## cr17146 — Morocco: Executive Summary and Staff Report (IMF, May 1, 2017)

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### Context and macroeconomic snapshot
- Macroeconomic vulnerabilities have declined since 2012, but growth remains sluggish and sensitive to volatile agricultural output.
- External imbalances are contained.
- Fiscal deficit declined between 2012–15, but fiscal and external year-end objectives were missed in 2016.
- New government confirmed commitment to resume fiscal adjustment and meet program objectives, including bringing public debt to about 60 percent of GDP by 2020.
- Key recent indicators:
  - Growth: 1.1 percent in 2016 (against 4.5 percent in 2015).
  - Unemployment: 9.4 percent in 2016 (9.7 percent in 2015); youth unemployment 22.5 percent in 2016 (20.8 percent in 2015).
  - Current account deficit: 4.4 percent of GDP in 2016.
  - International reserves: 6.6 months of imports or 99 percent of the standard IMF ARA metric (129 percent when adjusted for capital controls) at end-2016.
  - Fiscal deficit: latest estimate for 2016 is 4.1 percent of GDP (authorities’ objective was 3.5 percent).

### PLL arrangement, qualification, and review recommendation
- PLL arrangement approved July 2016: amount SDR 2.504 billion (or 280 percent of quota), equivalent to US$3.556 billion.
- Executive Board's 2016 Article IV consultation gave a generally positive assessment.
- Staff assessment and recommendation:
  - Morocco continues to meet PLL qualification criteria.
  - Performs strongly in four of five PLL areas (external, monetary, financial, and data); does not substantially underperform in the fiscal area.
  - Staff recommends completion of the first review under the PLL arrangement.

### Recent program performance and fiscal developments
- Program status:
  - End-September 2016 indicative target met (deficit 2.6 percent of GDP vs. target 2.7 percent).
  - September 2016 quantitative ITs were met.
  - End-March 2017 fiscal deficit IT met; end-March 2017 reserves IT missed due to widening current account since July 2016.
  - Authorities have not drawn on the arrangement and treat it as precautionary.
- Growth and labor market:
  - Growth estimated 1.1 percent in 2016; non-agricultural activity subdued.
  - Unemployment: 9.4 percent (2016); youth unemployment 22.5 percent (2016).
- Fiscal drivers for 2016 outcome:
  - Revenue shortfall from lower-than-expected growth and accelerated VAT reimbursements.
  - Increased capital spending to support growth; lower current spending partly offset.
  - First quarter 2017 preliminary data: tax revenue up 9 percent y-o-y; fiscal deficit below end-March program target.
- Monetary and financial sector:
  - BAM policy rate cut to 2.25 percent in March 2016.
  - Average inflation about 1.6 percent in 2016.
  - Credit growth recovered to 4.2 percent y-o-y by December 2016.
  - Tier 1 capital ratio: 13.7 percent in 2016.
  - NPL ratio: 7.5 percent at end-2016; provisioning comfortable but rising NPLs and credit concentration noted.

### Box: Fiscal and external data revisions for end-2016
- Revisions (percent of GDP):
  - Fiscal deficit: Art. IV projection 3.5; Latest data 4.1; Change -0.6.
  - Current account deficit: revised to 4.4 percent of GDP (from an estimated 2.9 percent).
- Fiscal table (selected rows, In percent of GDP):
  - Revenue: Art. IV projection 26.7; Latest data 26.2; Change -0.5.
  - Taxes: 22.0; 21.5; -0.5.
  - Net acquisition of nonfinancial assets: 5.2; 5.7; 0.5.
  - Overall balance: -3.5; -4.1; -0.6.
  - Overall balance excluding grants: -4.5; -5.1; -0.6.
- External causes of widening CAD: temporary higher imports of capital goods and food (drought), weaker phosphate prices; remittances and tourism receipts remained strong.
- Reserve accumulation in 2016 driven largely by higher external borrowing by private sectors.

### Reform priorities and near-term policy measures
- Fiscal policy and public financial management:
  - Implemented new organic budget law (OBL) and adopted pension reform.
  - Medium-term objective: reduce public debt to about 60 percent of GDP by 2020.
  - Policy measures recommended:
    - Accelerate tax reforms per 2013 national tax conference: boost VAT revenues, reduce tax exemptions (e.g., agricultural sector).
    - Better enforce tax payments by self-employed and liberal professions.
    - Ensure sound PFM at local level as part of fiscal decentralization.
    - Pursue comprehensive civil service reform.
    - Enhance financial oversight of SOEs; draft SOE governance law to be submitted.
- Financial sector and central bank governance:
  - Implement 2015 FSAP recommendations; increase supervisory capacity.
  - New central bank law expected in 2017 to strengthen independence and clarify financial stability role.
  - Enhance crisis management and resolution frameworks; introduce counter-cyclical capital buffers; prepare recovery plans for systemically important institutions.
- Exchange rate and monetary policy transition:
  - Entered final preparatory phase for greater exchange rate flexibility, expected to start gradually by mid-2017.
  - Aim to transition toward inflation targeting; preconditions largely in place.
- Structural reforms to boost inclusion and job creation:
  - Improve education quality, adjust labor market regulations, increase female labor force participation.
  - Improve business environment, credit information systems, and collateral frameworks.
  - Priorities: appoint Competition Council members; implement anti-corruption strategy; action plan for 2015 national employment strategy.

### Outlook and projection highlights
- Growth projections and inflation:
  - Growth expected to rebound to 4.5 percent in 2017 (positive base effect from agriculture) and stabilize around 4.6 percent over the medium term contingent on reforms.
  - Inflation expected at 1.1 percent in 2017; projected to stabilize around 2 percent over the medium term.
- External and reserves outlook:
  - Current account deficit expected to narrow to about 3.3 percent of GDP in 2017; remain in the 1.5–2 percent of GDP range thereafter.
  - FDI inflows projected to remain robust; reserves expected to rise to around 8 months of imports or 119 percent of the standard ARA metric (157 percent of adjusted metric) in the medium term.
- Fiscal trajectory:
  - Overall fiscal deficit expected to decline to 3.5 percent of GDP in 2017 and to stabilize at 2.1 percent of GDP in the medium term, consistent with authorities’ objective to reduce public debt to about 60 percent of GDP by 2020 (text indicates continuation ended abruptly in source).
  - Revision to 2017 fiscal deficit relative to PLL request: 0.5 percent of GDP higher, reflecting lower revenues (1.4 percent of GDP), lower current spending (1.1 percent of GDP), and higher capital spending (0.2 percent of GDP).

### Risks, stress scenarios, and External Stress Index
- Balance of risks: tilted to the downside.
  - Downside channels: weaker euro area growth, geopolitical risks, tighter/volatile global financial conditions.
  - Upside: continued lower energy prices; stronger-than-expected agricultural sector growth in 2017.
- External Stress Index composition and weights (as of PLL request stage):
  - Proxy variables: euro area growth; oil prices; VXEEM (emerging markets volatility index).
  - Weights: euro area growth 0.580; VXEEM 0.095; change in oil price 0.324.
  - Downside scenario assumptions: euro area growth one percentage point lower than baseline; US$15 increase in oil prices relative to baseline; VXEEM increase by two standard deviations.
  - Baseline uses April 2017 WEO projections and VXEEM consistent with VIX futures as of April 21, 2017; current juncture stresses marginally declined relative to July 2016.

