding the timeframe required for the adoption of the new OBL, the fiscal regulations implemented by the government in 2013, which were rolled over the following years in anticipation of the enactment of the OBL, contributed to a significant reduction in the vulnerabilities observed in 2012. In addition, budget execution monitoring was strengthened considerably as a result of the establishment of ad hoc high-level committees.
Government spending on wages, subsidies, other goods and services, and transfers was successfully contained on the whole. With respect to wage expenditure in particular, the government considerably reduced the net creation of new positions as well as the pace of increases of the salaries of government employees. However, regular statutory promotions of employees, combined with an economic environment that was less favorable than anticipated, characterized by a slowdown in economic growth and very low levels of inflation, reduced the impact of the measures to contain wage expenditures as a proportion of GDP. The incompressible nature of these and some other expenditures has limited the capacity of the government to increase investment appropriations while remaining in line with the budget deficit target.
It should be noted that most public investments are carried out by public enterprises in strategic infrastructure projects, and these investment expenditures are not consolidated in the fiscal position. Moreover, investment challenges in Morocco are more of a qualitative than quantitative nature, as the rate of investment in Morocco is among the highest in emerging countries but the efficacy of investments continues to be limited. As a result, and bearing in mind budgetary constraints, the government has, in recent years, prioritized improved streamlining of public investment, including through selecting investment projects that stand to be the most profitable in terms of their impact on growth. In this regard, in the written communication accompanying the PLL request sent in July 2012, the Moroccan authorities emphasized their intention to improve the selectivity and efficacy of public investment and to preserve the level of investment expenditure, without mentioning an increase in this expenditure. In fact the total budgetary investment expenditure, which includes the capital budget as well as capital transfers to public enterprises, increased by 0.3 percent of GDP from 2012 to 2014, the period covered by the PLL arrangement.
The recent changes in the stock and profile of public debt, which remains sustainable, should be viewed in light of the objectives of the proactive financing strategy adopted by the authorities, which aims to preserve the liquidity conditions of the domestic market and meet the requirements for appropriate financing of the economy, as well as to maintain an adequate level of foreign exchange reserves. The Treasury’s increasing reliance on external financing has been made possible by the relatively low level of external debt and favorable conditions on the international financial market. This policy has been successful since interest rates on the domestic market declined appreciably in 2014 and the conditions for financing the Treasury, particularly in terms of maturities and interest rates, have improved markedly, while freeing additional resources for the financing of private investment.
See “Request for an Arrangement Under the Precautionary and Liquidity Line” (CR/12/239, 8/13/12).
The successor arrangement has access of 550 percent of quota (about SDR 3.24 billion), with 500 percent of quota (about SDR 2.94 billion) available in the first year of the arrangement (see CR/14/241, 08/05/14).
“See Ex post Evaluations of Exceptional Access Arrangements—Revised Guidance note (IMF Policy Paper; February 25, 2010).” Normal access limits for arrangements supported by the General Resource Account (GRA) are 200 percent of quota annually and 600 percent of quota cumulatively (net of scheduled repurchases). Access above those limits is exceptional access.
The comparison in this EPE report of outturns to program objectives uses full-year comparisons for 2012–14, even though the first half of 2012 was not covered by the PLL arrangement and part of the second half of 2014 was covered by the successor PLL arrangement. Where relevant, this report compares end-2014 projections at the time of the cancellation of the PLL arrangement (in July 2014) to initial projections.
In May 2015, the Moroccan authorities released new national accounts data with base year of 2007. As a result, this report uses the data for realizations with the 2007 base year, while the initial PLL arrangement used data which had 1998 as the base year. The different base years affect the comparability of the outturn against original projections. Moreover, the data for realizations in this report incorporate a shift in the balance of payments methodology to the IMF’s 6th Balance of Payments Manual (BPM6). Compared with the old presentation, this change relates mainly to temporary imports and re-exports which are now reported, on a net basis, as an export of services (instead of on gross basis, as gross imports and exports respectively, previously).
A Selected Issues Paper prepared for the 2014 Art. IV Consultation (and building on the Pan-African Cross-Border Exercise, PACBE) provides additional information on the expansion of Moroccan banks in Sub-Saharan Africa, as well as BAM’s supervisory actions and challenges (see CR/15/106, 05/08/15).
