Morocco: Request for an Arrangement Under the Precautionary and Liquidity Line
Author: International Monetary Fund. Middle East and Central Asia Dept.
Publication Date:
24 Jan 2019
eISBN:
9781484396001
Language:
English
Keywords:
ISCR; CR; successor Precautionary and Liquidity Line; SDR; IMF Deputy managing director; authority; PLL; health insurance program; PLL eligibility; administration reform; reform effort; current account; Oil prices; Current account; Global; Middle East; monetary policy; euro zone GDP Growth; short-term debt; fiscal policy; GDP deflator
Download PDF (1 MB)

INTERNATIONAL MONETARY FUND

Abstract

INTERNATIONAL MONETARY FUND

Contents

INTERNATIONAL MONETARY FUND

November 30, 2018

Executive Summary

Context. Following the expiration of the third Precautionary and Liquidity Line (PLL) arrangement, in July 2018, the authorities have requested a new PLL arrangement. They did not draw on the last three arrangements and have made further progress in reducing domestic vulnerabilities in recent years, despite a sharp pick up in oil prices. In an external environment that remains subject to important downside risks, a successor arrangement will support the authorities’ policies to strengthen the economy’s resilience and promote higher and more inclusive growth.

PLL arrangement. In line with the generally positive assessment of Morocco’s policies by the Executive Board during the 2017 Article IV consultation, staff considers that Morocco continues to meet the PLL qualification criteria and recommends the approval of the authorities’ request:

  • Morocco’s economic fundamentals and policy frameworks are sound, the country is implementing (and has a track record of implementing) generally sound policies and remains committed to maintaining such policies in the future.

  • Morocco meets the PLL qualification criteria: it performs strongly in three out of the five PLL qualification areas (monetary, financial, and data), and does not substantially underperform in the areas of fiscal policy, and external position and market access. Morocco does not face any of the circumstances under which the Fund might no longer approve a PLL arrangement.

Fund liquidity: The authorities intend to treat the new arrangement of a proposed duration of two years as precautionary. Staff estimates that under a stress scenario, potential financing needs by 2020 could lead to a total access level of 240 percent of quota, amounting to SDR 2.15 billion, or US$3 billion.

Approved By

Taline Koranchelian and Vitaliy Kramarenko

The team consisted of Nicolas Blancher (head), Lorraine Ocampos, Jean Frédéric Noah Ndela, Babacar Sarr (all MCD), and Ermal Hitaj (SPR). The discussions took place in Rabat and Casablanca during November 1–14, 2018. Samira Kalla, Ramzy Al Amine, and Geraldine Cruz (MCD) assisted in the preparation of the report. The mission met with the Head of Government Mr. El Othmani, the President of the Chamber of Representatives Mr. El Malki, the Minister of Economy and Finance Mr. Benchaaboun, the Minister Delegate of General Affairs and Governance Mr. Daoudi, the Governor of the Central Bank Mr. Jouahri, and other senior officials and representatives of civil society. Mr. Daïri (OED) participated in most meetings.

Contents

  • Glossary

  • CONTEXT

  • RECENT DEVELOPMENTS

  • OUTLOOK AND RISKS

  • POLICIES UNDER THE PLL ARRANGEMENT

  • A. Macro-Financial Resilience

  • B. Public Sector Governance

  • C. Growth and Inclusion

  • ASSESSMENT OF QUALIFICATION

  • A. General Assessment

  • B. Assessment of Specific Criteria

  • C. PLL Approval Criteria

  • DURATION AND ACCESS LEVEL

  • CAPACITY TO REPAY THE FUND

  • STAFF APPRAISAL

  • BOXES

  • 1. Achievements Under the Third PLL Arrangement

  • 2. External Economic Stress Index

  • 3. Access Level

  • FIGURES

  • 1. Real Developments

  • 2. Fiscal Developments

  • 3. Financial Sector Developments

  • 4. External Developments

  • 5. Structural Reforms

  • 6. Morocco and Selected Countries: Comparing Adverse Scenarios

  • TABLES

  • 1. Selected Economic Indicators, 2015–23

  • 2a. Budgetary Central Government Finance, 2015–23 (Billions of dirhams)

  • 2b. Budgetary Central Government Finance, 2015–23 (Percent of GDP)

  • 3. Balance of Payments, 2015–23

  • 4. Monetary Survey, 2015–18

  • 5. Capacity to Repay Indicators, 2018–23

  • 6. External Financing Requirements and Sources, 2017–20

  • 7. Impact on GRA Finances

  • 8. Financial Soundness Indicators, 2015–18

  • ANNEXES

  • I. Public Debt Sustainability Analysis (DSA)

  • II. External DSA

  • APPENDIX

  • Written Communication

  • Attachment. Technical Appendix

Glossary

ARA

Assessing Reserve Adequacy

BAM

Bank al-Maghrib

EA

Euro Area

EBA

External Balance Assessment

ESI

External Stress Index

FDI

Foreign Direct Investment

FCL

Flexible Credit Line

FSAP

Financial Sector Assessment Program

GDP

Gross Domestic Product

GRA

General Resources Account

G-RAM

Global Risk Assessment Matrix

IIP

International Investment Position

NIIP

Net International Investment Position

NPL

Nonperforming Loan

OBL

Organic Budget Law

PLL

Precautionary and Liquidity Line

REER

Real Effective Exchange Rate

SDR

Special Drawing Rights

SME

Small and Medium Enterprises

SOE

State-Owned Enterprise

TA

Technical Assistance

VAT

Value-Added Tax

VIX

Volatility Index S&P 500

WEO

World Economic Outlook

Context

1. Macroeconomic conditions have improved in recent years, but accelerated reforms are needed to achieve higher and more inclusive growth. Economic activity rebounded in 2017–18, helped by two very good agricultural years, and inflation was low. The authorities reduced the fiscal deficit to 3.6 percent of GDP in 2017. Such progress was achieved despite a pickup in oil prices, which has weighed on external imbalances. Domestic reforms have been slow since the late 2016 elections. While some important reforms have been introduced in 2018, much remains to be done, especially to raise human capital and strengthen the labor market to reduce structural unemployment (in particular among the youth), strengthen social safety nets, and promote higher and more inclusive growth.

A01ufig1

Brent Oil Price and Time of PLL Requests

(US$ per barrel)

Citation: IMF Staff Country Reports 2019, 024; 10.5089/9781484396001.002.A002

Source: Bloomberg.

