Abstract
As the current Precautionary and Liquidity Line (PLL) arrangement comes to an end in July 2016, the authorities have requested a successor arrangement. They have not drawn on the past two arrangements and have successfully reduced fiscal and external vulnerabilities in recent years. In an external environment that remains vulnerable to important downside risks, a successor arrangement would continue to insure against external risks and support the authorities' policies to further strengthen the economy's resilience and promote higher and more inclusive growth.
I thank staff for their hard work and concise and well-balanced report. Morocco has made good use of the PLL instrument, consistent with the stated objectives of the facility. The two successive PLL arrangements since 2012 have provided insurance against exogenous risks, while the authorities continued to strengthen macroeconomic and financial stability, reduce or eliminate key vulnerabilities, and enhance resilience to shocks, including by strengthening the policy framework and increasing reserve buffers. Progress continued also to be made on structural reforms to strengthen the foundations for higher and more inclusive growth. The authorities treated the two PLL arrangements as precautionary and, as demonstrated in their request for the second arrangement in 2014, they saw PLL use as temporary, and were committed to gradually reducing access and exiting the facility as the main risk factors dissipate and external buffers are increased.
The staff paper indicates that program implementation under the 2014 PLL was satisfactory, with key macroeconomic indicators broadly in line with targets, even though growth in 2016 is projected to be lower, mainly reflecting the larger than expected decline in cereals production after the bumper 2015 crop. Notwithstanding still weak external environment, nonagricultural GDP growth should remain unchanged at 3.5 percent in 2016, with total GDP growth at about 2 percent. With the return of cereals crop to a normal level, continued strengthening of confidence, and improved outlook for the euro area, growth should recover in 2017 and strengthen over the medium-term to reach close to 5 percent. Inflation is projected to decline slightly to 1.3 percent from 1.5 percent in 2015, and to stabilize at 2 percent over the medium-term. Strong export performance, mainly in automobiles, along with low oil prices and continued resilience of tourism and workers’ remittances should contribute to a further decline in the current account deficit to 1.3 percent of GDP in 2016 and over the medium-term. With robust FDI flows, this should lead to a further build-up of reserves to reach 7 months of imports in 2016 and 9 months in 2021.
Notwithstanding this positive outlook, the Moroccan economy faces significant global and regional risks, including from geopolitical events affecting oil prices and tourism, slow euro area growth affecting trade, remittances and FDI, and more volatile global financial conditions. A new two-year PLL, at the expiration of the current arrangement this month, would help maintain an adequate level of reserves under severe exogenous shocks and preserve confidence.
Policies under the Program
As indicated by staff, the PLL arrangement will support continuation of current policies. The program for 2016-18 will focus on achieving the macroeconomic objectives set under the two previous programs and completing ongoing structural reforms in key areas. Building on positive developments so far, the authorities are confident that their fiscal deficit target of 3.5 percent of GDP in 2016 will be met, notwithstanding any shortfall in grants, and will take all necessary measures to this end, including by strengthening revenue mobilization and expenditure control. The 2017 budget will target a further reduction of the deficit to 3 percent of GDP. The authorities’ medium-term target of reducing public debt to 60 percent of GDP will anchor fiscal policy going forward.
The accommodative monetary policy stance will be maintained in view of the limited demand and credit growth, moderate inflation, and comfortable reserves. After the cut in the policy rate by 0.25 percent to 2.25 percent in March 2016, the third such reduction since 2014, BAM will continue to monitor developments closely and stand ready to further ease its monetary policy stance if needed. The ongoing revision to the central bank law will further strengthen central bank independence as well as its financial stability role. The draft law has just been amended in response to FSAP recommendations and will be tabled soon for cabinet approval before its submission to parliament.
The authorities continue the preparatory work for moving to greater exchange rate flexibility and adopting inflation targeting, with extensive technical assistance from the IMF, for which they are grateful. They have decided to start moving in this direction in view of the strong external position, the recent realignment of the exchange rate with fundamentals, and continued progress in fiscal consolidation. A roadmap for the reform will be finalized soon by the authorities with Fund technical assistance.
The authorities are comforted by the positive assessment of the financial sector by the recent FSAP mission and will continue to strengthen the resilience of the financial system and its contribution to growth, including through implementation of FSAP recommendations. Bank Al-Maghrib is cognizant of the risks to the financial system from loan concentration and increasing cross-border activity in Sub-Saharan Africa, and is taking steps to mitigate these risks, as indicated in the Written Communication, including by further strengthening regulation and supervision and enhancing coordination with host country supervisors. The recent increase in resources for supervision will be helpful in this regard.
Progress will continue to be made on the structural fiscal reform front. After most of the provisions of the new organic budget law (OBL) became effective on January 1st 2016, as planned, the remaining provisions will be implemented according to schedule. Moreover, after strong opposition by trade unions, the draft legislation on pension reform was adopted last month by the House of Counsellors. The second and last vote by the House of Representatives, in which the governing coalition has a majority, should take place shortly, with the expectation that the law would be effective on January 1st 2017, as indicated by the authorities during the third review of the current PLL. The recommendations of the 2013 Assises Fiscales on tax reform will continue to be implemented in line with the objectives of broadening the tax base, reducing distortions, simplifying the system, and promoting efficiency. Wage expenditures will be further contained to bring them down to 11.5 percent of GDP over the medium term, and the subsidy reform will continue, with further declines in the volume of subsidized flour. The decentralization process is gaining momentum following the September 2015 regional and local elections, the first to be held under the new constitution and the new organic laws. Along with increased devolution of spending, local government resources will continue to be increased through additional transfer of central government tax revenue and improved mobilization of their own resources within a transparent and fiscally responsible framework.