### External position, market access, and capacity metrics
- Trade and exports:
  - Emerging sectors account for 33 percent of total exports (2000: 14 percent).
  - External debt about 33 percent of GDP at end-2016; expected to decline to about 25 percent of GDP over the medium term.
- Sovereign access and debt structure:
  - Morocco issued EUR 1 billion in June 2014; OCP issued US$1 billion Eurobond in April 2015.
  - Average maturity of public external debt: 8 years and 6 months currently.
- Reserve adequacy (end-2016 metrics):
  - nearly 7 months of imports,
  - 99 percent of the standard ARA metric,
  - 129 percent of the metric adjusted for capital controls.
- Capacity-to-repay indicators if entire PLL drawn:
  - Fund obligations would represent a maximum of 8.1 percent of total external debt over projection period.
  - Debt service: 21 percent; Gross international reserves: 13.4 percent; Exports: 9.7 percent.
  - In a shock-based drawdown scenario (illustrative): reserves may be 25 percent lower and exports 6 percent lower, suggesting peak IMF credit ratios of 17.9 percent and 10.3 percent instead of 13.4 percent and 9.7 percent.

### Data adequacy, safeguards, and program monitoring
- Data transparency and integrity: data provision and quality are fully adequate; Morocco subscribes to the Special Data Dissemination Standard.
- Safeguards for BAM:
  - 2015 assessment found robust safeguards framework.
  - BAM implemented all but two recommendations: strengthen BAM law on autonomy and governance; implement IFRS.
  - Draft central bank law to be submitted to Parliament in mid-2017.
  - BAM decided to maintain current accounting standards and improve financial statement disclosures.

### Staff appraisal: priorities and required policy actions
- Program remains on track despite fiscal consolidation pause in 2016.
- Essential near-term policy requirements:
  - Resume fiscal consolidation to meet authorities’ objective of reducing public debt to 60 percent of GDP by 2020.
  - Reach fiscal deficit targets of 3.5 percent of GDP in 2017 and 3.0 percent in 2018.
  - Accelerate structural reforms: flexible exchange rate transition, fiscal revenue mobilization (broaden tax base, reduce exemptions), civil service reform, careful fiscal decentralization, strengthened SOE oversight, adopt amended central bank law and implement FSAP recommendations, improve business climate and labor market outcomes.
- Exit strategy:
  - Authorities should define and communicate exit strategy from PLL as buffers strengthen and exchange rate transition progresses.
  - Baseline by end of arrangement: primary fiscal deficit below debt-stabilizing balance; public debt on downward path; current account near emerging market norms; reserves at comfortable level (just under 100 percent of ARA metric; 129 percent adjusted).

### Appendix I — Written Communication (selected program commitments)
- PLL arrangement precautionary; authorities intend to draw only if unforeseen exogenous shocks occur.
- 2017 fiscal deficit target revised to 3.5 percent of GDP (from 3.0 percent) to avoid drastic reduction in public investment.
- Pension reform: gradual retirement age increases; higher contribution rates; new benefit rules; actuarial deficit reduction from 73 percent of GDP to 31 percent by 2065 targeted.
- Public financial management: OBL provisions being implemented; personnel appropriations limits in force since January 1, 2017.
- Quantitative indicative targets (selected, millions of U.S. dollars / dirham at program exchange rate 9.5695 MAD/$):
  - NIR (9/30/16 Adjusted Target): 25,981; Actual: 25,717.
  - 3/31/17 Actual NIR: 26,825; 3/31/17 Target: 26,302.
  - Fiscal deficit (cumulative since fiscal year start, millions of dirham): 9/30/16 Actual 30,629 vs. Adjusted Target 27,228; 3/31/17 Actual 9,499 vs. Target 26,973 (figures shown in Appendix tables).
- Authorities will provide IMF with necessary information to monitor program indicators.

*IMF staff report excerpt (cr17146).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Macroeconomic vulnerabilities have declined since 2012, but growth remains sluggish and sensitive to volatile agricultural output.  
- External imbalances are contained.  
- The fiscal deficit declined between 2012–15, but the fiscal and external year-end objectives were missed in 2016.  
- Following a protracted political transition, the new government has confirmed its commitment to resume fiscal adjustment and meet key program objectives, including bringing public debt to about 60 percent of GDP by 2020.  
- The outlook is subject to elevated risks, including fragile recovery in the euro area and geopolitical risks in the region.  
- Domestic challenges include reducing unemployment rates, and achieving higher and more inclusive growth.

### PLL arrangement and review
- The Executive Board's 2016 Article IV consultation gave a generally positive assessment of Morocco’s policies.  
- Considering the new government‘s commitment to sound policies and reforms agreed under the PLL arrangement, staff considers that Morocco continues to meet the PLL qualification criteria and recommends the completion of this review.  
- Key staff findings:  
  - Morocco’s economic fundamentals and policy frameworks are sound; the country is implementing (and has a track record of implementing) sound policies, and remains committed to maintaining such policies in the future.  
  - Staff assesses that Morocco continues to meet the PLL qualification criteria and performs strongly in four out of the five areas of PLL qualification (external, monetary, financial, and data), does not substantially underperform in the fifth area (fiscal), and does not face any of the circumstances under which the Fund might no longer approve a PLL arrangement.  
  - The September 2016 quantitative indicative targets (IT) were met. The end-March 2017 fiscal deficit IT was met, but the end-March 2017 reserves IT was missed due to the widening current account deficit since July 2016.  
  - The authorities have not drawn on the arrangement and continue to treat it as precautionary.