2. Three successive PLL arrangements have supported the authorities’ reform agenda since 2012. Morocco requested and qualified for the first PLL arrangement in a context of uncertainties in global oil prices and potentially weak growth in its European trading partners. The second PLL arrangement was approved in July 2014 with lower access, reflecting the strengthening of the economy and a lower balance of risks relative to the preceding PLL. Access was reduced further for the third PLL arrangement in July 2016 against the backdrop of lower vulnerabilities and stronger medium-term prospects. The authorities consider that the three PLL arrangements provided insurance against external risks, helped strengthen fiscal and external buffers in a challenging external environment, anchored their reform program, and sent positive signals to market participants.

Morocco: Precautionary Arrangements1

article image

Access for arrangements approved in 2012 and 2014 is relative to Morocco’s old quota.

3. Considering the still elevated external risks, the authorities have requested a successor arrangement. As noted, much remains to be done to secure macroeconomic resilience, raise growth potential, and further reduce unemployment and inequalities. Considering the positive experience with PLL arrangements, the authorities believe that a successor arrangement is useful in an external environment with significant downward risks, and will continue to provide important insurance and support to their program to strengthen the economy’s resilience and foster higher and more inclusive growth.

Recent Developments

4. The government remains committed to implementing sound policies and reforms. Its policy priorities include continued fiscal prudence and progress toward exchange rate flexibility, and reforms of taxation, governance, oversight of state owned enterprises, fiscal decentralization, and the business environment. Greater emphasis is also being put on reducing social and regional inequalities and increasing access to, and the quality of, public services. Reform coordination has been enhanced via a commission placed directly under the authority of the Head of Government.

5. Social tensions have increased since 2017. These tensions, initially in the northern region of the Rif, are due to perceptions of corruption and demands for better access to health services and jobs, and greater public investment. In 2018, social tensions have also reflected domestic gas price increases, and a boycott organized through social media has targeted certain products and prominent politicians with business interests. In response, the authorities took steps to accelerate social programs and investment projects, and renewed efforts to strengthen public accountability.

6. Economic activity is expected to remain robust in 2018. Output grew by 4.1 percent in 2017, reflecting a robust agricultural season and strong phosphate exports, while non-agricultural GDP growth was lower than expected (2.7 percent). Preliminary estimates show that growth should reach 3.1 percent in 2018, supported by another good cereal harvest and strong activity in tourism and commerce. On the demand side, private consumption continues to be the main driver of growth, underpinned by strong remittances and high agricultural income. Unemployment remains high, at 10 percent in the third quarter of 2018, particularly among youth and graduates (27.5 percent and 17.1 percent, respectively).

7. Fiscal consolidation has slowed down in 2018, due in large part to exogenous factors. The fiscal deficit declined to 3.6 percent of GDP in 2017 (against 4.5 percent in 2016), reflecting strong revenue performance and contained spending. For 2018, the latest data indicate that corporate tax revenues have under-performed, and grant revenues (mostly from Gulf countries) have been lower than anticipated (10 percent of budgeted amount at end-October 2018). At the same time, subsidies were significantly higher than projected due to elevated international butane prices (other public expenditures were in line with expectations). Overall, the headline deficit is expected to reach 3.6 percent of GDP in 2018, against the authorities’ objective of 3.0 percent. The cyclically-adjusted and primary deficits would decrease by about 0.3 percent of the GDP in 2018. Public debt remains sustainable and is projected to stabilize around 65.3 percent of GDP in 2018 (against 65.1 percent in 2017).

8. Monetary policy has remained accommodative in a context of moderate inflation and subdued non-agricultural and credit growth. Headline inflation reached 1.1 percent in October (compared to 0.64 percent in October 2017) due to higher food and energy prices and is projected to average 2 percent in 2018. Bank-Al-Maghrib (BAM) has kept its policy rate unchanged at 2.25 percent since its last reduction in March 2016. Lending rates have declined marginally, but credit growth to non-financial private enterprises, at 1.1 percent in September (y-o-y), remains sluggish (including for SMEs). Real estate prices are stable.

9. Following an improvement in 2017, the external position weakened in 2018 due mainly to higher international oil prices. The current account deficit is expected to widen to 4.5 percent in 2018 from 3.6 percent in 2017, due mainly to high energy and capital goods imports, and despite sustained exports of phosphate and industrial products.1 The EBA analysis updated in July 2018 found a current account gap of 1 percent of GDP, consistent with an exchange rate broadly in line with fundamentals. The authorities started a transition to greater exchange rate flexibility in January 2018, by announcing the widening of the dirham fluctuation band to 2.5 percent (from 0.3 percent) on either side of a reference parity (based on a euro/US dollar basket). To date, exchange rate fluctuations have remained very limited, and the central bank has not intervened in the foreign exchange market since March 2018.

10. Bank capitalization may need to be strengthened following the adoption of the International Financial Reporting Standard (IFRS 9), while non-performing loans (NPL), credit concentration, and international expansion, remain significant risk factors. Banks’ regulatory capital ratio declined slightly to 13.3 percent at end-June 2018. The authorities introduced the IFRS 9 in January 2018 which upgraded banks’ loan classification and provisioning practices. Its impact will be phased in over the next five years by increasing capital accordingly. NPL ratios remain elevated at 7.7 percent (September 2018), but provisioning levels are comfortable (70 percent). Risks from large credit exposures persist despite strict regulatory limits. The continued expansion of Moroccan banks in Africa (most recently in Egypt) provides diversification and profit opportunities but is also a potential channel of risk transmission.

Outlook and Risks

11. Gradually increasing growth, moderate inflation, and stronger fiscal and external buffers are expected over the medium term. These outcomes are predicated on sustained reform implementation, including to improve the business environment, boost productivity, and enhance tax revenues.

  • Growth is expected to reach 3.3 percent in 2019 as nonagricultural activity continues to recover, and 4.5 percent over the medium term. This trend assumes that the government’s reform commitments are implemented, including improvements to the business environment and the labor market, and further industrial diversification and integration into global value chains.2

  • Inflation is projected to slow to 1.4 percent in 2019 due to lower commodity and food prices, and to stabilize around 2 percent over the medium term.

  • The fiscal deficit is projected to increase to 3.7 percent of GDP in 2019, with privatization receipts reducing the public financing need to 3.3 percent of GDP. The deficit would then decline and stabilize around 3 percent of GDP by 2020, while expected privatization revenues would contribute to reduce public debt close to 60 percent of GDP over the medium term.

  • The current account deficit is expected to decline to 4 percent of GDP in 2019 and to 2.8 percent of GDP in the medium term, driven by sustained export growth, tourism receipts and remittances. Foreign direct investment is expected to increase to 2.2 percent of GDP and other private flows (including trade credit and portfolio investment flows) should hover around 1.7 percent of GDP.3 International reserves are expected to reach 93 percent of the ARA metric in the medium term.

