Morocco -- Preliminary Findings of the 2009 Article IV Consultation
November 20, 2009
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
November 13, 2009
1. An IMF mission visited Rabat from November 2 to 13, 2009 to conduct the 2009 Article IV discussions. The mission wishes to thank the Moroccan authorities for their excellent cooperation and the highly constructive discussions.
2. The mission took place in a global context that has deteriorated significantly since 2008, even if some signs of recovery have begun to appear. As noted below, Morocco has not escaped the effects of the global crisis, but these effects have been relatively limited for several reasons. First, for some years economic activity has been driven by domestic demand, which has compensated in part for the fall in global demand. In addition, the financial sector has not been affected by the global financial crisis, mainly because of its limited exposure to international markets. Moreover, a declining public debt and sound government finances have allowed the authorities to respond to the crisis through pro-active policies. These measures were taken in coordination with economic actors, in the context of close monitoring of the economic and financial situation, and were also supported by increased investment on the part of public enterprises. Finally, the positive effects of a record cereal harvest also contributed to growth in 2009.
3. Despite a deterioration of economic situation of its trading partners, particularly in the Euro area, Morocco’s economic performance has remained solid. GDP grew by 5.6 percent in 2008, despite the declines in the manufacturing, tourism, and export sectors that were registered in the last months of the year. In light of the recent stabilizing trends in these sectors and relatively sustained domestic demand, real non-agriculture GDP is expected to grow by about 2½ percent in 2009. Combined with the record cereal production, overall GDP growth is projected at about 5 percent. The consumer price index is expected to fall from 3.9 percent in 2008 to below 2 percent in 2009, partly as a result of the global decline in commodity prices. The unemployment rate remained below 10 percent in the third quarter of 2009. Despite the progress achieved, youth unemployment is still high, and reducing it remains an important challenge.
4. The mission expects the current account to improve after its deterioration in late 2008 and early 2009. Specifically, after having reached over 5 percent of GDP in 2008, the deficit should fall to about 4½ percent in 2009. This is based on the assumption that the trend toward a stabilization of the trade balance, tourism receipts and transfers noted during the third quarter of 2009 will continue until the end of the year. At the same time, the capital account is expected to deteriorate, reflecting the marked decline in FDI. Gross international reserves declined in late 2008 and early 2009, but have recently begun to increase again. The mission envisages that these reserves will remain comfortable through the end of the year at seven months of imports.
5. A budget deficit is expected in 2009, as a result of accommodative policies, following the strong fiscal performance of recent years. In 2008, the budget surplus was 0.4 percent of GDP, thanks to good performance on the tax revenue side, which more than compensated for the increased expenditures for oil and food subsidies. The budget deficit in 2009 is expected to be about 2.5 percent of GDP. Revenues will fall significantly as a percentage of GDP, owing to the slowdown in non-agricultural activity and lower tax rates, in addition to the absence of certain exceptional factors that were in play during 2008. On the expenditure side, the government has announced a series of measures aimed at stimulating the economy, including a better execution of public investment and support for the export sectors. These expenditure increases have been partially compensated for by reduced subsidies which, given the fall in world prices, should be well below the 2009 budget estimates. Public debt will fall from 53.5 percent of GDP in 2007 to 47.3 percent in 2008 and is expected to decrease slightly to 46.7 percent in 2009.
6. The global economy shows signs of improvement, influenced by the strong performance of the Asian economies and signs of recovery in other countries. However, the recovery is slow and activity remains below pre-crisis levels. Although receding, downside risks are still present, including a premature exit from accommodative fiscal and monetary policies. The global economy remains vulnerable to shocks such as an increase in the petroleum price, the H1N1 flu, protectionism, and geopolitical tensions. Over the medium term, growth is expected to resume at more moderate levels, given the permanent losses of potential growth that generally occur following financial crises.
7. Morocco’s economic outlook is expected to improve in 2010, but remains dependent on external developments. Although weak, the expected growth in the Euro zone—Morocco’s main trading partner—should contribute to a gradual recovery of exports of goods and services, as well as transfers. Moreover, taking into account the loosening of fiscal policy in 2010 (see below), which will help sustain domestic demand, non-agricultural GDP is expected to grow by about 4 percent in 2010. In addition, agricultural GDP is expected to resume its long-term trend, so that total GDP growth will reach between 3 and 3½ percent. The current account deficit will remain stable at about 4½ percent of GDP in 2010, before gradually decreasing over the medium term. Continued growth of the phosphate sector should help economic activity and exports. A deterioration of the terms of trade, resulting from increased oil prices or a drop in phosphate prices, or from weaker growth in tourism and transfer receipts caused by slower recovery in the Euro zone, could adversely affect the outlook with respect to growth and the current account.
