## cr17265

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### Background and PLL arrangement
- The Executive Board approved a two-year Precautionary and Liquidity Line (PLL) arrangement with Morocco in July 2014 as the successor to the 2012–14 PLL arrangement.
- Access under the 2014 PLL-supported program: total 550 percent of quota (about SDR 3.24 billion), with 500 percent of quota (about SDR 2.95 billion) available in the first year.
- The authorities treated the PLL arrangement as precautionary and did not intend to draw on it except in the event of unforeseen exogenous shocks or a significant worsening of the world economy.
- A successor arrangement was requested at end-July 2016 and approved on July 22, 2017 with total 280 percent of quota (SDR 2.5bn), of which up to 140 percent of quota available in year 1 and an additional 140 percent in year 2.

### Macroeconomic outcomes and program performance
- Overall assessment:
  - The PLL arrangement was successful in helping to reduce vulnerabilities in fiscal and external sectors but growth underperformed relative to expectations.
  - Quantitative indicative targets on net international reserves and the fiscal deficit were reported throughout and met, with the single exception of the end-September 2014 fiscal indicative target.
  - The PLL arrangement was not drawn upon.
- Fiscal strategy and outcomes:
  - Program fiscal objective: gradual reduction of the budget deficit to 3 percent of GDP by 2017 to bring the public-debt-to-GDP ratio closer to 60 percent in the medium term.
  - End-2016 fiscal outcome envisaged at end of arrangement: 3.5 percent (down from 4.9 percent in 2014) and in line with the program target; actual end-2016 deficit was considerably higher due to tax revenue shortfalls, higher capital spending, and higher subsidies.
  - The cyclically-adjusted primary balance was estimated to have improved by 1.6 percent of GDP by 2016.
  - The end-September 2014 deficit indicative target was missed by 0.7 percent of GDP, mostly reflecting frontloading of transfers to public entities, reimbursement of VAT credits, and higher investment spending.
- Subsidy reform and expenditure composition:
  - Elimination of gasoline and fuel subsidies in February 2014; diesel subsidies eliminated in January 2015; full liberalization of liquid fuel products in December 2015.
  - Reduction in subsidy spending of 2.3 percentage points of GDP between 2014 and 2016.
  - Investment spending: programmed 6.2 percent of GDP in 2014; outturn 7.3 percent of GDP in 2015; projected end-2016 performance suggested 6.8 percent of GDP (1 percentage point less than envisaged), while the end-2016 result met the initial spending target of 7.8 percent of GDP.
- Public payroll and pensions:
  - Objective to bring the public payroll below 11.5 percent of GDP in the medium term.
  - Reforms (contractual employment, increased personnel mobility) reduced the wage bill from 12.7 percent of GDP at end-2014 to 11.9 percent of GDP two years later.
  - Civil service pension reform adopted in June 2016; implementation began in September.
- External and competitiveness outcomes:
  - External balances strengthened, helped by falling oil prices; reserves increased.
  - Compositional shift in exports toward higher-value-added products.
  - By the time of the August 2016 successor PLL arrangement, Morocco was assessed as performing strongly in the external position and market access area.
- Growth and labor market:
  - Growth was lower than envisaged; a contributory factor was over-optimism about the positive impact of structural measures and difficulties forecasting volatile agricultural output.
  - Unemployment declined between 2014 and 2016 but substantial work remained—particularly on youth unemployment—to achieve higher and more inclusive growth.