12. The balance of risks remains tilted to the downside. On the domestic front, delays in implementing key fiscal and structural reforms could reduce future fiscal space, contribute to social tensions, and adversely affect the external sector (e.g., through lower tourism receipts) and the expected pickup in potential growth. Externally, oil prices, euro area growth, geopolitical risks and global policy uncertainty are key risks that could affect Morocco’s economy through lower exports, tourism, FDI flows, and remittances, worsening fiscal and external imbalances. Increasingly volatile global financial conditions may also increase borrowing costs and weaken investor confidence. On the upside, lower international oil (and butane gas) prices, as observed in recent weeks, could bring about significant improvements to Morocco’s macroeconomic imbalances.

Policies Under the PLL Arrangement

13. A new PLL arrangement would provide insurance against external shocks and support the authorities’ efforts to improve economic fundamentals and policy frameworks. Building on progress made under past PLL arrangements, the objectives would be to enhance macroeconomic resilience in an adverse international environment, and to help the authorities move towards a new growth model that is more private sector-led, broad-based and inclusive, including through strengthened public governance and reduced corruption and inequalities. Policies and sustained reform implementation will be needed in the following policy areas (see Written Communication (W-COM) attached).

A. Macro-Financial Resilience

14. The current combination of accommodative monetary policy and slower fiscal consolidation is appropriate (W-COM ¶19). In a context of contained inflation and subdued non-agricultural activity and credit growth, maintaining an accommodative monetary policy and a slowdown in fiscal consolidation in 2018–19 would be an appropriate response to the temporary impact of higher oil prices. Like for 2018, the public deficit envisaged in the 2019 budget would remain higher-than-expected, at 3.7 percent of GDP (3.2 percent including privatization revenues), due in part to still elevated international butane prices.

15. Over the medium term, fiscal consolidation will remain essential to reduce public debt and preserve fiscal space for social and growth-enhancing spending (W-COM ¶10). Morocco currently has some fiscal space, reflecting moderate gross financing needs, a favorable debt structure, and manageable medium and long-term adjustment needs. Public debt remains sustainable, resilient to various shocks, and below the benchmark of 70 percent of GDP for emerging markets (Annex I). Nevertheless, increased policy space is needed to absorb potential shocks to the economy while addressing social needs and growth constraints. The authorities are committed to gradually reduce public debt to 60 percent of GDP.4 For this, they intend to continue to reduce the public deficit and to implement a privatization program over the medium term. In addition, to the extent that butane gas prices decline in the period ahead (together with international oil prices), reduced subsidy spending on butane gas could generate some fiscal savings (up to 0.3 percent of GDP) that should help reach faster the authorities’ objective of 60 percent of GDP.

16. Several reforms are needed to secure medium-term fiscal sustainability and reduce fiscal risks (W-COM ¶11-12):

  • Tax reform: A comprehensive reform of the tax system is needed to increase its fairness and reduce distortions, while boosting tax collection by 0.8 percent of GDP by 2020 (and 1.3 percent of GDP over the medium term). This strategy should reflect the need to: align reduced VAT rates on manufacturing goods and services with the standard VAT rate; reduce tax exemptions; better enforce tax payments from the self-employed and liberal professions; lower and simplify corporate tax rates; and, raise property tax. In early 2019, a national conference on taxation will be an opportunity to design a tax reform strategy, and the Fund will be ready to provide technical support.

  • Public wage containment. The authorities intend to keep the public payroll below 10.5 percent of GDP over the medium term so as not to compromise priority spending. More broadly, given the elevated public wage bill in Morocco, a reform of the civil service is needed to generate durable savings while strengthening the efficiency and quality of public services. The authorities have introduced several measures that need to be implemented further, such as contractual employment and personnel mobility. Additional measures, including merit-based career progression and a simplification of the civil service statute, will also be needed.

  • Fiscal decentralization will be important to improve access to public services. The organic budget law for the regions adopted in 2015 defined the contour of this process and reinforced local governance. A draft law to strengthen the role of Regional Investment Centers (CRIs) and better reflect local needs in investment decisions was submitted to parliament in October 2018. Finally, with increasing transfers of public resources to local entities, mechanisms to ensure sound financial management at all levels are essential: a deconcentration charter, to be implemented in 2019, will help clarify local competences, introduce transparent criteria for intergovernmental transfers, mitigate contingent liability risks, and, in the longer term, enhance local taxation.

  • Public enterprises. A draft law to strengthen the governance and oversight of SOEs and to improve their performance should be submitted to parliament during the April 2019 session. SOEs are aligning their accounting practices with the International Financial Reporting Standard and the authorities are preparing consolidated SOE balance sheet data. The forthcoming privatization program will also help improve the performance of SOEs, including by refocusing their activities on core missions. Finally, ongoing technical assistance from FAD supports the authorities in their efforts to strengthen operational and strategic frameworks to assess and mitigate SOE-related fiscal risks.

17. Continuing the transition to greater exchange rate flexibility will strengthen external resilience (W-COM ¶22). Staff recommended moving forward without unnecessary delay for preventive purposes, to protect reserve buffers, put the economy in a better position to absorb potential external shocks, and preserve competitiveness. More broadly, this reform will encourage export diversification and SME development, which will support the generation of job opportunities and income for the poor and middle class (90 percent of enterprises are SMEs). The authorities remain committed to continue the exchange rate transition, which would consist in a further broadening of the dirham fluctuation band, when conditions permit and in the context of a well-structured communication strategy.

18. Continued efforts are needed to further enhance financial sector soundness (W-COM ¶21). Risks related to bank asset quality will continue to be monitored closely. The authorities indicated that the gradual introduction of strengthened provisioning requirements under IFRS9 should be absorbed without major impact on the capitalization of Moroccan banks, many of which have already prepared to adjust their capital structure in the period ahead. The supervisory authority is also encouraging greater use of syndicated lending to better distribute risks and reduce concentrated credit exposures. Finally, efforts to deepen supervisory collaboration with host countries in Africa are continuing, especially in the context of money laundering and terrorist financing risks and pressures on correspondent banking relationships.

B. Public Sector Governance

19. A more transparent and accountable public sector will help build confidence and promote a more dynamic private sector. The authorities’ recent commitment to clear the large stock of VAT credits due to public and private enterprises (about 4 percent of GDP) is a significant and welcome step in this direction. The authorities are also taking renewed measures to reduce payment delays in the public and private sectors, especially from public to private enterprises (through an electronic platform). Finally, it is expected that the Organic Budget law will continue to be implemented as planned, including measures to strengthen the oversight role of the Parliament and the Cour des Comptes, which will reinforce public accountability.