### Recent developments and performance under the program
- PLL arrangement approved in July 2016: amount SDR 2.504 billion (or 280 percent of quota), equivalent to US$3.556 billion.  
- The 2016 Article IV consultation with Morocco was concluded on January 23, 2017.  
- Political transition details:  
  - October 2016 elections followed by a protracted transition.  
  - King appointed a new Prime Minister, Saad-Eddine El Othmani, on March 17, 2017.  
  - New cabinet appointed on April 5, 2017.  
  - Completion of the first review delayed beyond end-January due to the absence of a cabinet capable to advance bills in Parliament.  
- Growth and labor market:  
  - Growth estimated at 1.1 percent in 2016, against 4.5 percent in 2015, due to a sharp slowdown in agriculture (negative base effect after record agricultural production in 2015 and a drought) and subdued non-agricultural activity.  
  - Unemployment rate decreased to 9.4 percent in 2016, from 9.7 percent in 2015.  
  - Youth unemployment increased to 22.5 percent in 2016 from 20.8 percent in 2015.  
- External position and reserves:  
  - Current account deficit estimated at 4.4 percent of GDP in 2016, larger than expected at the PLL request stage.  
  - Current account strengthened from 9.3 percent of GDP in 2012, supported by lower oil prices and strong export growth in emerging sectors such as automobiles.  
  - FDI inflows averaged 2.5 percent of GDP.  
  - International reserves exceeded the end-September indicative target, and reached 6.6 months of imports or 99 percent of the standard IMF Assessing Reserve Adequacy (ARA) metric (129 percent when adjusted for capital controls) at the end of 2016.  
- Fiscal performance:  
  - End-September 2016 indicative target under the PLL arrangement was met (deficit of 2.6 percent of GDP against an indicative target of 2.7 percent).  
  - Latest estimate for 2016 fiscal deficit is 4.1 percent of GDP, almost the same level as in 2015, but higher than the authorities’ objective of 3.5 percent of GDP, and associated with an increase in the structural fiscal deficit.  
  - Primary drivers of the 2016 fiscal outcome: revenue shortfall related to lower-than-expected growth and accelerated VAT reimbursements (to ease SME financing constraints); increased capital spending to support growth; offset by lower current spending.  
  - First quarter of 2017 preliminary data show strong tax revenue performance (9 percent increase y-o-y, despite much lower grant revenues than expected), leading to a fiscal deficit below the end-March program target.  
- Monetary and banking sector:  
  - Monetary policy accommodative; BAM reduced its policy rate to 2.25 percent in March 2016.  
  - Average inflation about 1.6 percent in 2016.  
  - Lending rates have declined and credit growth recovered to 4.2 percent by December 2016 (y-o-y), driven by household (mortgage and consumption) and investment lending.  
  - Real estate prices have declined gradually in recent years.  
  - Banks well capitalized: Tier 1 capital ratio stood at 13.7 percent in 2016.  
  - NPL ratios at 7.5 percent at the end of 2016, practically unchanged from 2015; provisioning levels are comfortable.  
  - Sources of concern: rising NPLs, credit concentration risks, and rapid expansion in Sub-Saharan Africa (SSA). Large exposure risks persist despite stricter limits than Basel III. Cross-border supervision is being strengthened.

### Box 1 — Fiscal and External Data Revisions for end-2016
- Data made available in late January differ from estimates at the time of the 2016 Article IV consultation (which were based on end-September 2016 data). Key changes: fiscal deficit of 4.1 percent of GDP in 2016 (against an estimated 3.5 percent), and a current account deficit of 4.4 percent of GDP (against an estimated 2.9 percent).  
- Fiscal deficit causes:  
  - Tax revenue shortfalls, including lower-than-expected income tax revenues (especially after October 2016) and VAT revenues (partially explained by accelerated VAT reimbursements).  
  - Higher capital spending due to stronger project execution in a low growth environment.  
  - Higher subsidies, including to public transportation.  
  - Significantly lower current spending, especially on wages, goods and services, and grants.  
- External accounts causes:  
  - Larger-than-projected trade deficit due mainly to temporary factors: higher imports of capital goods (to support infrastructure projects) and food products (due to the drought).  
  - Export growth slowed because of weaker-than-expected phosphate prices, while non-phosphate exports remained robust.  
  - Remittances and tourism receipts remained strong.  
- Reserves continued to increase in 2016, reaching just under 100 percent of the ARA metric, due mostly to higher external borrowing by private sectors.  
- Fiscal table (In percent of GDP):  
  - Revenue: Art. IV projection 26.7; Latest data 26.2; Change -0.5  
  - Taxes: 22.0; 21.5; -0.5  
  - Grants: 0.9; 1.0; 0.1  
  - Other revenue: 3.8; 3.8; 0.0  
  - Expense: 25.1; 24.7; -0.4  
  - Compensation of employees: 12.1; 11.9; -0.2  
  - Use of goods and services and grants: 7.4; 7.0; -0.4  
  - Interest: 2.7; 2.7; 0.0  
  - Subsidies: 1.2; 1.4; 0.2  
  - Other expenses: 1.8; 1.7; -0.1  
  - Net acquisition of nonfinancial assets: 5.2; 5.7; 0.5  
  - Overall balance: -3.5; -4.1; -0.6  
  - Overall balance excluding grants: -4.5; -5.1; -0.6

### Reform priorities and implementation
- Fiscal policy framework:  
  - Recent progress: implementation of the new organic budget law (OBL) and adoption of the pension reform.  
  - Over the medium term, continued efforts needed to reduce public debt to about 60 percent of GDP by 2020 and to increase fiscal buffers. Policy measures to pursue include: accelerating tax reforms in line with recommendations from the 2013 national tax conference (including measures to boost VAT revenues and reduce tax exemptions, e.g., in the agricultural sector); better enforcing tax payments by the self-employed and liberal professions; ensuring sound public financial management at the local level as part of fiscal decentralization; pursuing comprehensive civil service reform; and enhancing financial oversight of state-owned enterprises (SOE).  
- Financial sector policy framework:  
  - Authorities continue to implement 2015 FSAP recommendations, including increasing supervisory capacity.  
  - New central bank law expected to be approved by parliament in 2017; it will strengthen the central bank’s independence and clarify its role for financial stability.  
  - Enhancements to crisis management and resolution frameworks are planned.  
- Exchange rate regime:  
  - Authorities entered the final preparatory phase for the introduction of greater exchange rate flexibility, expected to be gradual and to start by mid-2017. Staff collaborating closely with authorities on operational aspects of the transition.  
- Business environment, access to finance, and labor market:  
  - Progress on property registration, setting up a business, and limiting payment delays in the public sector. Reforms to improve access to finance include strengthening credit information systems and collateral frameworks.  
  - Remaining actions: appoint members of the Competition Council; progress on implementing the national strategy to fight corruption; prepare a specific action plan to implement the national strategy for employment adopted in 2015.  
  - Priorities to support job creation and inclusive growth: improving the quality of education, adjusting labor market regulations, and increasing female labor force participation.

### Outlook and risks
- Macroeconomic projections and assumptions:  
  - Growth is expected to rebound to 4.5 percent in 2017, reflecting a strong pick up in agricultural output (positive base effect following the 2016 drought) and a slow recovery of non-agricultural activity. Over the medium term, growth should stabilize at around 4.6 percent, subject to steadfast reform implementation, including agricultural sector modernization, and continued structural reforms to improve the business climate and boost productivity.  
  - Inflation is expected to remain moderate at 1.1 percent in 2017 due to a decline in domestic food prices (following their sharp increase in 2016), in the context of an appropriately accommodative monetary policy. It is projected to stabilize around 2 percent over the medium term.  
  - Current account deficit should narrow to about 3.3 percent of GDP in 2017, and remain in the 1.5–2 percent of GDP range thereafter. Drivers: (i) continued export growth, including in higher value-added emerging sectors and recovering phosphate prices; (ii) steady imports, with slowly rising oil prices, and continuing investment-related imports; and (iii) declining grant revenues.  
  - FDI inflows projected to remain robust, helping to raise the reserves position to around 8 months of imports, or 119 percent of the standard ARA metric (157 percent of the adjusted metric) in the medium term.  
  - Overall fiscal deficit expected to decline to 3.5 percent of GDP in 2017 and to stabilize at (text ends).

- Risks: elevated, including external risks (fragile euro area recovery, geopolitical risks in the region) and domestic risks related to achieving higher and more inclusive growth and reducing unemployment.