8. The global context presents challenges as well as opportunities. The authorities’ policies are aimed particularly at growth, reducing unemployment and poverty, and sustainable improvements in living standards, while maintaining macroeconomic stability. Given that a strategy focused on domestic demand may not result over time in the desired growth rates, it is important to strengthen competitiveness, particularly with regard to traded goods. However, this task will be difficult in a context where potential growth in Europe has been reduced. Macroeconomic policies, structural reforms, and social policies must be coordinated to meet these objectives.
Economic policy issues
9. The consolidation of public finances in previous years created the fiscal space necessary for adopting countercyclical policies aimed at stimulating growth. In this context, the 2010 Budget Law anticipates a budget deficit of 4½ percent of GDP (excluding privatizations proceeds), thus providing significant support to the economy. This support will come in part from an increase in capital expenditure, above the already high 2009 level. In addition, the tax burden will be reduced following implementation of the second phase of the income tax reform, including an increase in the tax threshold, tax brackets, and a reduction of rates. A decrease in corporate tax revenue is also expected, owing to the slowdown in private sector activity in 2009 and 2010.
10. However, the crisis is a temporary phenomenon. It is therefore important to place the 2010 public finance framework within a medium-term outlook aimed at bringing the deficit to under 3 percent of GDP, in order to stabilize the debt-to-GDP ratio and allow more room for conducting monetary policy. While fiscal policy is appropriately accommodative in response to the crisis, Morocco has benefited greatly from macroeconomic stability and favorable borrowing costs resulting from the strong fiscal position achieved in recent years. As a result, the deficit should be gradually lowered beginning in 2011, which will stabilize or even lower the debt-to-GDP ratio, without endangering recovery by a premature withdrawal of policies aimed at supporting the economy. Fiscal consolidation should come from an increase in revenue or an adjustment in expenditure resulting from the implementation of reforms, including civil service and subsidy reforms. This strategy would be reinforced by a medium-term expenditure framework.
11. Considerable progress has been achieved in the area of fiscal reform. The mission encourages the authorities to continue these efforts, particularly by further simplifying the tax regime, including reform of the VAT and customs tariffs, by reducing the number of rates and exemptions and extending the scope of reimbursements for VAT credits. The overhaul of VAT rates could also lead to a reduction in the normal rate, with a neutral impact on revenue. These changes will help expand the tax base through increased taxation of the informal sector. In addition, compliance with tax regulations and control procedures will be less complex, permitting a more equitable distribution of the tax burden.
12. Considerable progress has also been achieved in the area of trade liberalization, with a reduction in the average nominal tariff, according to the WTO, from 33 percent in 2002 to 20 percent in 2008. In 2008, the average effective tariff (customs revenue divided by total imports) was about 5 percent. Morocco would nevertheless benefit from reducing the highest rates and harmonizing certain rates, with an aim to further reducing the complexity of the customs regime and facilitating its administration. The mission also noted the importance of reducing the high import tariffs applicable within the framework of the most-favored-nation regime, as well as ensuring that the various free trade agreements are coherent. These changes should be made with a view to avoid increasing the effects of diverting trade flows.
13. The authorities have taken the first important steps toward reforming the subsidy system, which should help reduce fiscal risks while enhancing the effectiveness of assistance for vulnerable populations. The volume of subsidized wheat has been reduced and a pilot program aimed at distributing targeted assistance, in cash, has been launched. Additional steps in this direction, notably by reforming fuel subsidies will be important. An overall reform program should be developed, within which current subsidies should be eliminated at the same time new targeted assistance is introduced. This approach will focus on assistance to disadvantaged populations without increasing the overall fiscal cost.