20. Reporting publicly on the implementation of the national strategy to address governance and corruption vulnerabilities will be important to safeguard public trust. Progress has been made in the context of this strategy, including the introduction of an online platform for public feedback on public service delivery. A draft law to establish illicit enrichment as a criminal offense has also been prepared and should be submitted to parliament in 2019. Staff welcomed the authorities’ intention to publish the first progress report of the national strategy, which will help reinforce its impact and credibility.

21. A key priority is to strengthen the efficiency and impact of public spending. As regard public investment, staff encouraged the authorities to implement the recommendations of the 2017 Public Investment Management Assessment (PIMA), including introducing tools to facilitate a centralized management of public investment projects and related risks. The authorities are also increasingly relying on public-private partnerships, also with Fund technical support (above-mentioned FAD technical assistance). As regard social spending, major shortcomings in the targeting and impact of social programs are being addressed (see below). More broadly, as noted above, important reforms such as decentralization and civil service reform should also help better tailor national policies and programs to local needs, and address regional disparities.

C. Growth and Inclusion

22. Raising growth while making it more inclusive will require steadfast reform implementation. Morocco’s total factor productivity (TFP) growth has been decelerating over the last decade, mostly due to structural impediments in the education system, the labor market, and the business environment. Addressing these impediments could boost potential growth and job creation and help reduce social and spatial disparities. The authorities intend to increase the pace and coordination of structural reforms on several fronts.

23. The business environment has improved in recent years, but further progress is needed to enhance competition and SME development (W-COM ¶6). Morocco’s Doing Business ranking rose from 69 in 2018 to 60 in 2019, reflecting ongoing efforts to strengthen the local business environment, effectively making Morocco a prime destination for foreign investment. Recent reforms include the new bankruptcy law, approved in April 2018, and the dematerialization of administrative procedures in areas such as starting a business or transferring property. The authorities are also in the process of developing a new Investment Charter to make the investment regime more attractive while further simplifying administrative procedures for investors. Nonetheless, longstanding weaknesses in competition practices limit opportunities for SME development and middle-class entrepreneurship. The Competition Council, created in 2014, should become operational imminently (following the nomination of its President in November 2018) and will help limit anti-competitive behaviors and monopolies.

24. Deepening financial inclusion is necessary, including for SMEs (W-COM ¶20). At about 33 percent of total credit, credit to SMEs is relatively high by regional standards. However, it has been stagnant in recent years, collateral requirements for small enterprises are high (above 200 percent, a level larger than the global and MENA averages), and firms continue to consider access to finance as the second largest obstacle to doing business in Morocco. Against this background, a national strategy for financial inclusion is expected to be finalized before the end of 2018. It will introduce specific objectives and measures to increase financial penetration and reduce financial disparities among population segments, such as by increasing financial education, expanding mobile payments and credit bureau coverage, and relaxing credit ceilings for microcredit institutions. Finally, the authorities will present soon to parliament a draft law that would extend the array of assets that can be pledged to facilitate access to credit, including moveable assets.

25. Reducing unemployment, particularly among the youth, will require ambitious labor market reforms. In this area, measures have been identified for implementation in 2018–19, including the creation of a labor market observatory to facilitate skills matching, efforts to support education and vocational training, and the strengthening of active labor market policies targeting the youth. While welcoming these initiatives, staff stressed the importance of further steps to unlock job opportunities for the youth, including measures to introduce greater flexibility for contractual employment and in hiring and firing regulations (together with proper unemployment safety nets), which may require revisions to the labor code.

26. Strengthening the targeting and efficiency of social spending remains a high priority.

Social programs are numerous but are not properly coordinated and evaluated, resulting in a situation where, despite relatively high levels of social spending in aggregate, the impact on the poorest population groups is unsatisfactory. The planned introduction of a social registry in 2019–20, with World bank support and building on international best practices, will be an important step to improve the targeting of these programs.5 In addition, broader efforts to raise the quality of public services will be critical, such as, regarding education, better teacher performance evaluation (a key component of the national strategy for education).

Figure 1.
Figure 1.

Morocco: Real Sector Developments

Citation: IMF Staff Country Reports 2019, 024; 10.5089/9781484396001.002.A002

Figure 2.
Figure 2.

Morocco: Fiscal Developments

Citation: IMF Staff Country Reports 2019, 024; 10.5089/9781484396001.002.A002

Figure 3.
Figure 3.

Morocco: Financial Developments

Citation: IMF Staff Country Reports 2019, 024; 10.5089/9781484396001.002.A002

Figure 4.
Figure 4.

Morocco: External Developments

Citation: IMF Staff Country Reports 2019, 024; 10.5089/9781484396001.002.A002

Sources: National authorities; and IMF staff estimates.Note: 2018 values are projections.
Figure 5.
Figure 5.

Morocco: Structural Reforms

Citation: IMF Staff Country Reports 2019, 024; 10.5089/9781484396001.002.A002

Sources: World Bank’s 2019 Doing Business Report, World Economic Forum’s 2018 Global Competitiveness Report and IMF staff calculations. The World Economic Forum’s Global Competitiveness Index combines both official and survey responses from business executives on several dimensions of competitiveness. Some of the scores rely on perceptions-based data and should be interpreted with caution.Note: Scores, 0-100, where 100 represents the optimal situation or ‘frontier’.

Assessment of Qualification

A. General Assessment

27. Staff assesses that Morocco continues to qualify for a PLL arrangement, in line with the generally positive assessment of Morocco’s policies by the Executive Board during the 2017 Article IV consultation.

28. Morocco meets the qualification criteria for a PLL arrangement and performs strongly in three out of the five PLL qualification areas (financial sector and supervision, monetary policy, and data adequacy), and does not substantially underperform in the other two areas (external position and market access, and fiscal policy). International reserves averaged 88 percent of the ARA metric over 2013–17. After improving in 2017, the external position weakened in 2018, and the underlying current account deficit remains relatively high, but it is broadly in line with fundamentals. On the fiscal front, while public debt has increased from 2012 to 2017 (from 56.5 percent to 65.1 percent of GDP), it is assessed to be sustainable with a high probability and resilient to various shocks.

29. Morocco’s economic fundamentals and institutional policy frameworks are sound, the country is implementing, and has a track record of implementing, sound policies, and it remains committed to doing so in the future, all of which give confidence that Morocco will take the policy measures needed to reduce any remaining vulnerabilities and will respond appropriately to the balance of payments difficulties that it might encounter:

  • Macroeconomic developments are broadly positive (Box 1). Growth averaged 3½ percent during the period 2012–17 and inflation remained low (less than 2 percent). Fiscal developments were favorable, with contained current expenditures offsetting weaker revenues, although the public deficit increased in 2018 due mostly to exogenous factors. The current account deficit narrowed in 2017 as capital equipment imports (related to specific infrastructure projects) and food imports stabilized, while industrial, phosphate and food exports picked up, and it is expected to widen temporarily in 2018 due to the impact of higher oil prices. Over the medium term, economic growth is projected to increase steadily in a context of moderate inflation. Both public and external debts are sustainable.

