IMF Executive Board Concludes 2012 Article IV Consultation with MoroccoPublic Information Notice (PIN) No. 13/13
February 5, 2013
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On February 1, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Morocco.1
Morocco has a track record of strong macroeconomic policies that, over the last decade, contributed to solid growth, low inflation, comfortable external reserves, financial deepening, and poverty reduction. These favorable developments have helped Morocco cushion the impact of the international crisis and respond to pressing social needs. In the context of political transitions in many countries in the region and high social demands, a new constitution was adopted in July 2011 in order to pave the way for broad-ranging political changes and reforms, including strengthened roles for the head of government and Parliament. Morocco’s positive record helped it qualify last August for a 24-month arrangement under the Precautionary and Liquidity Line (PLL), which aims to provide insurance against external shocks. More recently, this performance has been challenged by a deteriorating external environment and, in 2012, poor rainfall. Growth is expected to slow in 2012 to 3.2 percent, largely due to a lower-than-average cereal crop, but nonagricultural GDP growth is projected to remain robust at around 4.5 percent. Headline inflation has remained subdued at 1.6 percent (year-on-year) in November 2012, despite significant increases in the prices of several subsidized energy products in June, as part of the government’s effort to contain the fiscal cost of subsidies. Core inflation (excluding food and transport) was close to zero due to the large negative contribution of lower communication tariffs. Despite relatively strong growth, unemployment has remained around 9 percent since 2010.
The fiscal deficit should decline to about 6 percent of GDP in 2012, thanks to a combination of measures notably the increase in some energy-administered prices in June and the control of nonessential spending. Delays in the adoption of the 2012 budget and in disbursement of external grants resulted in lower-than-projected investment. This, in turn, helped offset the subsidy bill that reached about 6.2 percent of GDP. The 2013 budget envisions a further reduction of the deficit by 1.4 percent point of GDP to 4.7 percent of GDP. For the medium term, the authorities aim at a deficit below 3 percent of GDP.
The current account deficit is expected to increase to 8.8 percent of GDP in 2012 as import growth, pushed by energy-related imports, outpaced slow export growth. Tourism receipts and remittances are projected to fall slightly relative to 2011, reflecting the deterioration in the European economy. While gross international reserves (GIR) fell steadily in 2011 and most of 2012, they stabilized at around four months of imports in the last quarter. The issuance of a US$1.5 billion sovereign bond at favorable terms in late 2012 provided additional support in this regard.
Monetary conditions have remained broadly supportive. Lower international reserves had a substantial restrictive impact on bank liquidity, contributing to slowing credit growth to 7 percent in 2012. To help fill the liquidity shortage, the central bank stepped up its liquidity injection, including by extending eligible collateral for its repo. The policy interest rate was cut by 0.25 percentage point to 3 percent in March 2012 and has remained unchanged since then. In September 2012, it also cut its reserve requirements for banks by 2 percentage points to 4 percent.
Morocco’s social indicators have improved over the past decade. Higher economic growth, lower unemployment, better health and educational outcomes, better access to basic infrastructure, and a marked reduction in poverty rates are tangible evidence of the progress made in fostering inclusive growth. However, unemployment remains high particularly among the youth. The authorities’ reform agenda includes measures to boost potential growth, tackle inequalities in the distribution of income and access to health care, particularly across regions as well as reduce unemployment.
Executive Board Assessment
Executive Directors commended the authorities for their overall sound macroeconomic policies, which, over the past decade, have helped deliver solid growth, low inflation, and poverty reduction despite continued high youth unemployment. This strong performance has been challenged recently by external and domestic shocks in a context of pressing social demands. Directors agreed that the authorities’ program of fiscal consolidation, prudent monetary and financial policies, and structural reforms to boost competitiveness and inclusive growth and rebuild shock buffers is appropriate to deal with these challenges. They emphasized that the outlook hinges on the timely and sustained implementation of the reform agenda.
Directors welcomed the fiscal consolidation envisioned in the 2013 budget and beyond to help maintain external and fiscal sustainability, while emphasizing that consolidation should be as growth-friendly as possible. They welcomed the steps being taken toward reforming the subsidy system, and called on the authorities to move ahead resolutely in this area to aid medium-term fiscal adjustment and better assist the most vulnerable groups of the population. Directors also stressed the importance of moving ahead with pension reform to ensure the system’s viability. They encouraged a careful approach to fiscal decentralization so as not to increase fiscal risks. They welcomed plans to lower the ratio of the government wage bill to GDP and accelerate tax reforms. Directors concurred that clear communications and high-quality social dialogue will be key to successful implementation of the fiscal reform agenda.
Directors considered the current monetary policy stance to be appropriate. They encouraged the authorities to move toward greater exchange rate flexibility to enhance external competitiveness and the economy’s ability to absorb shocks, in coordination with other macroeconomic and structural policies.
Directors called for stepped-up efforts to foster higher and more inclusive growth, including by boosting youth employment and reducing inequalities in income and in access to health care and education. They underscored the importance of structural reforms to enhance external competitiveness and diversify the export base. They welcomed planned reforms to improve the business climate and promote small and medium-sized enterprises, both crucial to accelerate private-sector-led growth.
Directors noted that the financial sector remains sound overall. They commended the authorities’ efforts to further strengthen financial regulation and supervision, particularly in light of increasing international exposure of Moroccan banks. In this regard, they welcomed the authorities’ interest in an Financial Sector Assessment Program update. Directors encouraged the authorities to strengthen legislation against money laundering and terrorism financing, and to intensify reforms to promote financial development and deepening.
Directors agreed that Morocco continues to meet the qualification criteria for a Precautionary and Liquidity Line (PLL) arrangement. They noted that the arrangement provides useful insurance against exogenous shocks and that the program supported by the PLL is on track. Directors welcomed the authorities’ intention to continue to treat the PLL as precautionary.