Efforts will continue to strengthen competitiveness, further diversify the economy, and enhance growth potential, building on recent success in this area, including through well-designed sectoral strategies. Ongoing efforts aimed at increased diversification and enhanced productivity in agriculture have improved the economy’s resilience to adverse weather conditions, with overall GDP growth remaining positive despite a sharp fall in cereals crop, as observed in 2016, in contrast to past episodes in the 1990s when similar shocks led to a significant decline in real GDP. Continued enhancement of the business climate will further improve Doing Business and Competitiveness Indicators, while the operationalization of the Competition Council will help ensure a level playing field for business. To address excessive payment delays in the public sector, a decree was adopted on July 5 limiting such delays to 60 days and introducing penalties for nonobservance which, along with accelerated VAT refunds, would further improve the business climate by alleviating liquidity pressures, in particular for SMEs. The recently-adopted National Employment Strategy has outlined a number of reforms aimed at reducing unemployment, in particular among the youth and the educated, including through well-articulated active labor market policies and by improving education and training to address skill mismatches, while increasing female participation in the labor force to unleash growth potential.
PLL Qualification
As explained in the staff paper, Morocco continues to meet the criteria for PLL qualification. Following the strong performance under the external sector and market access criterion in 2015, Morocco now performs strongly in four out of the five qualification areas. The moderate underperformance in the fiscal area is mainly related to the relatively high public debt. In this regard, public debt remains sustainable and resilient to a number of shocks, as recognized by staff, reflecting recent fiscal consolidation, favorable currency and maturity structure, and sound debt management. The debt-to-GDP ratio has stabilized at around 64 percent of GDP in 2016, which is below the 70 percent of GDP benchmark for emerging market countries, and should start declining in 2017 to reach 60 percent of GDP by 2020. Moreover, after reaching 16.5 percent of GDP in 2014, gross financing needs declined to 13.5 percent in 2015 and should continue to fall to reach 8 percent in 2021. The subsidy reform, including the automatic price adjustment mechanism, and the OBL have also significantly strengthened the fiscal framework and reduced vulnerabilities.
Access and Duration
The adverse scenario applied for Morocco results in a financing need amounting to US$ 13.1 billion over the two-year period. In the absence of PLL resources and other new financing, this would reduce gross international reserves (GIR) as a ratio of the standard ARA metrics to 83 percent. The requested access equivalent to US$ 3.5 billion should help maintain GIR at 90 percent of standard ARA metrics or 136 percent of ARA metrics adjusted for existing capital controls on residents.
The authorities consider that while severe, the shocks applied to the economy are not unrealistic. Geopolitical risks could well lead to an increase in oil prices of the magnitude assumed by staff (US$ 15/b, net of US$ 5/b decline from lower growth in the euro area). Price developments since January indicate that an increase of a broadly similar magnitude can be observed over a short period. Moreover, the authorities agree with the assessed impact of lower growth in the euro area and of geopolitical factors, which may be exacerbated by uncertainty from the outcome of Brexit vote as well as recent terrorist attacks, respectively. In sum, the authorities are of the view that the requested access is well justified, particularly since the decision to move to a more flexible exchange rate policy may require a sufficiently large reserve cushion to maintain confidence and smooth excessive exchange rate volatility during the first phase of the transition. Since global and regional risks are unlikely to dissipate soon, the authorities consider that the two-year PLL provides the right time horizon to observe a durable reduction in risks.
Exit Strategy
By further reducing access under this third request, the authorities provide strong evidence of their continued commitment to gradually exit the facility, based on their assessment of external risks facing the economy, and progress in reducing vulnerabilities and increasing buffers. Access would continue to decline under the proposed arrangement, both in absolute terms (US$ 3.5 billion as against 5 billion in the 2nd PLL and 6.2 billion in the 1st) and in percent of pre-2010 reform quota (426 percent instead of 550 percent and 700 percent, respectively).
While the size of the shock under the adverse scenario for this request is assessed to be much higher than under the two first PLLs, the improvement in the reserves position has allowed a gradual and significant decline in PLL contribution to financing of the shock from 100 percent under the 1st PLL to 47 percent under the 2nd and 27 percent under this request. The authorities remain committed to continue with their gradual exit to allow full exit from PLL support at an early stage.
Conclusion
The authorities are grateful to management and the Board for their continued support and valuable advice. They are firmly committed to preserving recent gains in macroeconomic and financial stability, including during this pre-election period, and to continue strengthening the economy’s performance and resilience. With macroeconomic stability established as a joint responsibility of the government and parliament as mandated under the constitution, the authorities are confident that the government which will be formed after the general elections in October 2016 will stay the course of sound policy implementation. They intend to continue treating the PLL as precautionary, and look forward to Board approval of their request for a new two-year PLL and cancellation of the current arrangement.