*International Monetary Fund. EXECUTIVE SUMMARY for Morocco, May 1, 2017.*

### 2.1 percent of GDP in the medium term, consistent with the authorities’ objective to reduce

### cr17146 - 2.1 percent of GDP in the medium term, consistent with the authorities’ objective to reduce

### Fiscal outlook and deficit targets
- Authorities’ objective: reduce public debt to about 60 percent of GDP by 2020.
- Medium-term fiscal stance required: bring the fiscal deficit to about 2.1 percent of GDP.
- 2017 budget status: expected to be approved during the April 2017 parliamentary session.
- Revision to 2017 fiscal deficit relative to the PLL request: 0.5 percent of GDP higher, reflecting:
  - lower revenues: 1.4 percent of GDP (due mostly to a projected decline in various non-tax revenues, including interest income on treasury special accounts),
  - lower current spending: 1.1 percent of GDP,
  - higher capital spending: 0.2 percent of GDP (authorities intend to reduce public investment spending only gradually from their 2016 level to protect the slow growth recovery in non-agricultural sectors).
- These revisions require a small adjustment to the end-September indicative target for the fiscal deficit.
- Policy needs to achieve medium-term objectives:
  - expeditious measures to enhance tax revenues,
  - continued efforts to contain current spending,
  - identifying contingency measures to cope with a possible grant revenue shortfall.

### Risks and External Stress Index
- Balance of risks: tilted to the downside.
  - Downside channels: weak euro area growth → lower exports, tourism, FDI, remittances; geopolitical risks → increased oil price volatility and reduced tourism and investor confidence; tighter/volatile financial conditions and retreat from cross-border integration → higher borrowing costs, reduced trade and capital flows, weaker consumer/investor confidence.
  - Upside possibilities: continued lower energy prices → narrow external and fiscal imbalances; stronger-than-expected agricultural sector growth in 2017 → improvements in fiscal revenues and the public deficit for 2017.
- External Stress Index (method and composition):
  - Proxy variables:
    - euro area growth (captures lower exports, remittances, FDI, and tourism receipts from Europe),
    - oil prices (captures higher oil imports),
    - VXEEM (emerging markets volatility index; captures impact of global financial volatility on portfolio flows and borrowing costs).
  - Weights (as of the PLL request stage):
    - euro area growth: 0.580,
    - VXEEM: 0.095,
    - change in oil price: 0.324.
  - Baseline scenario: uses April 2017 WEO projections for euro area growth and oil prices; VXEEM consistent with VIX futures as of April 21, 2017; current juncture stresses have marginally declined relative to the July 2016 request.
  - Downside scenario: assumes euro area growth one percentage point lower than the baseline, a US$15 increase in oil prices relative to the baseline, and an increase in the VXEEM by two standard deviations; stresses in this scenario broadly comparable to July 2016 request.
  - Overall assessment: external pressures under the baseline have abated in recent years, but the model does not include a proxy for geopolitical risk, which at present would suggest a relatively more heightened stress index.

### PLL qualification and general assessment
- Staff assessment: Morocco continues to qualify for a PLL arrangement.
- Macroeconomic fundamentals and institutions:
  - Macroeconomic developments broadly positive despite less favorable fiscal developments in 2016 (attributed to slower growth and accelerated VAT reimbursements).
  - Reserves have further increased despite a higher-than-expected current account deficit (partly due to temporary factors).
  - Banking system remained stable.
  - Over the medium term, economic growth expected to gradually increase in a context of low inflation; public and external debts are sustainable.
- Authorities’ commitments:
  - New government committed to maintain key parameters introduced in the draft budget law and to take necessary measures to meet fiscal objectives.
  - Commitment to reduce public debt to 60 percent of GDP by 2020, requiring a fiscal deficit of about 2.1 percent of GDP in the medium term.
  - Intend to pursue structural reforms to raise potential growth and promote higher and more inclusive growth (including improving competitiveness, the business environment, and increased investment in human capital).
- Institutional capacity and policy frameworks:
  - New OBL enhancing budgetary procedures and practices; helped keep current spending below budgeted levels in 2016.
  - Authorities have previously taken swift corrective action for unforeseen grant revenue shortfalls (except in 2016).
  - During transition to the new government and pending 2017 budget approval, public expenditures and revenue collection ruled by decrees passed by the Head of Government.
  - Morocco performs well on indicators of ability to undertake countercyclical fiscal policy; scores lower in monetary policy cyclicality indicator (less relevant given pegged exchange rate regime).
  - Bank al-Maghrib (BAM) has a clear mandate; authorities intend to upgrade the monetary policy regime as part of transition to greater exchange rate flexibility and inflation targeting.
  - Morocco is in the mid-range of the World Bank’s anti-corruption and government effectiveness ranking.

### External position and market access (strengths and indicators)
- Criterion 1 — Sustainable external position:
  - Trade deficit declined between 2012 and 2015 due to decreasing international oil prices and stronger, more diversified export growth.
  - In 2016 trade deficit widened due to temporary factors (infrastructure development, drought, weaker-than-expected phosphate prices).
  - Emerging sectors account for 33 percent of total exports (2000: 14 percent).
  - External debt: about 33 percent of GDP at end-2016; expected to decline to about 25 percent of GDP over the medium term and remain sustainable and robust to standard stress tests.
  - Introduction of greater exchange rate flexibility would help competitiveness and shock absorption.
- Criterion 2 — Capital account dominated by private flows:
  - Private capital flows constitute about 82 percent of the capital account; FDI is the largest component.
  - Private external debt: about 11.1 percent of total debt or 3.9 percent of GDP.
  - Public capital flows largely loans from bilateral and development partners.
- Criterion 3 — Sovereign access to international markets:
  - Morocco has issued international bonds at favorable terms; government raised EUR 1 billion in June 2014; National Phosphate Company (OCP) issued a US$1 billion Eurobond in April 2015.
  - Sovereign spreads narrowed between 2011 and 2016.
  - Average maturity of public external debt: 8 years and 6 months currently (against 7 years and 4 months in 2009).
- Criterion 4 — Reserve position:
  - International reserves metrics at end-2016:
    - nearly 7 months of imports,
    - 99 percent of the standard ARA metric,
    - 129 percent of the metric adjusted for capital controls.
  - At end-2015: 95 percent and 124 percent of the respective metrics.
  - By 2022, reserves expected to increase to:
    - about 8 months of imports,
    - 118 percent of the standard ARA metric,
    - 156 percent of the metric adjusted for capital controls.

### Fiscal policy specific recommendations and reform priorities
- Fiscal projections and needs:
  - A deficit of 3.5 percent of GDP is projected in 2017.
  - Aim to reduce public debt to 60 percent of GDP by 2020 (65.1 percent of GDP in 2016).
  - Medium-term target requires bringing the fiscal deficit to about 2.1 percent of GDP.
- Recommended fiscal measures:
  - Accelerated tax reforms to broaden the tax base, reduce exemptions, boost VAT revenues, and improve corporate taxation.
  - Continued civil service reform to generate long-term savings on public wage spending.
  - Fiscal decentralization with sound public financial management at the regional level to preserve fiscal sustainability.
  - Implementation of key institutional mechanisms and checks and balances; authorities expressed interest in Fund technical assistance.
  - Draft law to reinforce governance and oversight of SOEs expected to be submitted to parliament in the near-term.