### Table 2: Deviation from Fiscal Targets (key reported figures)
- Revenue: 28.3, 27.8, 27.9, 28.1, 28.1, 26.7, 28.2, 26.9, 26.2, 0.2, -1.2, -1.4
- o/w tax revenue: 22.9, 22.3, 22.7, 22.1, 23.1, 21.3, 23.3, 21.7, 21.5, 0.7, -0.4, -1.1
- o/w grants: 0.7, 0.7, 1.3, 1.5, 1.1, 0.5, 1.0, 1.1, 1.0, -0.4, -0.4, 0.0
- Expenditure: 33.8, 32.9, 32.9, 32.9, 32.4, 30.9, 31.6, 30.4, 30.4, -1.2, -2.5, -1.3
- o/w compensation of employees: 12.9, 12.6, 13.0, 12.7, 12.7, 12.1, 12.1, 12.3, 11.9, -0.8, -0.4, 0.4
- o/w subsidies: 4.8, 4.6, 3.5, 3.5, 2.4, 1.4, 1.7, 1.2, 1.4, -1.8, -2.4, -0.5
- o/w investment: 6.8, 6.6, 6.2, 6.9, 7.3, 7.3, 7.8, 6.8, 7.8, 1.6, -0.1, -1.7
- o/w goods and services: 2.3, 2.4, 2.7, 2.6, 2.7, 2.6, 2.6, 2.6, 2.6, -0.1, 0.0, 0.1
- Budget balance: -5.5, -5.1, -4.9, -4.9, -4.3, -4.2, -3.5, -3.5, -4.1, 1.5, 1.3, -0.2
- Primary budget balance (excluding grants) 4/: -3.6, -3.2, -2.9, -3.6, -2.6, -1.9, -1.8, -1.9, -2.4, 1.1, 1.7, 0.6
- Cyclically adjusted primary balance (excluding grants) 4/: -3.5, -3.0, -3.4, -3.0, -2.6, -1.6, -1.8, -1.6, -2.2, 1.6, 1.4, -0.2
- Total government debt: 63.9, 61.7, 65.5, 63.5, 65.7, 64.1, 65.0, 64.4, 65.1, -0.5, 1.0, 1.5
- Memo: Real GDP: 4.4, 4.5, 3.5, 2.6, 4.7, 4.5, 5.0, 1.8, 1.1, 1.5, -0.7, -2.2

### Fiscal strategy, debt, and DSA insights
- Fiscal strategy aimed to balance bringing down the debt-to-GDP ratio in the medium term with investment, social protection, and inclusive growth.
- The PLL arrangement did not target a reduction in public debt over 2014–16; focus was on putting the debt-to-GDP ratio on a downward path after its expected peak in 2015, gradually reducing it toward 60 percent of GDP by 2019.
- Total public sector debt increased broadly in line with objectives during the arrangement; risks to gross financing needs and the debt outlook improved.
- Fiscal multiplier assumptions:
  - Impact multiplier varies between 0.095 and 0.3.
  - Cumulative impact is estimated to be around 0.6.
- Staff interpretation: well-designed fiscal consolidation (i.e., tilted to public consumption) would reduce public debt with limited contractionary effect on growth.

### Tax performance and Organic Budget Law (OBL)
- Tax-to-GDP ratio declined during the PLL arrangement, reaching an estimated 21.7 percent of GDP by mid-July 2016 compared to a programmed 22.7 percent of GDP in 2014.
- Part of the decline is explained by an acceleration of VAT refunds consistent with reform objectives; further analysis on tax administration or policy design was noted as needed.
- Adoption of the OBL in 2015 introduced:
  - multi-year and program budgeting,
  - a fiscal “golden rule” (limiting new borrowing to the financing of investment spending and debt amortization),
  - performance management,
  - strengthened transparency,
  - binding ceilings on the wage bill,
  - limits on carry-over of investment appropriations,
  - enhanced fiscal performance management and parliamentary oversight provisions.
- Most OBL provisions entered into force in January 2016; remaining provisions to be gradually introduced by 2020.
- Areas for further alignment with international best practice:
  - The law allows for a 30 percent limit on roll-over of credit appropriations compared to 3–5 percent internationally.
  - A rule with a more comprehensive fiscal target could be more effective than a golden rule focused on limiting borrowing for investment.
- Authorities took steps to address SOE-related fiscal risks outside the OBL; enactment of draft law to reinforce governance and oversight of SOEs is noted as important.

### Growth performance, labor market, and external outcomes
- Growth performance:
  - Real GDP growth realized at 2.7 percent during 2014–16, about 2 percentage points lower than the projected 4.6 percent at the start of the arrangement.
  - Contributory factors: over-optimism about structural measures, difficulties in projecting volatile agricultural output; fiscal and external developments judged unlikely to have contributed significantly.
- External environment:
  - Projected Euro Area growth of about 1.6 percent turned out higher—an average 1.9 percent during the period.
  - Oil price assumptions of US$103 per barrel during 2014–16 versus actual oil prices averaging US$65 per barrel.
- Counterfactual debt dynamics:
  - If the public sector DSA in 2014 had used actual GDP growth during 2014–16 (2.7 percent) and 3.5 percent for the subsequent three years, the projected public debt-to-GDP ratio by 2019 would have been about 7 percentage points higher than projected at the time of the request for the PLL arrangement.
- Labor market and inclusiveness:
  - Unemployment declined between 2014 and 2016; labor force participation remained low, especially among women; poverty persisted in rural areas; youth unemployment remained high.
  - Broader indicators of poverty and living standards improved (increased public spending on health, better access to sanitation, greater reach of financial services).
- External competitiveness, trade, and FDI:
  - Wage policy: a 10 percent increase in the minimum wage, spread over two years, was assessed as unlikely to impact competitiveness.
  - Depreciation of the ULC-based REER in 2015 indicated modest price competitiveness gains; by late-2015 the real exchange rate was assessed as broadly in line with fundamentals.
  - External balance strengthened largely due to declining import prices from lower oil prices; current account improved by 3.8 percentage point of GDP over two years from Q2 2014.
  - Goods export basket shifted toward higher-value-added manufacturing exports such as automobiles; export volume growth remained robust but export prices did not pick up; overall exports of goods and services remained broadly unchanged as a share of GDP.
  - FDI inflows strengthened during 2014 and into 2015 but by the end of the program the four-quarter sum of inward FDI had declined about ¾ percentage point of GDP from its peak in 2015.

