Morocco: Third Review Under the Arrangement Under the Precautionary and Liquidity Line
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International Monetary Fund. Middle East and Central Asia Dept.
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Publication Date:
08 Feb 2016
eISBN:
9781484398036
Language:
English
Keywords:
ISCR; CR; financial market volatility; IMF Deputy managing director; policy; deficit; adjustment plan; headline inflation; oil price volatility; capital investment; accounts payable
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Overall macroeconomic conditions have continued to improve, but challenges remain. Economic activity rebounded in 2015, helped by a very good agricultural year. Fiscal and external imbalances have declined and reserve buffers are building up. While poverty, unemployment rates, and inequality have decreased in recent years, much remains to be done, including to reduce unemployment among the youth and to increase female labor participation. The outlook remains subject to domestic and external risks, related in particular to reform implementation, weak growth in key trading partners, and a potentially volatile international environment.

Abstract

Overall macroeconomic conditions have continued to improve, but challenges remain. Economic activity rebounded in 2015, helped by a very good agricultural year. Fiscal and external imbalances have declined and reserve buffers are building up. While poverty, unemployment rates, and inequality have decreased in recent years, much remains to be done, including to reduce unemployment among the youth and to increase female labor participation. The outlook remains subject to domestic and external risks, related in particular to reform implementation, weak growth in key trading partners, and a potentially volatile international environment.

Recent Developments and Performance Under the Program

1. The Executive Board approved a two-year precautionary and liquidity line (PLL) arrangement in July 2014 in the amount of SDR 3.2351 billion (or 550 percent of quota), equivalent to US$5 billion. The arrangement supports the authorities’ program to rebuild fiscal and external buffers and promote higher and more inclusive growth. The authorities continue to treat the arrangement as precautionary and upon completion of the second review, on July 24, 2015, the full amount was made available. The 2015 Article IV consultation with Morocco was concluded on December 14, 2015. Executive directors welcomed the authorities’ continued strong commitment to sound policies and encouraged them to move forward with reforms to further reduce vulnerabilities and promote stronger job creation and more inclusive growth.

2. Economic activity rebounded in 2015. Growth is expected to have reached 4.7 percent, against 2.4 percent in 2014. This reflects a very good agricultural season, while non-agricultural activity remained sluggish (3.3 percent), including tourism (affected by rising geopolitical risks) and traditional manufacturing (such as textile). The unemployment rate picked up slightly to 10.1 percent on Q3-2015, from 9.6 percent in the same period of last year, while youth unemployment remained high at 21.4 percent.

3. External imbalances declined substantially. The current account deficit is expected to narrow to about 1.4 percent of GDP in 2015, from its peak of 9.5 percent of GDP in 2012. Furthermore, steady FDI growth and international bond issuance have strengthened the capital account. As a result, international reserves have increased further to 6.9 months of imports, and 111 percent of the standard Assessment Reserve Adequacy (ARA) metric (154 percent, adjusted for capital controls) at end-2015.

4. Fiscal developments were positive in 2015. At end-September, the overall deficit (including grants) was 2.7 percent of GDP, compared with an indicative target of 3 percent under the PLL arrangement. For the year as a whole, the authorities were on track to meet the objective of 4.3 percent of GDP, and the cyclically-adjusted primary deficit (excluding grants) is estimated to have decreased compared to 2014 by about 1.5 percent of GDP. Despite lower than expected grant revenues, this reflects continued efforts to contain or reduce spending on wages, goods and services, and energy subsidies, and to step up revenue collection.

5. Monetary policy continued to be prudent in a context of low inflation and subdued credit growth. Due to mixed economic developments and a still uncertain outlook, Bank-Al-Maghrib (BAM) maintained its policy rate at 2.5 percent in 2015, following two cuts of 25 basis points each in September and December 2014. Liquidity pressures receded, helped by improved foreign reserves position, but bank lending remained stagnant, growing at a modest 0.7 percent in October 2015 (y-o-y), due to slow non-agricultural growth and lower imports. Headline inflation was low at 1.4 percent in October (y-o-y).