See IMF Country Report No. 08/333, October 2008.
The bulk of the cost of the generalized subsidy system went to subsidizing petroleum products (gasoline, diesel, industrial fuel oil, butane, and fuel oil for electricity generation), and the remainder to wheat flour and sugar. For a detailed discussion on subsidies, see the Selected Issues Paper in CR/13/110, 05/08/13 and Box 2 in CR/15/43, 02/23/15).
For a country with a fixed-exchange rate, the reserve metric is defined as the sum 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). For details, see Assessing Reserve Adequacy (IMF Policy Paper, February 2011). This paper suggests that coverage in the region of 100–150 percent of the metric would be adequate for a typical country. However, the weight of M2 could be reduced where effective capital controls are in place that would prevent capital flight (page 28). The recent Board paper on reserve adequacy, discussed at the Board after the expiration of the 2012–14 PLL arrangement with Morocco, introduced an adjusted ARA metric which incorporates halving the weight of broad money used in the metric (see Assessing Reserve Adequacy—Specific Proposals, IMF Policy Paper, April 2015).
These cover trade and exchange restrictions, bilateral payment arrangements, multiple currency practices, and external arrears.
Specifically, relative to baseline projections the program assumed an oil price increase of US$10 and US$8 per barrel, and a decrease in Morocco’s trading partners’ growth by 4 and 2½ percentage points, respectively, in the first and second year of the program.
See also Figure 9 at the end of this paper for a comparison of projections and outturn for a selected set of macroeconomic variables.
Staff analysis suggests that a downturn of about 1 percent in Europe would decrease Morocco’s potential output by about 0.3 percent within the year, and by about 0.65 percent three years out. See Box 1 in CR/13/110 (05/08/13).
See Box 2 in “Review of the Flexible Credit Line, the Precautionary and Liquidity Line, and the Rapid Financing Instrument (IMF Policy Paper, January 2014).”
Data reported at the time of the second review of the PLL arrangement in July 2013. For additional information, see also see Box 1 and paragraph 19 of CR/13/302, 09/27/13.
The OBL’s adoption by Parliament in November 2014 fell outside the period under consideration for this EPE. The Constitutional Council subsequently ruled some provisions in the OBL unconstitutional. A revised OBL, addressing comments by the Constitutional Council, was adopted by Parliament on April 28, 2015 and validated by the Constitutional Council on May 18.
The status of the pension system was discussed in depth at the time of the 2012 Art. IV Consultation (see CR/13/96, 04/05/13).
The Financial System Stability Assessment (FSSA) report is expected to be discussed by the Executive Board later in the year together with the next Article IV Consultation.
On April 13, 2015, the Moroccan authorities decided to revise composition of the weights in the currency basket from 80/20 to 60/40, in order to better reflect the changing international transactions. The press release announcing this change noted that this was to be a first step in the transition to a more flexible exchange rate regime.
For example, in 2013 Morocco received TA on macroeconomic modeling, which helped the authorities strengthen their analytical capacity for inflation forecasting, a key ingredient in the efforts to prepare for the adoption of an inflation targeting framework. In 2014, IMF teams provided several rounds of TA both on improving monetary frameworks through inflation targeting and on exchange rate flexibility.
See discussion and Box 1 in the staff report for the 2013 Art. IV Consultation (CR/14/65, 03/06/14) and the Selective Issues Paper on inclusive growth prepared for the 2012 Art. IV Consultation (CR/13/110, 05/08/13).
See Figure 10 for a cross-country comparison of key macroeconomic indicators for Morocco with other emerging markets, covering 2011 and 2014.
Consistent with the proposals adopted during the Review of the FCL, PLL, and RFI in 2014, the 1st Review of Morocco’s 2014 PLL included indicators of institutional and policy quality based on data for 2007–12. These indicators suggested that Morocco was above average on counter-cyclical fiscal policy, about average on anticorruption and government effectiveness, and below average on counter-cyclical monetary policy. See figure and discussion in paragraph 9 of CR/15/44, 02/23/15.
In that regard, the end-2012 fiscal slippage reported shortly after the completion of the first review was attributed in part to weaknesses in budget monitoring and expenditure controls, and not to data issues.
See CR/14/241 (08/05/14) for details.