### PLL qualification, access phasing, and financing scenarios
- Qualification and compliance:
  - Morocco met PLL qualification standards at the time of the request and at each of the three reviews.
  - Strong performance noted in monetary policy (low and stable inflation); financial sector (well-capitalized banks, strengthened supervision in line with Basel III); data adequacy (subscriber to the Special Data Dissemination Standard).
  - Exceptional access criteria: all four substantive criteria were assessed as met at approval and at each review.
- Access phasing and scenarios:
  - PLL phasing allowed up to 500 percent of quota in the first year, with the remainder available at the start of year two; quantitative financing scenarios indicated a potential financing gap of 494 percent of quota in the first year, increasing to 543 percent of quota in the second year.
  - Phasing produced a counterintuitive increase in access from 500 percent of quota in year one to 550 percent in year two despite declining access across back-to-back arrangements.
- External Economic Stress Index (ESI) and transparency issues:
  - ESI variables included: (i) growth in the euro area; (ii) emerging markets volatility index (VXEEM); (iii) oil prices.
  - Morocco’s ESI indicated improvement in external conditions but downside risks remained.
  - Transparency issues: weights applied to external variables were changed within the PLL arrangement without explanation; downside scenario shocks were not updated across reviews; omission of the assumed shock to the VXEEM left the downside scenario incompletely specified.
- Reserve drawdown assumptions and alternative:
  - Financing gap defined after drawing down reserves to 90 percent of the ARA metric (larger buffer than prior arrangement which allowed drawdown to 85 percent of ARA).
  - Allowing drawdown to 85 percent of the ARA under the second arrangement would have reduced financing needs by USD 1.1 billion and USD 1.2 billion in the two years, respectively, corresponding to access of 410 percent of quota instead of the requested 550 percent of quota.
  - A clearer discussion of the change in the reserve drawdown assumption from the first arrangement would have improved transparency.

### Conditionality, exit strategy, and market reaction
- Exit strategy and market reaction:
  - Authorities indicated intent to exit the PLL as external risks receded and requested reduced access; this aligned with PLL guidance.
  - Reduction in access was not associated with adverse market reaction; EMBI spreads narrowed on the day of the July 28, 2014 press release and were 12 basis points lower two days later.
- Conditionality:
  - Parsimonious use of ex-post conditionality under the PLL was appropriate; PLL arrangements of one to two years include ex-post conditionality in the form of indicative targets and standard performance criteria.
  - It was noted that additional conditionality related to passing the OBL in a timely manner could have been reasonable.
  - Given lower-than-expected growth performance, additional ex-post conditionality on measures to boost investment and raise productivity could have been considered, but staff judged that strong ownership and corrective actions meant additional ex-post conditionality was not needed and could have been counterproductive.

### Key conclusions and lessons
- With strong ownership, parsimonious conditionality can be effective in delivering program commitments.
- Growth projections should be more realistic; projected increases in potential growth should be better motivated by linking investment, productivity, and reform implementation in staff reports.
- More conservative growth assumptions would have highlighted the need for additional measures to support higher and more inclusive growth and facilitated a more realistic fiscal strategy discussion.
- Continued strong policies and accelerated fiscal and structural reforms are required going forward to achieve higher and more inclusive growth.
- Remaining policy priorities:
  - Comprehensive civil service reform to control the wage bill and improve public service efficiency.
  - Further pensions reform—urgent and requiring strong political commitment.
  - Finalization of subsidy reform together with further strengthening of the social safety net.
  - Additional focus on labor market reforms to remove impediments to job creation and to free up fiscal space for public investment and pro-growth reforms.
  - As the economy opens further, reform of the monetary policy framework and allowing exchange rate flexibility will likely become more pressing, although priority was appropriately given first to reducing fiscal and external vulnerabilities.
- Phasing policy note: the phasing policy, while safeguarding Fund resources, can produce an irregular access path in contexts of back-to-back declining access arrangements for countries addressing vulnerabilities.