6. The financial sector is well capitalized and profitable, but rising NPLs and credit concentration risks need to be monitored.1 At end-June 2015, capital adequacy ratios stood at 13.8 percent for the banking system, well above Basel III requirement. Bank profitability has been stable despite low credit growth. NPL ratios increased to 7.5 percent in August 2015 due to weak non-agricultural activity, but provisioning levels are high. Concentrated bank exposures to large corporates constitute a significant source of risk identified in the FSAP.

7. Reforms have progressed further, with the implementation of the new organic budget law and reduced energy subsidies, but there have been delays in some areas, such as pension reform or the adoption of the new central bank law. Specifically:

  • Organic budget law (OBL). The new OBL adopted in 2015 will strengthen Morocco’s fiscal framework considerably. Most of its provisions enter into force in January 2016 and are reflected in the 2016 budget, including as regards fiscal performance management and transparency. The remaining provisions will be gradually implemented by 2020.

  • Subsidies and social safety nets. The full liberalization of fuel product prices (diesel, gasoline and kerosene) took place at end-November 2015 as expected. Food subsidies will be gradually reduced in 2016, and a reform of butane subsidies is not envisaged at this point. In parallel, the authorities continue to expand social programs targeting the most vulnerable groups.

  • Financial sector policy framework. In addition to Basel III and the new banking law, the authorities are taking steps to implement recent FSAP recommendations, such as increasing resources for bank supervision. Regarding the new central bank law, which will strengthen the central bank’s independence, clarify its objectives, and enhance its supervisory and resolution powers, the authorities are still in the process of adjusting the draft, including by incorporating recent FSAP recommendations.

  • Exchange rate and monetary regime. Following intense preparatory work in recent years, the authorities agree that Morocco has a unique window of opportunity to introduce exchange rate flexibility. Staff will continue to collaborate with the authorities on next steps in the transition.

  • Pension reform. A parametric reform is essential to secure the financial viability of the public sector pension system and to eliminate the current gap between contributions and benefit payments. The civil service pension reform was adopted by the government on January 7, 2016 and will be soon submitted to Parliament, but its implementation has been postponed to early 2017.

  • Business environment and labor market. Progress has continued in these areas, including recently on customs procedures, property registration, setting up a business, and limiting payment delays in the public sector. The authorities are also pursuing new reforms, including the National Strategy for Employment, introduced in 2015, and the formulation of a national strategy to fight corruption.

Outlook and Risks

8. Gradually increasing growth, low inflation, and stronger external and fiscal buffers are expected over the medium term:

  • Growth is expected to slow in 2016, reflecting a return to normal of agricultural activity while non-agricultural growth should gradually increase. The recent pick up in the tertiary sector should continue and a recovery in manufacturing activities should be supported by improved prospects in Europe, low oil prices, and stronger domestic confidence. Over the medium term, subject to improved external conditions and steadfast reform implementation, agricultural sector modernization, continued expansion of Moroccan firms into new markets and sectors (such as automobile and aeronautic), and higher capital investment, are expected to improve Morocco’s positioning in global value chains and lift potential growth.

  • Inflation is expected to remain low at 1.3 percent in 2016, due to declining commodity prices, stable domestic food production, and a prudent monetary policy stance. It is projected to stabilize around 2 percent over the medium term.

  • The current account deficit should decrease further to 0.5 and 0.9 percent of GDP in 2016 and 2017, respectively. Over the medium term, given projections of low oil prices, stronger external demand, and declining grant revenues, the current account deficit is expected to stabilize at about 1.6 percent. FDI inflows are projected to remain strong, helping to raise the reserves position to above 8 months of imports, or 151 percent of the standard ARA metric, by 2020.

  • Fiscal consolidation. The overall fiscal deficit is expected to decline to 3.5 percent of GDP in 2016, in line with projections at the time of the second review of the PLL arrangement. This would reflect stronger tax revenues (due in particular to the introduction of new corporate tax brackets), and moderate spending growth (with further reductions in subsidies and sustained public investment and social spending). The authorities are determined to continue on the path of fiscal consolidation over the medium term, aiming for a fiscal deficit of about 2 percent of GDP by 2020, consistent with their objective to gradually reduce public debt to about 60 percent of GDP by 2020.