### Monetary policy and financial sector assessment
- Monetary policy:
  - Morocco performs strongly in monetary policy area.
  - Criterion 6 — Low and stable inflation: moderate and stable inflation expected to continue; inflation expectations well anchored.
  - Authorities aim to gradually shift to an inflation targeting regime as part of transition to greater exchange rate flexibility.
  - Preconditions for transition largely in place: increased fiscal and external buffers; financial sector resilience; exchange rate alignment with fundamentals; limited FX risk exposures; estimated moderate pass-through of exchange rate movements to consumer prices.
- Financial sector soundness and supervision:
  - Criterion 7 — Sound financial system: banks have adequate capital buffers and stable funding (mainly non-remunerated deposits).
    - NPLs have been rising since 2012 but remain moderate.
    - Credit concentration risks remain significant despite strict regulatory limits and declining aggregate exposure.
    - Moroccan banks’ expansion into Sub-Saharan Africa introduces new channels of risk transmission.
    - Provisioning levels are high and increasing.
    - 2015 FSAP stress tests showed banking system could withstand severe shocks.
  - Criterion 8 — Effective supervision: bank supervision is effective and 2015 FSAP recommendations to strengthen it further are being implemented.

*IMF staff report: Morocco — Review of PLL Qualification (excerpts).*

### introduction of stricter capital and provisioning requirements, the authorities are enhancing the

### cr17146 - introduction of stricter capital and provisioning requirements, the authorities are enhancing the

### Data adequacy and transparency
- Data provision and quality are fully adequate.
- Criterion 9—Data transparency and integrity: Overall data quality continues to be strong and 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.

### Other program issues and quantitative targets
- The end-September 2016 quantitative indicative targets (IT) for the fiscal deficit and net international reserves (NIR) were met.
- The end-March 2017 fiscal deficit IT was met without adjustments, and with a substantial margin once the adjustor for grants is considered.
- The end-March 2017 NIR IT (set at the time of the PLL request) was missed by a margin of US$1.1 billion (or 4 percent of the adjusted target), reflecting the widening current account deficit since July 2016 (by nearly US$3 billion at end-2016).
- The end-September 2017 IT for the fiscal deficit and NIR have been set:
  - The fiscal deficit IT accounts for the higher fiscal deficit expected in 2017 relative to the program request.
  - The end-September 2017 NIR IT reflects a slower increase in reserve accumulation due to temporary factors in 2016-17 (such as higher capital equipment and food product imports) and to a higher path of oil prices relative to the PLL request stage.
  - Reserves are still expected to remain at comfortable levels.

- Morocco’s capacity to repay if the entire PLL amount were drawn:
  - Fund obligations would represent only a small share of Morocco’s total external debt (a maximum of 8.1 percent over the projection period).
  - Debt service: 21 percent.
  - Gross international reserves: 13.4 percent.
  - Exports: 9.7 percent.
  - The impact of the PLL arrangement on the Fund’s liquidity and potential exposure continues to be moderate.
  - The commitment to Morocco is modest and the PLL arrangement reduces the Fund’s forward commitment capacity only marginally.
- Footnote illustrative adjustments (as provided):
  - In a shock-based drawdown scenario used at the time of the PLL request, reserves may be 25 percent lower and exports 6 percent lower, suggesting peak IMF credit ratios of 17.9 percent and 10.3 percent instead of 13.4 percent and 9.7 percent in the table.

### Safeguards and central bank governance
- The 2015 assessment found a robust safeguards framework with strong control mechanisms at the central bank (Bank al-Maghrib, BAM).
- BAM has implemented all but two recommendations from that assessment:
  - Strengthening the BAM law in the areas of autonomy and governance.
  - Implementing International Financial Reporting Standards (IFRS).
- The authorities have drafted a new central bank law which will be submitted to Parliament in mid-2017.
- Following a feasibility study carried out by BAM with the assistance of an audit firm, BAM decided to maintain the current accounting standards, and instead improve financial statement disclosures to enhance transparency.

### Exit strategy and baseline projections
- Given projected improvements in Morocco’s fiscal and external positions in the baseline, the authorities will need to define and communicate their exit strategy in due course.
- Baseline outcomes by the end of the arrangement (as described):
  - The primary fiscal deficit would fall below the debt-stabilizing balance.
  - Public debt would be on a downward path.
  - The current account deficit would be close to what would be expected for an emerging market country like Morocco.
  - Reserves would have reached a comfortable level (just under 100 percent of the Fund’s standard ARA metric; 129 percent of the adjusted metric).
- The authorities should account for continued strengthening in the economy’s buffers and policy space, remaining reforms, and the exchange rate transition (as articulated in W-COM.-¶15), in conjunction with the evolution of relevant global and regional external risks.

### Staff appraisal: progress, risks, and reform priorities
- Program status and recent performance:
  - The program remains on track.
  - External imbalances have been contained and the fiscal deficit has declined.
  - The end-September 2016 indicative targets were both met.
  - Fiscal consolidation was paused in 2016.
- Fiscal targets and requirements:
  - To meet the authorities’ objective of reducing public debt to 60 percent of GDP by 2020, it will be essential to resume fiscal consolidation.
  - It will be essential to reach the fiscal deficit targets of 3.5 and 3.0 percent of GDP in 2017 and 2018, respectively.
- Accelerated reforms needed to strengthen macroeconomic resilience and achieve higher and more inclusive growth:
  - Transition to a more flexible exchange rate regime this year to help preserve competitiveness and improve resilience.
  - Further fiscal reforms to provide more space to support growth and social spending for the most vulnerable, including:
    - A comprehensive approach to enhance public revenues, including by broadening the tax base and reducing exemptions.
    - Civil service reform to generate long-term savings on public wage spending.
    - Careful implementation of fiscal decentralization.
    - Strengthened SOE oversight.
  - Adopting the amended central bank law and implementing the 2015 FSAP recommendations to strengthen the financial sector policy framework.
  - Continued efforts to improve the business climate, including reducing payment delays, promoting competition, addressing corruption, facilitating SME access to finance, reducing unemployment levels, and increasing women’s participation in the labor force.

### PLL qualification and institutional assessment
- Morocco continues to meet the PLL qualification criteria.
- The IMF Executive Board’s assessment in the context of the 2016 Article IV consultation was positive.
- Morocco’s economic fundamentals and institutional frameworks are sound.
- Morocco performs strongly in four out of the five PLL qualification areas:
  - External position and market access.
  - Financial sector and supervision.
  - Monetary policy.
  - Data adequacy.
- Morocco does not substantially underperform in the other qualification area (fiscal policy).
- The protracted transition to a new coalition government led to some delays in policy implementation in 2016–17, but it has not affected the authorities’ commitments to sound policies under the program and Morocco’s continued PLL qualification.