### Authorities’ views and near-term projections (as reported by the authorities)
- Authorities broadly agree with the main conclusions and welcome recognition of improved macroeconomic fundamentals and continued PLL eligibility; they contest implications of over-optimism in growth projections and highlight the role of slowdown in domestic demand.
- Authorities’ reported macro outcomes and near-term projections:
  - Projected total growth in 2017: 4.8 percent (up from 1.2 percent in 2016).
  - Credit recovery supported by accommodative monetary policy; inflation should decline to less than 1 percent.
  - Current account deficit projection for 2017: 4 percent of GDP.
  - Fiscal deficit projected to decline to 3.5 percent of GDP in 2017 from 4.1 percent last year, and to fall further to the PLL target of 2.1 percent of GDP in 2021.
  - Public debt to GDP ratio expected to decline from 64.7 percent in 2016 to 63.2 percent in 2017 (against 64.3 percent projected under the PLL), on a declining trend to reach under 60 percent of GDP by 2021.
  - Authorities reported significant overperformance in tax collection and current spending control through June 2017 and expected additional tax measures to be identified for the 2018 budget process.
  - Structural reform priorities reaffirmed: implementation of the Organic Budget Law, tax reform, subsidy reform, responsible decentralization, improved public investment management and oversight/performance of public enterprises, civil service reform, business environment improvement, education reform, governance, and human development/inclusiveness.
  - Transition to more exchange rate flexibility: planned start end-June 2017 postponed after demand for hedging led to a significant decline in official reserves and increase in commercial banks’ foreign assets; official reserves stabilized subsequently and the authorities remain committed to moving to a more flexible exchange rate regime at an appropriate time.
- Authorities concluded they will continue treating the PLL as a precautionary instrument and will assess the need for continued engagement under precautionary arrangements at the expiration of the current PLL.

*Executive Summary, cr17265.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Background and PLL arrangement
- The Executive Board approved a two-year Precautionary and Liquidity Line (PLL) arrangement with Morocco in July 2014 as the successor to the 2012–14 PLL arrangement.
- Access under the 2014 PLL-supported program: total 550 percent of quota (about SDR 3.24 billion), with 500 percent of quota (about SDR 2.95 billion) available in the first year.
- The authorities treated the PLL arrangement as precautionary and did not intend to draw on it except in the event of unforeseen exogenous shocks or a significant worsening of the world economy.
- A successor arrangement was requested at end-July 2016 and approved on July 22, 2017 with total 280 percent of quota (SDR 2.5bn), of which up to 140 percent of quota available in year 1 and an additional 140 percent in year 2.

### Macroeconomic outcomes and program performance
- Overall assessment:
  - The PLL arrangement was successful in helping to reduce vulnerabilities in fiscal and external sectors but growth underperformed relative to expectations.
  - Quantitative indicative targets on net international reserves and the fiscal deficit were reported throughout and met, with the single exception of the end-September 2014 fiscal indicative target.
  - The PLL arrangement was not drawn upon.
- Fiscal strategy and outcomes:
  - Program fiscal objective: gradual reduction of the budget deficit to 3 percent of GDP by 2017 to bring the public-debt-to-GDP ratio closer to 60 percent in the medium term.
  - End-2016 fiscal outcome envisaged at end of arrangement: 3.5 percent (down from 4.9 percent in 2014) and in line with the program target; actual end-2016 deficit was considerably higher due to tax revenue shortfalls, higher capital spending, and higher subsidies.
  - The cyclically-adjusted primary balance was estimated to have improved by 1.6 percent of GDP by 2016.
  - The end-September 2014 deficit indicative target was missed by 0.7 percent of GDP, mostly reflecting frontloading of transfers to public entities, reimbursement of VAT credits, and higher investment spending.
- Subsidy reform and expenditure composition:
  - Elimination of gasoline and fuel subsidies in February 2014; diesel subsidies eliminated in January 2015; full liberalization of liquid fuel products in December 2015.
  - Reduction in subsidy spending of 2.3 percentage points of GDP between 2014 and 2016.
  - Investment spending: programmed 6.2 percent of GDP in 2014; outturn 7.3 percent of GDP in 2015; projected end-2016 performance suggested 6.8 percent of GDP (1 percentage point less than envisaged), while the end-2016 result met the initial spending target of 7.8 percent of GDP.
- Public payroll and pensions:
  - Objective to bring the public payroll below 11.5 percent of GDP in the medium term.
  - Reforms (contractual employment, increased personnel mobility) reduced the wage bill from 12.7 percent of GDP at end-2014 to 11.9 percent of GDP two years later.
  - Civil service pension reform adopted in June 2016; implementation began in September (year implicit in source).
- External and competitiveness outcomes:
  - External balances strengthened, helped by falling oil prices; reserves increased.
  - Compositional shift in exports toward higher-value-added products.
  - By the time of the August 2016 successor PLL arrangement, Morocco was assessed as performing strongly in the external position and market access area.
- Growth and labor market:
  - Growth was lower than envisaged; a contributory factor was over-optimism about the positive impact of structural measures and difficulties forecasting volatile agricultural output.
  - Unemployment declined between 2014 and 2016 but substantial work remained—particularly on youth unemployment—to achieve higher and more inclusive growth.