9. Risks to the outlook remain tilted to the downside, but have decreased somewhat. On the domestic front, the general elections in 2016 could delay reform implementation, particularly in key areas related to fiscal consolidation, such as pension, subsidy, and tax reforms. On the external front, lower than expected growth in the euro area would slow economic activity through lower exports, tourism, FDI flows and remittances, and exacerbate fiscal and external imbalances; volatility in global financial markets could impact global growth and increase borrowing costs; and geopolitical risks could increase oil price volatility and reduce tourism activity, potentially reversing some of the recent current account improvements. On the upside, continued low level of commodity prices would help further narrow those imbalances.

Morocco: External Stress Index

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

A01ufig1

Morocco - External Stress Indicator

Citation: IMF Staff Country Reports 2016, 038; 10.5089/9781484398036.002.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 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 December 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

Review of Qualification

A. General Assessment

10. Morocco’s economic performance has improved further, supported by sound economic policies. Economic growth has recovered in 2015 and policy action has contributed to significantly reduce macroeconomic imbalances and vulnerabilities. The IMF Executive Board’s assessment in the context of the 2015 Article IV consultation, discussed in December 2015, was positive. The program is on track, with end-September 2015 indicative targets on the central government fiscal deficit and NIR met with comfortable margins.

11. Going forward, the authorities are committed to maintaining sound policies, including regarding medium-term fiscal sustainability. The comprehensive medium-term strategy included in the authorities’ written communication (W-COM) for the request of the PLL arrangement and for the last two reviews, has been confirmed in the attached W-COM dated January 11, 2016. The authorities are committed to reduce public debt to 60 percent of GDP by 2020, which will require bringing the fiscal deficit to about 2 percent of GDP. This will reflect stronger tax revenues, lower subsidies and contained wage expenditures. In addition, the authorities will pursue further structural reforms to increase potential growth and promote higher and more inclusive growth, including by improving competitiveness and the business environment, labor market reform, and investment in human capital.

12. Flexible policy and institutional frameworks allow the authorities to implement needed reforms in the face of shocks. The fiscal policy framework is being strengthened through the implementation of the new OBL, which enhances budgetary procedures and practices. Indicators of a country’s ability to undertake countercyclical policy in the event of shocks show that Morocco performs well in the fiscal policy area,2 and scores lower in the monetary policy area—but this latter indicator is less relevant for Morocco given its pegged exchange rate regime.3 Lastly, Morocco ranks within the 25-75 percentile range on anti-corruption and government effectiveness indicators of the World Bank.

13. Overall, Morocco continues to meet the qualification criteria for a PLL arrangement, and to perform strongly in three out of the five PLL qualification areas (financial sector and supervision, monetary policy, and data adequacy). It does not substantially underperform in the other two qualification areas (external position and market access, and fiscal policy). Morocco has sound economic and institutional policy frameworks, is implementing (and has a track record of implementing) sound policies, and remains committed to maintaining such policies in the future.

B. Assessment of Specific PLL Criteria

14. Morocco performs strongly in three out of the five PLL qualification areas: External position and market access

  • Criterion 1. Sustainable external position. Morocco’s current account deficit narrowed substantially in 2015, to 1.4 percent of GDP from 5.7 percent of GDP in 2014, mostly due to the sharp decline in international oil prices. This favorable performance is expected to continue over the medium term as exports rise, boosted by increasing external demand and the expansion of newly developed export sectors, while import growth remains moderate in an environment of low commodity prices. The real effective exchange rate is in line with fundamentals based on the most recent external balance assessment (EBA).4 The updated external debt sustainability analysis provided in the 2015 Article IV report shows that Morocco’s external debt has been rising but remains relatively low, at about 32 percent of GDP; it is expected to decline to around 30 percent of GDP over the medium term, and to remain sustainable and robust to standard stress tests. Finally, the introduction of greater exchange rate flexibility would help enhance the economy’s competitiveness and capacity to absorb shocks.

A01ufig2

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

(Index, 2010 = 100)

Citation: IMF Staff Country Reports 2016, 038; 10.5089/9781484398036.002.A001

  • Criterion 2—Capital account position dominated by private flows. Private capital flows constitute the largest share of the capital account (about 82 percent of total capital flows), and FDI is the largest component. Access to international financial markets by non-financial corporations remains modest in size compared to other emerging markets, and private external debt is small (about 2.7 percent of GDP). Sovereign bond issuance and loans from development partners constitute the bulk of public capital flows.