  • The authorities have implemented generally sound policies, although reform implementation has been slow. During the last Article IV consultation, on December 13, 2017, the Executive Board welcomed the authorities’ commitment to sound policies and encouraged them to accelerate reform implementation to further reduce vulnerabilities and promote stronger job creation and more inclusive growth.

  • The authorities are committed to maintain sound policies. Although fiscal consolidation slowed down in 2018, due mostly to exogenous factors, the authorities remain committed to secure strong revenue performance, contain spending, and reduce public debt to close to 60 percent of GDP over the medium term. The authorities intend to pursue structural reforms to raise potential growth and promote higher and more inclusive growth, including by improving competitiveness and the business environment, strengthening the fight against corruption, and raising human capital.

  • Flexible policy and institutional frameworks allow the authorities to implement needed reforms in the face of shocks. On the fiscal front, OBL implementation continues to enhance the policy framework, including by helping to maintain current spending within budgeted levels. 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.6 Morocco scores lower in the monetary policy area, but this criterion is less relevant for Morocco given its pegged exchange rate regime.7 Bank al-Maghrib (BAM) has a clear mandate to implement monetary and exchange rate policies, and the authorities are in the process of upgrading their monetary policy regime as part of the transition to greater exchange rate flexibility and inflation targeting. Finally, Morocco performs well relative to its peers in the 2017 Worldwide Governance Indicators on control of corruption and government effectiveness.8

Achievements Under the Third PLL Arrangement

In an external environment subject to significant downward risks, the 2016 PLL arrangement provided insurance and support to the authorities’ reform program. Growth was projected to reach 1.8 percent of GDP in 2016 and 4.8 percent in 2017. The fiscal target was set at 3.5 percent of GDP in 2016 and 3 percent of GDP in 2017. The current account deficit was projected to reach 1.2 percent in 2016, and 1.4 percent in 2017. Reserves were expected to increase to 7.6 months of imports in 2017. The macroeconomic scenario was supported by the following external assumptions and domestic reforms:

  • Euro zone GDP growth was projected to improve by 0.1 percent of GDP from 2016 to 2017. Oil prices were expected to increase from US$43.1 in 2016 to US$50 in 2017.

  • The authorities intended to pursue important reforms, including of the pension and the tax systems, and exchange rate flexibility. The authorities also planned to implement reforms to improve the business environment and competitiveness and raise Morocco’s growth potential.

Important reforms were implemented during the third PLL arrangement. A parametric reform of the main public sector pension plan was implemented in 2017 and a pension scheme for self-employed and independent workers was adopted in November 2017. Following the full liberalization of liquid fuel prices in 2015, the authorities have focused on improving the targeting of social programs and prepared the introduction of a social registry. The transition to greater exchange rate flexibility was initiated on January 2018, with a widening of the dirham fluctuation band to +/-2.5 percent around the reference parity.

Economic growth and the fiscal position improved less than expected. Real GDP growth in 2016 and 2017 was below the projections at the onset of the program, partly hampered by a severe drought (2016). The subsidy reform led to improvement in fiscal deficits, but these were still above targets, at 4.1 percent of GDP in 2016 instead of an expected 3.5 percent of GDP, and 3.6 percent of GDP in 2017 instead of 3.0 percent of GDP. This reflected the lower growth environment and grant revenues. As such, public debt was higher than projected in 2017.

Despite continued export diversification and performance, higher oil prices than forecast affected the external position. The current account deficit was above expectations, at 4.2 percent of GDP and 3.6 percent of GDP, respectively in 2016 and 2017, instead of the expected 1.2 percent and 1.4 percent of GDP. This was essentially due to larger food imports in 2016 (due to the drought), and to the higher level of international oil prices since 2017, which implied an even stronger shock than assumed under the adverse PLL scenario. Lower-than-expected net capital inflows also contributed to weaker reserves, which nevertheless remained above five months of imports during 2016–18.

Morocco: 2016 PLL 1 vs. Current Macro Framework, 2016-18

article image
Sources: Moroccan authorities; and IMF staff estimates.

Refers to the macro-framework for the 2016 PLL Request.

B. Assessment of Specific Criteria

30. Morocco performs strongly in three out of the five PLL qualification areas (financial sector and supervision, monetary policy, and data adequacy) and does not substantially underperform in the other two areas (external position and market access, and fiscal policy). The underlying current account remains large, with a substantial trade deficit, and the external position, following an improvement in 2017, weakened in 2018. On the fiscal front, while public debt is assessed to be sustainable with a high probability and remains resilient to various shocks, it has continuously increased from 2012 to 2017, from 56.5 to 65.1 percent of GDP. This qualification has not changed since the third review of the last PLL arrangement.

External position and market access: Morocco does not substantially underperform in the external position and market access area.

  • Criterion 1. Sustainable external position. Based on the July 2018 external balance assessment (EBA), Morocco’s external position is broadly in line with fundamentals. The current account deficit narrowed in 2017 after widening substantially in 2016 due to infrastructure developments, drought, and weaker-than-expected phosphate prices. The current account improvement was supported by strong export performance in the food, phosphate and derivatives, and emerging sectors (which now account for 33 percent of total exports, against 14 percent in 2000), and strong tourism and remittance receipts. However, the current account deficit has widened in 2018, owing to high energy and capital goods imports, and should reach 4.5 percent of GDP at the end of 2018. The current account is expected to gradually improve over the medium term as exports rise, boosted by increased demand from the euro area and the expansion of higher value-added export sectors—reflecting strong FDI in the aeronautics and automotive sectors, and import growth slows in an environment of moderate commodity prices. Morocco’s external debt increased in recent years but remains low, at 33.7 percent of GDP, and is expected to decline to 31 percent of GDP in the medium term.

  • Criterion 2—Capital account position dominated by private flows. Private capital flows constitute the largest share of the capital account (about 81 percent on average between 2015 and 2017), and FDI is their largest component. Access to international financial markets by nonfinancial corporations remains modest compared to other emerging markets, and private external debt is small (about 10.7 percent of total debt or 3.6 percent of GDP). Loans from bilateral and 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 not issued international bonds since 2014.9 The authorities plan to issue in early 2019. Morocco continues to be rated favorably by major ratings agencies despite a recent deterioration of their outlook assessment, and interest rate spreads declined further in 2018, suggesting that Morocco could tap international markets on a durable and substantial basis (even though the scale or duration of actual sovereign borrowing fell short of core indicators).10 The average maturity of public external debt was extended to eight years and six months (against seven years and four months in 2009).