*Source: IMF staff report excerpt (cr17146).*

### 23.      Against this background, staff recommends the completion of the first review under

### 23. Against this background, staff recommends the completion of the first review under the PLL arrangement.

### Staff recommendation
- Staff recommends the completion of the first review under the PLL arrangement.

### Real and external developments
- Economic activity slowed significantly in 2016.
- Domestic demand was the main driver of growth in 2016.
- Core inflation remains moderate and food prices are declining.
- The trade and current account deficits widened despite stable tourism and remittance receipts.
- As FDI declined, private borrowing comprised a large share in the current account financing mix.
- Morocco’s reserves coverage has further improved along all reserve adequacy metrics.
- Selected time-series and metrics shown:
  - Morocco and Euro Area Growth (annual percent change): visual series spanning 2008–2016 (Morocco overall, non-agricultural; Euro Area).
  - Contributions to GDP Growth (annual percent change) components: Public Consumption, Private Consumption, Investment, Net Exports for years through 2016-est.
  - Inflation (annual percent change): CPI General Index, CPI Core, CPI Food through Mar-17.
  - Reserve Adequacy Metrics (In USD billions): Reserves, 3 months imports, Standard metric 20% of broad money, Adjusted metric Reserves/(ST debt + CA deficit); series through 2021p shown.

### Fiscal developments
- Fiscal consolidation stopped in 2016; public revenues have weakened while public expenditures are well contained.
- The cyclical and structural fiscal balances have deteriorated.
- Public debt is sustainable and projected to decline gradually.
- Sovereign spreads declined in 2016.
- Key fiscal indicators (selected figures from tables):
  - Budget balance (percent of GDP): -7.2 (2012), -5.1 (2013), -4.9 (2014), -4.2 (2015), -3.5 (2016), projections through 2022 show -3.0 (2017), -3.0 (2018), -3.5 (2019), -3.0 (2020), -2.5 (2021), -2.1 (2022).
  - Total government debt (percent of GDP): 56.5 (2012), 61.7 (2013), 63.5 (2014), 64.1 (2015), 64.4 (2016), projected 63.5 (2017), 63.8 (2018), 64.3 (2019), 63.9 (2020), 62.1 (2021), 60.2 (2022).
  - Government revenue (percent of GDP): 28.0 (2012), 27.8 (2013), 28.1 (2014), 26.7 (2015), 26.9 (2016).
  - Government expenditure (percent of GDP): 35.2 (2012), 32.9 (2013), 32.9 (2014), 30.9 (2015), 30.4 (2016).
  - Cyclical and structural balances (percent of GDP): shown as cyclically adjusted balance and structural balance with deterioration noted across 2015–2016.

### Monetary and financial sector
- Broad monetary and banking indicators (selected):
  - Broad money annual growth rates and levels reported in monetary survey tables across 2011–17 (billion dirhams).
  - Credit to the economy (annual percent changes and levels) through 2016 and projections.
  - Financial Soundness Indicators (2008–16):
    - Regulatory capital to risk-weighted assets: 11.2 (2008), 11.7 (2009), 12.3 (2010), 11.7 (2011), 12.3 (2012), 13.3 (2013), 13.8 (2014), 13.7 (2015), 13.7 (*) (2016).
    - Nonperforming Loans (NPLs) to total loans: 6.0 (2008), 5.5 (2009), 4.8 (2010), 4.8 (2011), 5.0 (2012), 5.9 (2013), 6.9 (2014), 7.4 (2015), 7.5 (2016).
    - Specific provisions to NPLs: 75.3 (2008), 74.1 (2009), 70.1 (2010), 68.7 (2011), 67.8 (2012), 64.0 (2013), 65.0 (2014), 68.0 (2015), 69.0 (2016).
    - Deposits to loans: 113.0 (2008), 108.0 (2009), 104.0 (2010), 99.0 (2011), 96.1 (2012), 96.2 (2013), 100.8 (2014), 104.3 (2015), 105.4 (2016).
  - Banking sector profitability and liquidity metrics across 2008–16 reported (ROA, ROE, net interest margin, liquid assets ratios).

### External sector and balance of payments
- Current account and trade:
  - Current account (billions of U.S. dollars): -9.2 (2012), -8.1 (2013), -6.5 (2014), -2.2 (2015), -1.3 (2016), -3.0 (2017), projections through 2022 show -1.3 (2021), -1.3 (2022) in percent of GDP columns as well.
  - Trade balance (billions of U.S. dollars): -21.9 (2012), -21.9 (2013), -20.6 (2014), -14.7 (2015), -15.0 (2016).
  - Exports, f.o.b. (billions USD): 17.0 (2012), 18.3 (2013), 20.0 (2014), 18.6 (2015), 19.4 (2016).
  - Imports, f.o.b. (billions USD): -38.9 (2012), -40.2 (2013), -40.6 (2014), -33.3 (2015), -34.4 (2016).
  - Services and tourism receipts: Services 6.9 (2012), 6.4 (2013), 7.0 (2014), 6.8 (2015), 6.7 (2016); Tourism receipts 6.7 (2012), 6.9 (2013), 7.1 (2014), 6.3 (2015), 6.2 (2016).
  - Transfers (including workers' remittances): Transfers 7.7 (2012), 8.7 (2013), 7.7 (2014), 7.7 (2015), 8.9 (2016); Workers' remittances 6.7 (2012), 6.8 (2013), 7.1 (2014), 6.1 (2015), 6.6 (2016).
- Financial account and reserves:
  - Financial account (billions USD): 6.2 (2012), 9.4 (2013), 8.8 (2014), 5.8 (2015), 4.4 (2016).
  - Direct investment (billions USD): 2.3 (2012), 3.0 (2013), 3.1 (2014), 2.6 (2015), 2.6 (2016).
  - Reserve asset accumulation (negative indicates increase): 3.3 (2012), -1.8 (2013), -2.9 (2014), -4.3 (2015), -3.1 (2016).
  - Gross official reserves (billions USD): 17.4 (2012), 19.0 (2013), 20.5 (2014), 23.0 (2015), 26.7 (2016).
  - Reserves in months of prospective imports of GNFS: 4.3 (2012), 4.6 (2013), 6.0 (2014), 6.1 (2015), 7.1 (2016).
  - Reserves as percent of ARA metric: 75.6 percent (2012), 74.3 percent (2013), 79.9 percent (2014), 94.7 percent (2015), 102.8 percent (2016).

### Selected indicators and projections (from tables)
- Output and prices (Real GDP annual percent change): 3.0 (2012), 4.5 (2013), 2.6 (2014), 4.5 (2015), 1.8 (2016), projections: 1.5 (2017), 1.1 (2018), 4.8 (2019), 4.4 (2020), 4.5 (2021), 3.0 (2022).
- Investment and saving (percent of GDP): Gross capital formation 35.0 (2012), 34.8 (2013), 32.2 (2014), 30.2 (2015), 30.2 (2016), projections through 2022 up to 35.6.
- Public finances (percent of GDP): Revenue 28.0 (2012), 27.8 (2013), 28.1 (2014), 26.7 (2015), 26.9 (2016); Expenditure 35.2 (2012), 32.9 (2013), 32.9 (2014), 30.9 (2015), 30.4 (2016).
- External debt and reserves (selected): Total external debt 28.5 (2012), 29.3 (2013), 33.4 (2014), 34.1 (2015), 32.6 (2016); Gross reserves (USD billions) 17.4 (2012), 19.0 (2013), 20.5 (2014), 23.0 (2015), 26.7 (2016).
- Capacity to repay (2016): GRA credit to Morocco exposure and repayments table shows GRA credit to Morocco 1,252.0 (2016) in SDR million; in percent of quota 140.0 (2016). Memorandum items include Nominal GDP 103.0 (2016, in billions of U.S. dollars) and Gross international reserves 25.4 (2016, in billions of U.S. dollars).