  • Criterion 3—Track record of steady sovereign access to international capital markets at favorable terms. Morocco has been able to steadily issue international bonds at favorable terms, aided by the global low-rate environment. Such access was confirmed when the government raised EUR 1 billion in June 2014, and the National Phosphate Company (OCP) successfully issued a US$1 billion Eurobond in April 2015. Each issuance benefited from low spreads and long maturities, reflecting the confidence placed in Morocco by market participants: sovereign spreads have narrowed between 2011 and 2015, and the average maturity of public external debt is currently close to 8 years and 9 months (against 7 years and 4 months in 2009).

  • Criterion 4—A reserve position, which—notwithstanding potential BOP pressures that justify Fund assistance—remains relatively comfortable. As noted, Morocco’s international reserves have reached a comfortable level equivalent to 111 percent of the standard ARA metric at end-2015 (against 94.7 percent at end-2014). Furthermore, considering existing controls on capital outflows for residents, the ARA metric should be adjusted to lower the weight of broad money (reflecting lower risk of capital flight).5 Accordingly, Morocco’s international reserves amounted to 154 percent of the adjusted ARA metric. Over the medium term, reserves are expected to increase further and exceed 151 percent of the ARA metric (220 percent of the adjusted metric) by 2020.

Fiscal policy

  • Criterion 5—Sound public finance, including a sustainable public debt position. The authorities remain committed to a sustainable fiscal path and a track record of sound public finances (W-COM-¶5). Consistent with their medium-term objectives to reduce public debt to 60 percent of GDP (against 64 percent of GDP at present) by 2020, which will require bringing the fiscal deficit to about 2 percent of GDP, the pace of fiscal adjustment and reform has picked up since end-2013. A deficit of 4.3 percent of GDP is likely to have been achieved in 2015, thanks to declining subsidy spending and wage bill containment, and a deficit of 3.5 percent of GDP is projected in 2016. Nevertheless, staff continues to assess that Morocco is not performing strongly in the fiscal area. The updated debt sustainability analysis shows that public sector debt is sustainable and generally resilient to various shocks and vulnerabilities despite high gross financing needs, which are expected to decline due to a lengthening of average maturities. Still, public debt remains relatively high, and is expected to increase further in 2016. Furthermore, a less ambitious decline in the public wage bill than at the time of the second review is now projected over the medium term (11.5 vs 11.0 percent of GDP), due in part to a revised assessment of the impact of public pension sector reform (W-COM-¶7,9). The delay in implementing the pension reform should not affect the fiscal deficit and debt trajectory as the authorities plan to offset its impact on the public wage bill through expenditure and revenue measures.

Monetary policy

  • Criterion 6—Low and stable inflation. Morocco continues to maintain low and stable inflation. Inflation was 1.4 percent (y-o-y) at end-October 2015 and is expected to remain low in the medium term. Inflation expectations remain well anchored, as reflected in BAM’s surveys. The authorities plan to gradually introduce greater exchange rate flexibility (W-COM-¶13).

Financial sector soundness and supervision

  • Criterion 7—Sound financial system and absence of solvency problems that may threaten systemic stability. Banks are well capitalized and profitable, benefiting from comfortable interest rate margins, low operating costs, rising fee and commission income, and stable funding (mainly domestic deposits). NPLs have been rising and concentration risks are significant, but FSAP stress tests show that the banking system could withstand severe adverse shocks associated with prolonged weak growth in advanced economies and greater global financial market volatility.

  • Criterion 8—Effective financial sector supervision. The 2015 FSAP concluded that bank supervision is effective and has improved, benefiting from increasing resources. The new banking law adopted in November 2014 expands BAM’s regulatory and supervisory powers, and aims to improve cross-border supervision and tighten rules for consolidated risk management. The regulations to make it operational are expected to be fully in place by end 2016. Supervision of Moroccan banks in sub-Saharan Africa is improving through strengthened coordination and exchange of information with supervisory agencies in host countries (W-COM-¶12).