    A01ufig2

    CDS Spreads

    (2013–18 basis points)

    Citation: IMF Staff Country Reports 2019, 024; 10.5089/9781484396001.002.A002

    Sources: Bloomberg and Markit. Note: 2018 data available until Oct. 30

  • Criterion 4—A reserve position, which—notwithstanding potential balance of payments (BOP) pressures that justify Fund assistance—remains relatively comfortable. Morocco’s reserves have been below 100 percent of the Assessing Reserve Adequacy (ARA) metric on average over the last three years, at 95 percent. However, they remain adequate according to several other metrics (Figure 1): 5.6 months of imports, ample coverage of short-term debt and broad money, and 110 percent of the ARA adjusted for capital controls at the end of 2017. By 2023, reserves are expected to reach about six months of imports, 93 percent of the standard ARA metric, and 121 percent of the metric adjusted for capital controls.

Fiscal policy: Morocco does not substantially underperform in the fiscal area.

  • 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. However, a deficit of 3.6 percent of GDP is expected in 2018 due mostly to exogenous factors, and the authorities aim to reduce public debt close to 60 percent of GDP over the medium term (against 65.1 percent of GDP in 2017), which will require bringing the fiscal deficit to about 3 percent of GDP by 2020.11 Morocco’s public debt is sustainable with high probability and resilient to various shocks and vulnerabilities despite high gross financing needs, which should decline due to a lengthening of average maturities (from 6 years and 6 months in 2014 to about 7 years and 3 months in 2017). Future fiscal consolidation will benefit from further tax reforms, including reduced exemptions, stronger VAT revenues, and improved corporate taxation. Civil service reform will be needed to generate long-term savings on the wage bill while strengthening the efficiency of the public sector. A range of institutional mechanisms to control risks from fiscal decentralization will need to be put in place as this reform advances. Finally, the authorities intend to submit to parliament a draft law to reinforce the governance and oversight of SOEs in April 2019, and to undertake a multi-year privatization plan that will bring about efficiency and performance improvements for SOEs.

Monetary policy: Morocco performs strongly in the monetary policy area.

  • Criterion 6—Low and stable inflation. Inflation has been in the single digits over the last five years. It remained low at 1.1 percent y-o-y in September 2018 and is expected to stabilize around 2 percent in the medium term. The monetary policy framework continues to be based on an exchange rate anchor vis-à-vis a composite basket comprising the euro and the U.S. dollar. The transition to greater exchange rate flexibility initiated in January 2018 is expected to lead to inflation targeting in the coming years, allowing the economy to better absorb external shocks. In staff’s assessment, this transition is likely to proceed smoothly as pre-conditions are largely in place, and Morocco is moving from a position of strength due to reasonable fiscal and external buffers, a resilient financial sector, and restrictions on capital outflows by residents.

Financial sector soundness and supervision: Morocco performs strongly in the financial sector area.

  • Criterion 7—Sound financial system and absence of solvency problems that may threaten systemic stability. Banks have adequate capital buffers, even though these will need some further strengthening following the alignment of loan classification and provisioning rules with International Financial Reporting Standards (IFRS 9) in early 2018. Banks benefit from stable funding (mainly non-remunerated deposits). NPLs remain relatively high at 7.7 percent, but provisioning levels are comfortable (70 percent). Risks from large credit exposures persist despite strict regulatory limits. Moroccan banks’ expansion into Africa provides diversification and profit opportunities but needs to be contained given the riskier local operating environment and lower regulatory standards in some of the host countries. The 2015 FSAP stress tests showed that the banking system could withstand severe shocks.

  • Criterion 8—Effective financial sector supervision. Bank supervision capacity is improving along the lines of the 2015 FSAP recommendations. Together with recent enhancements to the macroprudential policy framework, the oversight of Moroccan banks expanding into Africa has intensified, in close collaboration with supervisory agencies in host countries. To reduce large credit exposures, since 2016, corporate groups are required to prepare consolidated financial statements and risk weights have been raised for large connected exposures. More broadly, bank supervision is moving to a more risk-based and forward-looking approach (including about AML/CFT-related risks).

Data adequacy: Data provision and quality are fully adequate.

  • 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.

31. Morocco has a track record of sound policies. Morocco has met the PLL qualification standard since 2012. Staff’s assessment of the relevant core indicators over the five most recent years confirms this assessment.

C. PLL Approval Criteria

32. Morocco does not face any of the circumstances under which the Fund may not approve a PLL arrangement. Specifically: (i) as noted above, Morocco has access to international capital markets; (ii) there is no need to undertake large macroeconomic or structural policy adjustment (neither the planned fiscal adjustment nor the expected external sector adjustment is large in international perspective); (iii) the public debt position is sustainable in the medium term, with a high probability; and, (iv) there are no widespread bank insolvencies.

Duration and Access Level

33. In the baseline scenario, because of its sound policies and fundamentals, Morocco does not face a financing gap. Gross external financing requirements are expected to stabilize around US$6.5 billion at end-2020 (Table 6) and should be financed primarily through net FDI inflows (about US$2.8 billion), and medium- and long-term borrowing. Gross international reserves are projected to strengthen to about 93 percent of the ARA metric in the absence of external shocks.

34. Nevertheless, the balance of payments remains vulnerable to external shocks, justifying continued access under a PLL arrangement. The current account deficit remains vulnerable to higher oil prices, while exports, FDI, remittances, and tourism receipts are vulnerable to lower demand in key European trading partners. These risks could weaken the current account and put pressure on reserves. The resulting financing gap abstracts from potential increased financing from other multilateral and bilateral sources, as no additional commitments have been identified in the event of a significant adverse shock. In the case of an adverse shock or if expected financing were to fall durably short, staff encourages the authorities to seek financial assistance from both multilateral and bilateral donors to meet financing needs.

35. Duration of the PLL arrangement. The authorities have expressed interest in a two-year successor arrangement. Staff believes that a two-year precautionary arrangement would indeed be appropriate, given that: (i) geopolitical and security risks, and more broadly volatile global financial conditions, are unlikely to improve markedly in the near term, and (ii) a two-year period is necessary to address remaining vulnerabilities and further strengthen macroeconomic buffers that would allow for a successful exit should external circumstances warrant.