*International Monetary Fund staff summary based on CR/17146 PDF content.*

### Appendix I. Written Communication

### Appendix I. Written Communication

### Macroeconomic outlook and recent developments
- 2016 growth was revised downward and should be within the 1–1.5 percent range, after a strong 2015 performance that was followed by a particularly poor grain harvest; non-agricultural growth remained moderate.
- Growth is expected to recover in 2017 and should increase to 4.5 percent, due primarily to a return of cereal production to a normal level and higher non-agricultural growth.
- Inflation was 1.6 percent in 2016 and should decrease to 1.1 percent in 2017.
- Unemployment declined to 9.4 percent in 2016 from 9.7 percent in 2015.
- The current account deficit increased to 4.4 percent of GDP in 2016 from 2.2 percent of GDP in 2015, driven largely by a sharp increase in imports of capital goods and wheat, and lower phosphate exports.
- The current account deficit should narrow to about 3.3 percent of GDP in 2017, due to a good cereal harvest and normalization of capital goods imports.
- Foreign exchange reserves reached nearly 7 months of imports in 2016 and are expected to increase further in the medium term.
- GDP growth is noted as 3.4 percent on average over the period 2012-17 (statement by Alternate Executive Director).

### Precautionary PLL arrangement and program stance
- The PLL arrangement approved on July 22, 2016 is considered precautionary; the authorities intend to draw on it only if there are unforeseen exogenous shocks.
- The arrangement provides insurance against external shocks and strengthens investor confidence.
- The authorities confirm commitment to policies in the July 7, 2016 written communication and to providing IMF with information needed to monitor indicators listed in Table 1.

### Fiscal performance, targets, and composition
- Final 2015 fiscal deficit was 4.2 percent of GDP (revised from 4.4 percent) due to an upward revision of revenues.
- The 2016 fiscal deficit was slightly reduced to 4.1 percent of GDP despite less favorable economic conditions and lower-than-projected grants; this was achieved mainly by strengthening tax revenue collection and better control of current spending (wage bill and subsidies), while appreciably increasing investment spending relative to projections.
- The fiscal deficit target for 2017 has been revised to 3.5 percent of GDP (instead of 3 percent) to avoid a drastic reduction in public investment and to preserve growth.
- Fiscal consolidation objective: lower the public debt ratio to 60 percent by 2020.
- Authorities will introduce measures as necessary to remain in line with the 2017 fiscal deficit target.

### Revenue measures and tax reform priorities
- Continue implementation of tax reform in line with recommendations from the 2013 national tax conference to make taxation simpler, more equitable and more favorable to competitiveness.
- Priorities:
  - Continue to reduce tax exemptions, particularly those granted to large agricultural firms.
  - Simplify the VAT by reducing the number of rates to mitigate distortionary effects.
  - Expand the tax base, with emphasis on gradually integrating the informal sector.

### Expenditure policy, public investment, and social spending
- Continue to control spending while prioritizing investment in infrastructure and human capital.
- Civil service wage bill (including social contributions) has been reduced by almost 1 percentage point of GDP since 2012; target to bring it back to 10.5 percent of GDP in the medium term.
  - Measures include limiting net creation of positions, limiting advances and promotions, and any potential wage increases based on the budget envelope.
  - Legislative and regulatory texts concerning mobility and contractual employment have been promulgated.
- Maintain public investment at a high level while ensuring compliance with fiscal consolidation objectives, increasing effectiveness, and better supporting private investment.
- Gradually lower remaining food subsidies while improving effectiveness of social spending through better targeting of the most vulnerable groups.

### Pension reform
- Parliament passed draft laws to reform the pension system run by the Moroccan Pension Fund (CMR) in July 2016.
- Reform elements:
  - Gradually raise the retirement age.
  - Increase employer and employee contribution rates.
  - New rules for calculating benefits.
- Expected outcome: extend sustainability of the CMR and lower the actuarial deficit by 2065 from 73 percent of GDP to 31 percent.
- Gradual implementation began in September 2016.
- Medium-term expectation: shift toward a bipolar (private sector/public sector) retirement system.

### Public financial management reforms and governance
- The organic budget law (OBL) adopted in 2015 took effect in 2016; most provisions implemented in 2016 and remaining provisions to be put in place gradually by 2020.
  - Personnel appropriations limiting provision entered into force on January 1, 2017.
  - Regulatory measure limiting carry-forward of investment appropriations was renewed pending relevant OBL provisions on January 1, 2018.
- A draft law to strengthen governance and auditing of public enterprises and establishments has been submitted to the General Secretariat of the Government.

### Fiscal decentralization and advanced regionalization
- Fiscal decentralization has begun as part of advanced regionalization and will be implemented carefully to preserve fiscal sustainability.
- Regions have been given responsibility for a series of powers at the regional level, including fiscal powers, and public resources are being transferred to the local level.
- The government is preparing a comprehensive strategy for fiscal decentralization focusing on capacity building, transparency, and accounting.
- A national charter of administrative decentralization is being prepared to align ministry activities at the regional level.

### Monetary policy and Bank Al-Maghrib (BAM)
- BAM maintained an accommodative monetary policy in a context of limited growth in activity and lending, moderate inflation, and comfortable foreign exchange reserves.
- In March 2016, BAM cut its key policy rate to 2.25 percent (its historically lowest level) to support growth.
- BAM will continue to promote appropriate financing of the economy, particularly for SMEs.
- A draft central bank law, adjusted to reflect FSAP recommendations, will be presented to the Government Council and submitted to Parliament in the upcoming April 2017 session; the new law will reinforce BAM’s independence and expand its missions to contribute to financial stability and financial inclusion.

### Banking sector resilience and prudential measures
- The banking sector is sound and resilient; prudential framework and surveillance are being strengthened, including through implementation of FSAP recommendations.
- NPLs remain at a moderate level and are well provisioned, though their ratio increased due to a slowdown in some branches.
- Vulnerabilities include asset concentration risk and exposures in sub-Saharan Africa; coordination with host country supervisory authorities is improving.
- BAM measures and commitments:
  - Strengthen resources for banking supervision.
  - Strengthen regulations for granting and supervising loans to conglomerates.
  - Complete loan classification rules.
  - Adapt oversight of exchange rate and liquidity risks in the transition to a more flexible foreign exchange regime.
  - Adopted regulations introducing counter-cyclical capital buffers (CCB).
  - Enact guidance for recovery plans for systemically important institutions before the end of the year.
  - Strengthen the macro-prudential framework and work towards reinforcing the bank resolution framework.