Data adequacy

  • Criterion 9—Data transparency and integrity. Overall data quality continues to be adequate to conduct effective surveillance and program monitoring. Morocco subscribes to the Special Data Dissemination Standard. The authorities are committed to improving data quality and access.

Other Program Issues

15. 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 risks were to materialize. Since the inception of the program, Morocco has benefited from low oil prices and a gradual economic recovery in the euro area, which helped rebuild external buffers. However, the risks of structurally weak growth in key advanced economies (particularly the Euro area), increased energy price volatility, and tighter or more volatile global financial conditions, could give rise to exceptional balance of payment pressures that could result in a need for Fund financing that could not be met within normal access limits.

  • Criterion 2. A rigorous and systematic analysis indicates that there is a high probability that Morocco’s public debt will remain sustainable over the medium term, that it is resilient to various shocks and vulnerabilities linked to its level and profile, and that it will start declining in 2017.

  • Criterion 3. Staff considers that Morocco could continue to access capital markets while Fund resources would be outstanding, were Morocco to make purchases under the arrangement. Indeed, the PLL facility provides not only a stopgap necessary to address immediate balance of payments needs, but also, given its underlying ex ante conditionalities, guidance on key policy commitments shoring up investors’ confidence. Staff expects that such confidence will continue to strengthen 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 implement the reform agenda.

16. 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).6 Whereas the authorities continue to treat the PLL arrangement as precautionary, in the event of a drawdown, Fund obligations would represent only a small share of Morocco’s total external debt (a maximum of 13.4 percent over the projection period), debt service (18 percent), gross international reserves (18 percent), and exports (15 percent). 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.

17. An update of the 2013 safeguards assessment of BAM—completed in January 2015— found that the safeguards framework remains relatively strong. Governance arrangements are supported by strong internal audit and risk management functions. The Audit Committee oversight has been strengthened by the appointment of a third member with experience in banking. Amendments to BAM’s legal framework to sustain good governance practices, and strengthen BAM’s autonomy, remain in progress, particularly with the expected approval of a new central bank law in 2016. The recommendation to implement International Financial Reporting Standards (IFRS) has not yet been implemented. To this end, BAM contracted an audit firm to conduct an in-depth feasibility study of adopting IFRS, completed in July 2015, and decided to maintain the current accounting standards while improving the quality of disclosures on risks and main differences with IFRS.

18. Prospects for an eventual exit from the PLL have increased as a result of strong program implementation, which has made the economy more resilient to external shocks (W-COM.-¶.6). The authorities noted that the current PLL has been successful in supporting the implementation of policies aimed at strengthening Morocco’s economic fundamentals and buffers. Looking ahead, there remain important external risks related to growth in key advanced economies and volatility in global financial conditions and commodity prices, which could affect emerging market economies and Morocco. Such risks, together with strong domestic policy implementation, will need to be fully taken into account in deciding on an orderly exit strategy from the current PLL arrangement. The authorities’ firm commitment to maintain strong policies should eventually facilitate such an exit, contingent on the lowering of these external risks.

19. In the near term, any successor arrangement would likely be associated with a reduced access level. Given the recent progress in strengthening macroeconomic policies and buffers, especially in the external sector, and absent a large increase in external risks by the time the current PLL arrangement ends, access under a successor arrangement would be expected to decline. At this point, the authorities are still considering whether they may request such a successor arrangement. In this regard, staff reiterated the importance for the authorities of defining a preferred strategy and communicating accordingly in order to manage market expectations.

Staff Appraisal

20. The program remains on track. Macroeconomic conditions have improved, with external imbalances declining substantially and fiscal consolidation advancing. The September 2015 indicative targets were met comfortably. Progress in strengthening the policy and institutional frameworks includes the implementation of the new OBL in the 2016 budget, and ongoing improvements to financial sector regulation and supervision. The authorities also intend to transition to a more flexible exchange rate regime, which will help improve competitiveness and macroeconomic resilience. However, implementation of the pension reform has been delayed.

21. In an environment that remains subject to significant downside risks, sustaining the reform momentum will be essential. Building on recent achievements, sustaining the pace of reforms will help further reduce remaining vulnerabilities, and achieve higher and more inclusive growth. Further fiscal consolidation will require continued efforts to replace the remaining subsidies with better targeted social safety nets, and to contain public wage spending. Adopting the central bank law and implementing recent FSAP recommendations will help strengthen the financial sector policy framework. The authorities should also continue their efforts to improve the business climate by simplifying bureaucratic procedures and addressing corruption, while decisive progress is needed to reduce still high unemployment levels and increase women participation in the labor force.