Monetary and exchange rate policies
14. The Central Bank has pursued policies adapted to the economic context. In the absence of inflationary pressures, it reduced its key interest rate by 25 basis points in March 2009, bringing it to 3.25 percent. Within the context of increased structural liquidity needs, due principally to reduced net foreign exchange inflows, Banque Al-Maghrib (BAM) gradually reduced reserve requirements for banks from 15 to 8 percent during 2009. It also increased the volume of its money market interventions. The mission noted the authorities’ intention to adjust monetary policy in response to economic and financial conditions.
15. The exchange rate regime, under which the dirham is pegged to a basket of currencies composed essentially of the Euro, has served Morocco well, contributing to macroeconomic stability, and particularly to price stability. Increased flexibility in monetary and exchange rate policies could help Morocco better adapt to changes in the international environment. In particular, implementing an explicit inflation targeting framework combined with increased flexibility in the exchange rate could be beneficial, particularly in a context where inflationary pressures are low.
16. The mission considers that the prerequisites for adopting a monetary policy regime based on inflation targeting have essentially been met, as the Central Bank has the necessary independence, expertise, and statistical resources, as well as a complete range of instruments that it continues to refine. Medium-term price stability is already the priority objective of the Bank, and its analytical and operational framework resembles closely that of central banks that have adopted explicit inflation targets. Moreover, inflation is low, the financial system is robust, and the fiscal situation is largely under control, while the mission noted the importance of continuing to ensure the medium-term sustainability of the public debt.
17. With respect to the exchange rate regime, a number of factors that have emerged over the past year point to the benefits of increased liberalization. The current account position is less favorable over the medium term than previously anticipated. The risks linked to the transition to such a framework, particularly the risk of imported inflation, are low in the current international context. In addition, the potential negative implications for the balance sheets of banks, businesses, and households are very limited, particularly owing to the low level of their foreign currency exposure.
18. Morocco’s financial system remains robust. For this reason, but also because of its limited integration with the external world, it has not felt the direct effects of the global financial crisis. Rather, it is the slowdown of activity in certain sectors, particularly real estate, that could lead to a slight increase in nonperforming loans.
19. After witnessing growth of over 20 percent in 2007 and 2008, related to most sectors, particularly the real estate, credit growth is expected to slow to about 12-13 percent in 2009. This is still quite high and continued vigilance is needed. Nonperforming loans fell considerably, from 15.7 percent in 2005 to 5.5 percent in June 2009. However, the figures reflect in part a process of cleaning up the balance sheets of banks by writing off old nonperforming loans that are fully provisioned, and thus do not reflect only recent credit trends.
20. Aware of the rapid expansion of credit, the authorities have launched several initiatives aimed particularly at enhancing information. A key measure was establishing a credit bureau with which financing institutions are required to consult. The bureau, managed by a private entity, is currently operational and its activities are continually expanding. The authorities are also working on developing a real estate price index and implementing periodic surveys to gain a better understanding of the financial position of households and businesses.
21. With respect to macro-prudential policies, implementation of Basel II system continues, with priority given to Pillar 2 concerning supervision. For Pillar 1, the standardized approach was introduced in 2007 and the authorities intend to move to the advanced approach beginning in 2011. The capital adequacy ratio (CAR) of banks was raised at end-2008 from 8 to 10 percent of weighted assets. The authorities have announced their intention to raise this ratio to 12 percent for certain banking institutions, based on their risk profile, while taking into account the overall economic situation. The authorities have also continued to strengthen their capacity in stress testing and macro-prudential analysis.
22. With respect to liberalization of the capital account, although economic operators have not fully taken advantage of the possibilities for placement abroad that have been opened to them, the mission notes that the authorities are committed to continue the gradual opening process initiated by the reforms in 2007. Liberalization should be pursued in a prudent manner, consistent with the progress achieved in moving to a more flexible exchange rate regime.
Social and structural policies
23. The authorities have undertaken a wide range of reforms aimed at increasing the productivity and competitiveness of the Moroccan economy. To this end, the recently announced reform of the judicial system should lead to a marked improvement in the business climate. By boosting agricultural productivity, the Morocco “Plan Vert” could significantly increase the income of rural inhabitants and reduce the economy’s dependence on weather conditions. Efforts in other sectors, such as energy and tourism, should also bear fruit. Coherent social policies, particularly in the areas of education and training, are needed to develop human resources, which are a key element of a competitive economy. The success of this comprehensive reform package is essential in order to achieve the objectives set by the authorities, including sustained and lasting growth, as well as reduced unemployment and poverty.