### Exchange rate policy and transition to inflation targeting
- Authorities are determined to gradually introduce a more flexible foreign exchange system and transition to an inflation targeting regime.
- Expected benefits: better absorption of exogenous shocks, preservation of competitiveness, and support for trade diversification.
- Preconditions for transition have largely been met, including improved fiscal and external buffers, resilient financial sector, alignment of the exchange rate with fundamentals, and gradual economic diversification.
- Authorities have finalized a roadmap for a gradual transition.

### Structural reforms and labor market policies
- Government intends to accelerate structural reforms to strengthen competitiveness, increase growth potential, and reduce unemployment, particularly among youth.
- Education reform:
  - A strategic vision for 2015-30 has been validated by the highest authorities of the Kingdom.
  - A draft law setting guidelines and objectives for education, training and scientific research is being finalized.
- Other reforms and priorities:
  - Improve business environment, establish bodies and means to enable the Competition Council to fully exercise powers in 2017.
  - Strengthen financial inclusion and continue anti-corruption strategy.
  - Implement the National Strategy for Employment to reduce unemployment (especially youth and women) via active labor market policies and vocational training programs.

### PLL performance criteria and program monitoring
- For end-September 2016 indicative targets and standard performance criteria under the PLL:
  - Net international reserves were above the target, and the fiscal deficit target was met.
- Authorities confirm compliance and intention to continue compliance with standard criteria related to trade and exchange restrictions, bilateral payment arrangements and multiple currency practices, and non-accumulation of external debt payment arrears.
- Authorities will provide IMF with all information needed to monitor developments and the indicators listed in Table 1.

### Table 1 — Quantitative Indicative Targets (selected figures as presented)
- Net international reserves (NIR) of Bank Al-Maghrib (BAM) 1/ (end-of-period stock, in millions of U.S. dollars, evaluated at the program exchange rate fixed at the end-April 2016, namely 9.5695 MAD/$):
  - 9/30/16 Adjusted Target: 25,981
  - 9/30/16 Actual: 25,717
  - 3/31/17 Target: 26,302
  - 3/31/17 Adjusted: 27,461
  - 3/31/17 Actual: 26,825
  - Proposed 9/30/17 Target: 25,719
  - Proposed Adjusted Target: 26,208
- Fiscal deficit (cumulative since beginning of fiscal year, eop in millions of dirham):
  - 9/30/16 Adjusted Target: 27,228
  - 9/30/16 Actual: 30,629
  - 3/31/17 Target: 26,973
  - 3/31/17 Adjusted: 7,302
  - 3/31/17 Actual: 9,499
  - Proposed 9/30/17 Target: 6,747
  - Proposed Adjusted Target: 26,135
- Memorandum items:
  - Adjustor on NIR (in millions of U.S. dollars) 2/:
    - 9/30/16: 918
    - 3/31/17: 567
    - 3/31/17: 351
    - Proposed: 2,011
    - Proposed Adjusted: 636
    - Proposed Actual: 1,375
    - Proposed 9/30/17: 2,364
  - Adjustor on the fiscal deficit (in millions of dirham) 3/:
    - 9/30/16: 7,045
    - 3/31/17: 3,400
    - 3/31/17: 3,645
    - Proposed: 2,410
    - Proposed Adjusted: 2,197
    - Proposed Actual: 213
    - Proposed 9/30/17: 7,500

*Rabat, Morocco, April 28, 2017 — Appendix I. Written Communication*

### 0.5 percent of GDP reduction in the deficit to 3 percent in 2017. In light of the 2016

### cr17146 - 0.5 percent of GDP reduction in the deficit to 3 percent in 2017. In light of the 2016

### Fiscal stance and public debt objectives
- The government raised its target for 2017 to 3.5 percent (deficit), maintaining the programmed annual decline in the deficit and avoiding a drastic reduction in investment spending.
- Previous objective was a 0.5 percent of GDP reduction in the deficit to 3 percent in 2017.
- The government is committed to continuing fiscal consolidation to meet the PLL objective of reducing the public debt-to-GDP ratio to 60 percent over the medium term.
- With a favorable fiscal outcome in the first quarter of 2017, and indications that agricultural production and GDP growth in 2017 may be higher than currently projected, a better fiscal position in 2017 than assumed in the report can be expected.
- Authorities will discuss the macroeconomic framework and underlying policies in June in the context of the second review of the program, once the budget is approved and more data on growth trends in 2017 is available.

### Monetary policy, exchange rate and financial sector
- Bank Al-Maghrib has maintained an accommodative policy stance, citing limited growth in economic activity and lending, moderate inflation, and a comfortable reserve cushion.
- A draft central bank law to enhance independence and expand the mission to financial stability and inclusion is expected to be submitted to parliament during this session.
- Financial sector soundness is being strengthened, including through implementation of the 2015 FSAP recommendations.
- Preparatory work for gradual introduction of a more flexible exchange rate regime and adoption of inflation targeting is virtually completed; the authorities intend to start their move in this direction shortly.

### Structural reforms and policy priorities
- The program aims to accelerate structural reforms to:
  - improve competitiveness,
  - raise potential growth,
  - reduce unemployment,
  - enhance inclusion and reduce inequality.
- Priority areas include:
  - raising quality and efficiency of education,
  - further improving governance and the business climate,
  - enhancing effectiveness of active labor market policies.
- Structural fiscal reforms to continue include:
  - follow up to recommendations of the 2013 National Tax Reform Conference,
  - enactment of remaining reforms under the new OBL,
  - roll out of the regionalization program,
  - civil service reform,
  - further subsidy reform,
  - oversight of state-owned enterprises.
- Expected outcomes: strengthen revenue mobilization, improve spending efficiency, improve service delivery, and reduce fiscal risks.

### PLL-specific status and program performance
- The PLL-supported program remains on track.
- Indicative targets for the budget deficit and reserves for end-September 2016 were met.
- The indicative target for end-March 2017 for the budget deficit was met with a wide margin, even without adjustment for the higher deficit in 2016 and the revised target for 2017.
  - This adjustment was agreed with staff but not submitted to the Board for endorsement due to the postponement of the First Review.
- There was a shortfall of about $1.1 billion in the indicative target for reserves for end-March (unadjusted for the lower reserves at end-December).
- Authorities welcome staff indication that Morocco continues to meet the PLL qualification criteria, performing strongly in:
  - external sector and market access,
  - financial sector and supervision,
  - monetary policy,
  - data,
  - without significantly underperforming in the fiscal area.
- Authorities view the PLL as a useful complement to their own reserves and will continue to treat it as precautionary.
- Authorities are committed to achieving economic and social objectives through implementation of policies in their Written Communication.

### Risk monitoring and exit strategy
- The authorities broadly agree with staff assessment of risks to the program.
- They will continue to monitor external risks closely and strengthen Morocco’s resilience and buffers, with the objective of exiting the PLL once risks have abated and capacity to absorb shocks is enhanced.
- Enhanced capacity is expected to come in part from a stronger policy framework under a more flexible exchange rate regime.
- Authorities agree on the importance of a clear communication strategy with regard to exit.

*Source: IMF staff report text provided in the content unit.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17146.pdf_