22. Morocco continues to meet the PLL qualification criteria. The IMF Executive Board’s assessment in the context of the 2015 Article IV consultation was positive. Morocco’s economic fundamentals and institutional frameworks are sound. The country has a track record of—and is implementing—sound policies and adjusting to shocks, and remains committed to such policies in the future. Morocco performs strongly in three out of the five areas in which PLL qualification is assessed (financial sector and supervision, monetary policy, and data adequacy), and is not substantially underperforming in the other two (external position and market access, and fiscal policy). Against this background, staff recommends the completion of the third review under the PLL arrangement.

Figure 1.
Figure 1.

Morocco: Real and External Developments

Citation: IMF Staff Country Reports 2016, 038; 10.5089/9781484398036.002.A001

Sources: Moroccan authorities; and IMF staff estimates.
Figure 2.
Figure 2.

Morocco: Fiscal and Financial Market Developments

Citation: IMF Staff Country Reports 2016, 038; 10.5089/9781484398036.002.A001

Sources: Moroccan authorities; and IMF staff estimates.
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.

For 2015, actual value as of August 2015

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.

Table 6.

Morocco: Financial Soundness Indicators, 2008–June 2015

(Percent, unless otherwise indicated)

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Source: Bank Al-Maghrib.

Financial Soundness Indicators (FSIs) are calculated according to guidelines of the IMF FSIs compilation guide, 2004.

Net Banking Product (NPB) = net interest margin-commissions paid+commissions received.

Provisional figures calculated according to Basel III definition and transitional provisions

Table 7.

Morocco: Capacity to Repay Indicators, 2015–20 1/

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Source: IMF staff estimates and projections.

Upon approval of the second review of the PLL arrangement Morocco can draw up to 550 percent of quota. The Moroccan authorities have expressed their intention to treat the arrangement as precautionary.

Appendix I. Written Communication

Madame Christine Lagarde

Managing Director

International Monetary Fund

Washington, D.C. 20431

United States

Rabat, Morocco

January 11, 2016

Madame Managing Director,

1. Morocco’s economic fundamentals are still sound. The economy continues to improve and external and fiscal vulnerabilities have abated further. We are committed to continue implementing our economic and financial program with the support of the IMF Precautionary and Liquidity Line (PLL), as described in our communication of July 11, 2014, in which we requested approval of the PLL arrangement, and our communication of July 8, 2015 pertaining to the second review.

2. Economic growth picked up in 2015 and should be close to 5 percent, supported by a very good grain harvest, while inflation would remain low at an average of 1.6 percent. The current account deficit should shrink further below 2 percent of GDP, with falling energy and food costs, surging exports from emerging sectors, and strong inflows of remittances from Moroccans resident abroad. Given these circumstances, and the continuing high level of foreign direct investment, international reserves have increased substantially in 2015 and are equivalent to almost 7 months of goods and services imports.

3. Even though Morocco does not need balance of payments financing, the arrangement under the PLL approved on July 28, 2014 still provides helpful insurance against external shocks and supports our efforts to make our economy more resilient and increase its growth potential. We will continue to treat the arrangement as precautionary and do not foresee drawing upon it, except in the event of unexpected external shocks or substantial worsening of the international environment.

4. Fiscal consolidation is continuing. The fiscal deficit at the end of September stood at MAD 26.9 billion, well below the indicative target of MAD38.8 billion. Better control of spending on goods and services and on public wages, and reduced subsidies expenditures, offset the drop in current revenue of 0.7 percent of GDP observed at end-September resulting from weaker activity in non-agricultural sectors and lower grant revenues than expected. These efforts continued and tax revenue collection was stepped up so as to keep the fiscal deficit for 2015 at 4.3 percent of GDP, as stipulated in the budget.