36. Risks. Morocco is facing risks that are similar to the 2016 PLL arrangement and highlighted in the October 2018 WEO and G-RAM (External Stress Index). Specifically, the risks that would most significantly affect the Moroccan economy are:

  • Geopolitical and security risks related to the Middle East and North Africa. These could trigger rises in oil prices, declines in tourism activity, as well as disruptions in capital flows, which could directly and substantially weaken Morocco’s external position.

  • A protracted period of slower growth in Morocco’s main euro area trading partners. As set out in the WEO, growth prospects have been further weakened for advanced economies, including through potential spillbacks from global policy uncertainty. The resulting weak external demand would worsen the current account through lower exports and tourism receipts, as well as reduced inward FDI and remittance flows.

  • More volatile global financial conditions, particularly for emerging and frontier economies. Heightened investor risk aversion and uncertainty, compounded by an appreciating dollar, could trigger a flight to safe assets and a pullback of capital flows from emerging economies. Morocco would face a combination of higher borrowing costs in international markets (although the share of short-term external debt is low), and lower portfolio and FDI flows.

External Economic Stress Index

Background. The external economic stress index is an indicator of the evolution of the external environment faced by a country. Its use was mandated by the IMF Executive Board for Flexible Credit Line (FCL) and PLL arrangement countries at the time of the review of these instruments in June 2014.1 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. The model was first developed at the time of the 2012 PLL arrangement request.

A01ufig3

Morocco: External Stress Index

Citation: IMF Staff Country Reports 2019, 024; 10.5089/9781484396001.002.A002

Sources: WEO; and IMF staff estimates.

Risks. The main external risks for Morocco based on the October 2018 Global Risk Assessment Matrix (G-RAM), are: (i) a protracted period of slow growth in advanced economies, particularly in Morocco’s main trading partners, resulting in lower exports, FDI, tourism, and remittances; (ii) heightened geopolitical risks resulting in higher oil prices and dislocations to capital flows and tourism receipts; and (iii) tighter global financial conditions, resulting in higher borrowing costs and disruption to portfolio flows.

Proxy variables. (i) Lower exports, remittances, FDI, and tourism receipts from Europe are captured by growth in the euro area, Morocco’s main trading partner (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 portfolio flows and borrowing costs are captured by the emerging markets volatility index (VXEEM).

Weights. A data-based approach was used to determine the weights for each variable. Weights for each proxy variable are estimated using the balance of payments and IIP data as a share of GDP. The weight on euro area growth (0.580) corresponds to the sum of exports, FDI, remittances, and tourism receipts from Europe, the weights on the VXEEM (0.095) correspond to the stocks of external debt and equity, and the weight on the change in oil price (0.324) corresponds to oil imports. The highest weights fall on euro area growth and the oil price (based on their relative contribution to items on the balance of payments/financing needs). The VXEEM has a smaller weight reflecting the small size of portfolio flows in the financial account.

Baseline scenario. The baseline corresponds to the October 2018 World Economic Outlook (WEO) projections for euro area growth and oil prices, while the VXEEM is consistent with volatility index (VIX) futures as of end-September 2018. The graph suggests that, at the current juncture, external economic stresses have declined relative to the July 2016 request (solid lines). This reflects higher oil price path assumptions being largely offset by stronger EA growth and improved VXEEM index projections.

Downside scenario. The downside scenario is broadly consistent with staff’s adverse scenario and assumes euro area growth that is 0.5 percentage point lower than the baseline, a US$10 increase in oil prices relative to the baseline, and an increase in the VXEEM by two standard deviations.2 The graph suggests that in a downside scenario, external economic stresses are less severe than those at the July 2016 request.

Overall assessment. The external economic stress index for Morocco suggests that external pressures under the baseline have abated in recent years but increased more recently. However, the model does not include a proxy for geopolitical risk (given the difficulty in choosing such a variable). At present, this would suggest a relatively more heightened stress index.

1 See “The Review of the Flexible Credit Line, the Precautionary and Liquidity Line, and the Rapid Financing Instrument,” IMF Policy Paper, January 2014.2 The scenario combines a US$15 increase in oil prices and a US$5 drop consistent with lower growth in the euro area.

37. Access level. Staff’s assessment of potential balance of payments needs is predicated on a downside scenario of a disruption in capital flows, adverse oil shock, and declining tourism revenues stemming from geopolitical tensions and the related drop in investor confidence, which is consistent with past crises and with recent Flexible Credit Line country cases (Figure 6). Morocco’s reserves level would not be comfortable enough to cover the financing need generated under this scenario. Indeed, staff’s preliminary assessment is that the financing gap, determined by the shortfall of reserves relative to 80 percent of the Fund’s ARA metric, would be consistent with a total access level of 240 percent of new quota (about US$3 billion) by 2020 (Box 3), to be disbursed in two tranches of US$1.7 and US$1.3 billion over 2019 and 2020, respectively. This access level would be lower than in the 2016 PLL arrangement, reflecting the improved balance of external risks. Indeed, some of the downside scenario risks under the previous PLL did materialize – even though the authorities did not draw on PLL resources.

38. Exit strategy. Staff considers that the authorities’ policies, as described below, will be instrumental to continue reducing fiscal and external vulnerabilities and strengthening the economy’s resilience. Under the baseline scenario, the primary fiscal deficit would fall below the debt-stabilizing balance, and public debt would be put firmly on a downward path. The current account deficit by the end of the arrangement would be close to the norm expected for an emerging market country like Morocco, while reserves would have reached a comfortable level (about 90 percent of the Fund’s ARA metric). This should position Morocco well for exiting the PLL when global and regional risks subside, especially those stemming from oil prices, euro area growth prospects, or geopolitical risks. The authorities will need to communicate publicly about their exit strategy.

Access Level

The adverse scenario assumes the simultaneous materialization of key downside risks to Morocco’s balance of payments. In line with the October 2018 Global Risk Assessment Matrix (G-RAM) and World Economic Outlook (WEO), the adverse scenario entails a growth slowdown in Morocco’s euro area trading partners, an upward shock to oil prices, heightened security risks in the Middle East and North Africa that could disrupt capital flows and tourism receipts,1 and more volatile financial conditions. The shocks are broadly in line with recent FCL country cases.2 The combined impact of these shocks would result in:

Comparison of Adverse Scenario Assumptions

article image

  • A net increase in the oil price by about US$10. This includes: (1) an increase by US$15 attributable to a negative shock to oil producers related to geopolitical risks and supply bottlenecks; and (2) a decrease by US$5 attributable to the spillover effects on commodity markets of weak euro area growth. This would impact the current account through higher energy imports.

