Statement by Mr. Mohammed Daïri, Alternative Executive Director on Morocco August 1, 2017

Second Review Under the Arrangement Under the Precautionary and Liquidity Line(PLL)-Press Release; Staff Report; and Statement by the Executive Directo

Abstract

Second Review Under the Arrangement Under the Precautionary and Liquidity Line(PLL)-Press Release; Staff Report; and Statement by the Executive Directo

My Moroccan authorities are grateful to staff for the interesting discussions and the concise reports for the second Precautionary and Liquidity Line (PLL) review and the ex-post evaluation (EPE) of exceptional access under the 2014–16 PLL.

Precautionary and Liquidity Line Review

Macroeconomic indicators are improving significantly in 2017. After a disappointing cereal crop in 2016, more favorable weather conditions in 2017 have led to as strong recovery in agriculture GDP, while non-agriculture GDP is recovering from its slowdown last year, raising projected total growth in 2017 to 4.8 percent, its highest level since 2011 (up from 1.2 percent in 2016). Credit to the economy is recovering, supported by accommodative monetary policy and effective transmission, while the financial system remains sound and well supervised. Inflation should decline to less than 1 percent, and the current account deficit to 4 percent of GDP, notwithstanding higher oil import prices. Continued strong FDI should help maintain reserves at a comfortable level despite large Moroccan investments abroad. These favorable developments have led to improved market sentiment, with Morocco’s sovereign spreads much lower and declining much faster than EMBI average.

The new government, which took office in early April 2017, confirmed its commitment to continue with the policies and reforms under the program. The authorities take positive note of staff indication that the program remains on track and that Morocco continues to meet the PLL qualification criteria, performing strongly in four out of the five qualification areas (external position and market access, financial sector and supervision, monetary policy, and data quality), while not substantially underperforming in the fiscal policy area. In view of the short time elapsed since the first review, this statement will be brief and will only address a few issues.

Fiscal Performance and Policies

The new government’s fiscal policy is in line with the objectives announced under the PLL as revised during the first review. The fiscal deficit is projected to decline, as agreed, to 3.5 percent of GDP in 2017 from 4.1 percent last year, and to fall further to the PLL target of 2.1 percent of GDP in 2021. The public debt to GDP ratio is expected to decline from 64.7 percent in 2016 to 63.2 percent in 2017 (against 64.3 percent projected under the PLL), putting it on a firm declining trend to reach the medium-term target of under 60 percent of GDP by 2021. In this regard, the deviation from the target for 2020 set in the PLL is minimal (0.5 percent of GDP) and does not indicate a weakening of fiscal consolidation.

The authorities are confident that their fiscal targets for 2017 and beyond will be achieved. After meeting the adjusted March 2017 indicative target with a wide margin, fiscal developments through June are also much more favorable than projected, with significant overperformance in tax collection and current spending control, including on wages, which should continue over the near to medium term and bodes well for achieving fiscal targets. In this regard, continued efforts at modernizing tax administration and simplifying procedures (including e-filing), have been instrumental in improving tax collection. Moreover, tax revenue for 2018–21 does not include the impact of new measures, and it is expected that new tax measures, which will be identified and discussed by the cabinet in time for the mandatory presentation of the draft 2018 budget to parliament by October 20, will provide additional room for maneuver for achieving the authorities’ fiscal objectives for 2018 onward, while creating more space for priority spending.

Structural Reforms

Structural fiscal reforms continue to be at the heart of the authorities’ program, with focus on the priority areas identified in the PLL, including continued implementation of the Organic Budget Law as per the agreed schedule; further progress in tax reform in line with the recommendations of the 2013 National Conference; additional steps in subsidy reform to improve targeting and reduce costs; implementation of responsible decentralization; improving management and assessment of public investment as well as oversight and performance of public enterprises; and reform of the civil service. The Written Communication (¶7–9) highlights recent progress in these areas since the government took office, including the adoption of a series of decrees on governance and oversight of subnational entities, as well as the finalization of the draft law on public enterprise oversight and its submission to the Secretary General of the Government.

The authorities are committed to accelerating structural reforms to strengthen competitiveness, increase growth potential, and reduce unemployment. As elaborated in the Written Communication (¶14) and in Box 1, key priorities include further improving the business environment, reforming education and public administration, establishing good governance, and promoting human development and inclusiveness. The recent adoption by the government of the revised central bank charter should enhance its independence and effectiveness in monetary policy and its role in financial stability. A draft law is under preparation to translate the recently adopted Vision for education reform into specific guidelines and objectives.

All in all, while recognizing that the pace of implementation could have been faster absent the delay in the change of government, the authorities’ commitment to reform remains strong. They broadly agree with the main reform priorities identified in the report, which are in line with the government program. The next Article IV consultation and third review of the PLL mission in October will provide the opportunity for more in-depth discussion on the new government’s reform agenda.

Transition to Exchange Rate Flexibility

After completion of the preparatory work on transition to more exchange rate flexibility, including an intensive communication strategy, supported by valuable Fund technical assistance, the authorities planned to start the transition by end-June 2017. However, demand for hedging from some market participants soared to an unexpected level, notwithstanding repeated assurances that the current level of the exchange rate is in line with Morocco’s solid fundamentals and that there is no risk of currency depreciation at the current juncture. This increased hedging has led to a significant decline in official reserves, with concomitant increase in commercial banks’ foreign assets. The postponement by the government of the start of the transition and the indication that the initial widening of the band will be limited have helped alleviate these pressures. Official reserves have stabilized and should start to recover, helped by the favorable seasonal pattern of tourism and workers’ remittances, and as options bought by market participants expire. The authorities remain committed to moving to a more flexible exchange rate regime, and will announce the start of the transition at the appropriate time.

Ex Post Evaluation of Exceptional Access

The authorities share the conclusions of the EPE, including the significant improvement in Morocco’s fundamentals and reduction in vulnerabilities under the 2014–2016 PLL. As highlighted in Annex I, they are of the view that while growth turned out to be lower than expected, it is difficult to link this shortfall to over-optimism in growth projections. More analysis will be needed in particular to assess the extent to which the impact of fiscal consolidation on growth may have been underestimated. Discussion of the impact of structural reforms on growth is also important, but is fraught with uncertainty regarding the time needed for these reforms to deliver their full effect. Finally, while they take note of the report’s indication of the considerable improvement in external balances over 2012–15, they do not share staff indication that gains in competitiveness were modest, pointing to the significant diversification of exports to new sectors and new regions, despite the sharp slowdown in world trade volume.

Conclusion

The authorities are grateful for the Fund’s support, advice, and technical assistance. They are firmly committed to staying the course of sound policies and reforms to unlock the economy’s potential and achieve higher and more inclusive and job-rich growth. They will continue to reduce the economy’s vulnerabilities and strengthen its resilience. In this regard, they are committed to achieving the objectives of the PLL which has proven to be a useful instrument and which they will continue to treat as precautionary. They will assess the need for continued close engagement with the Fund under precautionary arrangements at the expiration of the current PLL, and will carefully consider available options in this area.

Morocco: Second Review Under the Arrangement Under the Precautionary and Liquidity Line(PLL)-Press Release; Staff Report; and Statement by the Executive Director for Morocco
Author: International Monetary Fund. Middle East and Central Asia Dept.