5. The 2016 Budget calls for a reduction of the fiscal deficit to 3.5 percent of GDP, in line with the government’s medium-term objective of greater fiscal consolidation, thereby lowering the government debt ratio progressively to 60 percent of GDP. This gradual consolidation should primarily result from improved tax revenue collection, along with continued efforts to control current spending and reduce subsidies. These efforts will make it possible to maintain the priority on investment in infrastructure and human capital to support growth, and on social programs targeting the most vulnerable segments of the population. Additional resources will also be allocated to regional development programs as part of the implementation of the advanced decentralization project.

6. On the revenue side, the government has continued implementing the reform of the tax system that started in 2014 with the aim of making the system simpler, more equitable and more supportive of competitiveness. Specifically, the 2016 budget calls for further simplification of the VAT and revised tax brackets for corporate income tax. The budget also includes measures that are part of ongoing efforts to reduce tax exemptions.

7. On the spending side, efforts will continue on several fronts. The government’s wage bill, including social contributions, will be reduced to 11.5 percent of GDP in the medium term. This will be achieved by continuing to curb pay increases and limiting the creation of new civil service jobs, which will be dedicated in priority to improving security, health and education. The level of government investment will be maintained with an emphasis on making it more efficient. At the same time, social protection for the most vulnerable segments of the population will benefit from increased social spending under the RAMED health program and the TAYSSIR education program, along with support programs for widows, as reflected in the 2016 budget.

8. The implementation decree for the new Organic Budget Law was adopted in July 2015. As we indicated in our previous written communications, this law substantially improves the budget framework. Most of the provisions entered into force on January 1, 2016, except for those under Article 69, which will be implemented in stages up until 2020. The measures taken since 2013 to limit risks related to the carryover of investment appropriations and to the wage bill are being rolled over until the entry into force of the relevant provisions in the new Organic Budget Law.

9. The civil service pension reform bill on the Moroccan Pension Fund (CMR) was adopted by the government on January 7, 2016 and will soon be submitted to Parliament, and is expected to enter into force on January 1, 2017. This reform calls for a gradual increase in the statutory retirement age, higher employer and employee contribution rates, and new rules for calculating pension benefits. It will extend the sustainability of the pension fund and balance contributions against benefits as soon as it is implemented. The next pension reform steps include switching to a two-pillar system, with a private-sector fund and a public-sector fund.

10. Bank Al-Maghrib (BAM) has maintained its accommodative policy, while continuing to closely monitor economic developments and the levels of inflation and international reserves. Bank liquidity has improved recently, due in particular to increased international reserves. BAM will continue to promote appropriate financing terms for the economy in order to support growth and maintain price stability.

11. The recent Financial Sector Assessment Program mission found that Moroccan banks are adequately capitalized and profitable, with stable funding sources, and that banking supervision is effective. Non-performing loans have increased since 2012 as economic activity weakened in certain sectors, but they are still at a moderate level and well provisioned. BAM will continue to ensure that banks’ risks, particularly related to credit concentration and liquidity risks, are properly managed.

12. The authorities are committed to improving the financial policy framework and welcome the Financial Sector Assessment Program mission’s recommendations. In 2015, BAM continued improving bank regulation and supervision, with the implementation of the Basel III standards and preparations for a specific framework for systemically important banks. The authorities have also implemented the banking law adopted in 2014, and most regulations pertaining to this law are about to be adopted. The regulations dealing with financial conglomerates and recovery plans for systemically important institutions are planned for 2016. The draft central bank law aims to increase its independence and broaden its remit to include contributing to financial stability. The government will submit the bill to Parliament at the earliest.

13. Preparations for a potential move towards a more flexible exchange rate regime have progressed substantially with technical assistance from the IMF. On April 13, 2015, authorities revised the basket of currencies against which the dirham is pegged, lowering the euro’s weight from 80 percent to 60 percent, and raising the dollar’s weight from 20 percent to 40 percent, in order to align it more closely with the current structure of Morocco’s foreign trade. We now consider that Morocco’s macroeconomic and structural situation is favorable enough to start a gradual transition towards a more flexible exchange rate regime.