  • A decline in euro area trading partners’ growth by about 0.5 percentage point, broadly consistent with the October 2018 WEO downside scenario. This would impact the current account through lower exports and remittances (based on estimated elasticities with euro area growth).

  • A net decline in tourism receipts by about 15 percent relative to the baseline, driven by a decline in euro area growth (about half of the decline; based on the 2008–13 average historical response of tourism revenues to declines in euro area growth) and heightened geopolitical risks (another half of the decline).

  • A decline in FDI inflows by 15 percent and equity portfolio outflows of about 60 percent relative to the baseline. This is driven by both the decline in euro area growth and the increase in geopolitical risks.

  • An increase in interest rates by 100 basis points above the baseline, reflecting increased risk aversion, tighter global financial conditions, and geopolitical uncertainty.

The financing gap is defined as the level of financial support needed to bring gross international reserves under the adverse scenario to 80 percent of the Fund’s ARA metric. The above adverse scenario results are consistent with a potential financing need of about US$3 billion by the end of 2020 (equivalent to a total access level of 240 percent of the quota).

Size of Shock and PLL Financing, US$ millions

article image
1 The potential impact of heightened security risks on tourism was reduced vis-à-vis the 2016 PLL request—while these risks did materialize in the Middle East in 2016–18, Morocco’s tourism revenues proved resilient.2 A tightening of financial conditions and intensification of trade and political tensions were the main possible shocks in the recent FCL requests from Mexico and Colombia.

Capacity to Repay the Fund

39. Morocco has no outstanding debt to the Fund. Full drawing under the proposed PLL arrangement—which the authorities intend to treat as precautionary—would bring Morocco’s outstanding use of GRA resources to an amount equivalent to SDR 2.15 billion.

40. Were the full amount available under the proposed PLL arrangement in the first and second year to be purchased in 2018 and 2019 (Table 5):12

  • Morocco’s total external debt would remain moderate, with Fund credit reaching about 5 percent of total external debt at its peak.

  • External debt service would increase over the medium term. Morocco’s projected debt service to the Fund would peak in 2023 at about 1 percent of GDP.

41. The proposed arrangement would represent manageable credit and liquidity risks to the Fund (see Table 7). This assessment is supported by the rigorous ex ante and focused ex post conditionality. In line with the proposed access, the one-year forward commitment capacity (FCC) of the Fund would decrease by about 1.2 percent to about SDR 181.7 billion (Fund finances as of November 23, 2018) upon approval of the proposed PLL arrangement. The proposed access represents a small share of current total GRA commitments (1.5 percent), suggesting that the effect on the Fund’s liquidity would remain manageable. Should the authorities fully draw the proposed PLL arrangement, GRA credit to Morocco would be equivalent to about 4 percent of current GRA credit outstanding (as of November 23, 2018). This amount represents about 12.4 percent of the Fund’s end-FY2018 precautionary balances. Peak charges would be equivalent to about one-third of the current burden-sharing capacity.

Staff Appraisal

42. Staff assesses that Morocco continues to meet the qualification criteria for access to a new PLL arrangement. Morocco has made significant strides in reducing domestic vulnerabilities in recent years despite the pick-up in oil prices and lower grants. The authorities have a track record of sound policy management and are firmly committed to implementing sound policies and accelerate the pace of reforms that have recently resumed after the slowdown of the last two years.

43. Building on progress made under past PLL arrangements, this new arrangement would help enhance macroeconomic resilience and move towards a new growth model that is more private sector-led, broad-based and inclusive. The authorities’ policy priorities include continued fiscal prudence, progress toward exchange rate flexibility, reforms of taxation, governance, oversight of state owned enterprises, and sustained improvement of the business environment. They are putting great emphasis on reducing social and regional inequalities. They also aim to increase access and the quality of public services through the implementation of an ambitious structural reform agenda will aiming to secure macroeconomic resilience, raise growth potential, and further reduce inequality and unemployment, particularly among the youth.

44. The authorities’ policy package appropriately addresses short- and medium-term challenges. Staff considers that the program described in the authorities’ written communication is appropriate. The fiscal consolidation in 2018–19 would accommodate the temporary impact of higher oil prices and address social and investment spending needs without jeopardizing medium-term sustainability. Their five-year privatization program would also bring about economic efficiency and performance improvements in the SOE sector.

45. Staff recommends the approval of a new two-year PLL arrangement of SDR 2.15 billion (240 percent of quota), of which 140 percent would be available in the first year. This access level is consistent with the size of downside risks as evaluated in staff’s adverse scenario. The phasing is appropriate to help insure against the possibility that several independent risks materialize at the same time. The two-year duration is consistent with the nature, and potential persistence, of these external risk factors.

46. Staff considers that the proposed PLL arrangement carries low risks to the Fund. While Morocco intends to treat the PLL as precautionary, GRA credit to Morocco would be low even with a drawing. In addition, risks would be further mitigated by Morocco’s relatively low external debt levels and debt service obligations.

Figure 6.
Figure 6.

Morocco and Selected Countries: Comparing Adverse Scearios 1

(Probability Density)

Citation: IMF Staff Country Reports 2019, 024; 10.5089/9781484396001.002.A002

Source: IMF staff calculations.1 The countries shown are previous FCL/PCL/PLL arrangements, numbered consecutively by country. MEX6 is thus the current FCL arrangement.
Table 1.

Morocco: Selected Economic Indicators, 2015–23

article image
Sources: Moroccan authorities; and IMF staff estimates.

Refers to the macro framework for the Third Review Under PLL Arrangement in Country Report No. 18/58.

Based on revised ARA weights.

Table 2a.

Morocco: Budgetary Central Government Finance, 2015–23

(Billions of dirhams)

article image
Sources: Ministry of Economy and Finance; and IMF staff estimates.

Refers to the macro framework for the Third Review Under PLL Arrangement in Country Report No. 18/58.

Includes capital transfers to public entities.

Table 2b.

Morocco: Budgetary Central Government Finance, 2015–23

(Percent of GDP)

article image
Sources: Ministry of Economy and Finance; and IMF staff estimates.

Refers to the macro framework for the Third Review Under PLL Arrangement in Country Report No. 18/58.

Includes capital transfers to public entities.

Does not include deposits at the Treasury from third parties (SOEs, private entities and individuals).

Table 3.

Morocco: Balance of Payments, 2015–23

(In billions of U.S. dollars, unless otherwise indicated)

article image
Sources: Ministry of Finance; Office des Changes ; and IMF staff estimates and projections.

Refers to the macro framework for the Third Review Under PLL Arrangement in Country Report No. 18/58.

Based on WEO data for actual and projections.

Excluding the reserve position in the Fund.

Based on revised ARA weights.

Public and publicly guaranteed debt.