14. The government continues to implement an ambitious reform program to enhance the competitiveness and growth potential of Morocco’s economy. This program aims in particular to reduce the unemployment rate to 8 percent by 2020, with a focus on youth unemployment, and to raise the labor force participation rate of women. The National Strategy for Employment will contribute by improving labor market governance and the effectiveness of employment support and vocational training programs. The authorities are also committed to improving the effectiveness of the already high level of government spending on education to facilitate young people’s entry into the labor market. Discussions with social partners are under way to reform the labor code and improve the social security system for workers. A great deal of progress has been achieved with regard to the business climate by streamlining procedures for businesses and individuals. A national strategy to fight corruption was adopted by the government in December 2015.

15. Both indicative targets under the PLL arrangement for the end of September 2015 were met with comfortable margins. In line with PLL requirements, we have complied with, and will continue to comply with the standard performance criteria on trade and exchange restrictions, bilateral payment agreements, multiple exchange rate practices and non-accumulation of external debt arrears.

16. Resolute implementation of our economic and financial program is bound to enhance the economy’s resilience to external shocks. Provided there is a substantial reduction in external risks, improved fiscal and external positions, including increased reserves, along with a stronger economic and financial policy framework, will lead to better prospects for an exit from the PLL.

17. We are confident that the policies described in this communication, and those described in the July 11, 2014, January 27, 2015 and July 8, 2015 communications, are the right ones for achieving our objectives. On this basis, we are requesting completion of the third review under the PLL arrangement.

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Morocco: Quantitative Indicative Targets

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Source: IMF staff estimates.

Evaluated at the program exchange rate fixed at the end-March 2014 value (8.1496 MAD/US$ for the end-March 2015 target; and the equivalent value of 8.5287 MAD/US$ for the end-September 2015 target, reflecting the change in the dirham basket on April 13, 2015).

Adjustments are specified in the technical appendix. The floor on NIR of BAM will be adjusted downward (upward) in the event of a shortfall (surplus) of official grants and loans received by the central government from bilateral and multilateral agencies relative to program projections. The adjustors are cumulative from end-September 2014.

Adjustments are specified in the technical appendix. The fiscal deficit ceiling will be adjusted upward (downard) in the event of a shortfall (surplus) of budgetary grants received by the central government from bilateral and multilateral agencies relative to program projections. The adjustors for 2015 are cumulative from end-December 2014.
1

The 2015 Financial System Stability Assessment for Morocco was discussed by the Executive Board together with the 2015 Article IV staff report, on December 14, 2015.

2

The fiscal policy measure used here is the 10-year backward correlation between the cyclical component of real GDP and the cyclical component of the ratio of government spending to GDP.

3

The indicator of monetary policy cyclicality used here is the 10-year backward correlation between the cyclical component of real GDP and the cyclical component of the real short-term interest rate.

4

The EBA assessment, consistent with the fall 2015 WEO, finds the real effective exchange rate (REER) to be valued in the range of -11.7 percent to 9.1 percent of its equilibrium. The current account method finds a current account gap of 0.6 percent of GDP at end-2015, equivalent to an undervaluation of the REER gap of 2 percent. The REER approach shows an overvaluation of 9.1 percent, while the external sustainability approach finds an undervaluation of -11.7 percent.

5

See Assessing Reserve Adequacy—Specific Proposals at http://www.imf.org/external/pp/longres.aspx?id=4947.

6

Since drawing would typically occur after a shock, the macroeconomic variables in the table would likely be worse than under the baseline presented in the table; for example, based on the illustrative scenario used to determine access at the time of the PLL request, reserves may be 25 percent lower and exports 6 percent lower, suggesting peak IMF credit ratios of 30.2 percent and 16.7 percent instead of 22.6 percent and 15.7 percent in the table. These considerations suggest caution in interpreting Table 7, but do not materially impact staff’s current view of Morocco’s capacity to repay.

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Cover IMF Staff Country Reports
Morocco: Third Review under the Arrangement under the Precautionary and Liquidity Line-Press Release; Staff Report; and Statement by the Executive Director for Morocco
Author:
International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2016: Issue 038
Publisher:
International Monetary Fund
ISBN:
9781484398036
ISSN:
1934-7685
Pages:
35
DOI:
https://doi.org/10.5089/9781484398036.002

Morocco - External Stress Indicator

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

(Index, 2010 = 100)
Figure 1.

Morocco: Real and External Developments
Figure 2.

Morocco: Fiscal and Financial Market Developments