### Program design, policy consistency, and conditionality
- The macroeconomic strategy, program design and financing were in line with Fund policy, including the Exceptional Access Policy.
- The level of access was appropriate and well justified; exit from the 2014–16 PLL arrangement was properly signaled; the phasing of access was in accordance with Fund policy.
- Parsimonious use of conditionality was appropriate and effective given strong ownership.
- Noted phasing issue: access increased in the second year of the program even as vulnerabilities were being addressed, reflecting a balance between balance-of-payments need and safeguards considerations.

### Key conclusions and lessons
- With strong ownership, parsimonious conditionality can be effective in delivering program commitments.
- Growth projections should be more realistic; projected increases in potential growth should be better motivated by linking investment, productivity, and reform implementation in staff reports.
- More conservative growth assumptions would have highlighted the need for additional measures to support higher and more inclusive growth and facilitated a more realistic fiscal strategy discussion.
- Continued strong policies and accelerated fiscal and structural reforms are required going forward to achieve higher and more inclusive growth.
- Remaining policy priorities noted:
  - Comprehensive civil service reform to control the wage bill and improve public service efficiency.
  - Further pensions reform—urgent and requiring strong political commitment.
  - Finalization of subsidy reform together with further strengthening of the social safety net.
  - Additional focus on labor market reforms to remove impediments to job creation and to free up fiscal space for public investment and pro-growth reforms.
  - As the economy opens further, reform of the monetary policy framework and allowing exchange rate flexibility will likely become more pressing, although priority was appropriately given first to reducing fiscal and external vulnerabilities.

*Executive Summary, cr17265.*

### 2016. A broader structural reform will be needed to ensure the sustainability of the overall pension

### 2016. A broader structural reform will be needed to ensure the sustainability of the overall pension

### Table 2: Deviation from Fiscal Targets (key reported figures)
- Revenue: 28.3, 27.8, 27.9, 28.1, 28.1, 26.7, 28.2, 26.9, 26.2, 0.2, -1.2, -1.4
- o/w tax revenue: 22.9, 22.3, 22.7, 22.1, 23.1, 21.3, 23.3, 21.7, 21.5, 0.7, -0.4, -1.1
- o/w grants: 0.7, 0.7, 1.3, 1.5, 1.1, 0.5, 1.0, 1.1, 1.0, -0.4, -0.4, 0.0
- Expenditure: 33.8, 32.9, 32.9, 32.9, 32.4, 30.9, 31.6, 30.4, 30.4, -1.2, -2.5, -1.3
- o/w compensation of employees: 12.9, 12.6, 13.0, 12.7, 12.7, 12.1, 12.1, 12.3, 11.9, -0.8, -0.4, 0.4
- o/w subsidies: 4.8, 4.6, 3.5, 3.5, 2.4, 1.4, 1.7, 1.2, 1.4, -1.8, -2.4, -0.5
- o/w investment: 6.8, 6.6, 6.2, 6.9, 7.3, 7.3, 7.8, 6.8, 7.8, 1.6, -0.1, -1.7
- o/w goods and services: 2.3, 2.4, 2.7, 2.6, 2.7, 2.6, 2.6, 2.6, 2.6, -0.1, 0.0, 0.1
- Budget balance: -5.5, -5.1, -4.9, -4.9, -4.3, -4.2, -3.5, -3.5, -4.1, 1.5, 1.3, -0.2
- Primary budget balance (excluding grants) 4/: -3.6, -3.2, -2.9, -3.6, -2.6, -1.9, -1.8, -1.9, -2.4, 1.1, 1.7, 0.6
- Cyclically adjusted primary balance (excluding grants) 4/: -3.5, -3.0, -3.4, -3.0, -2.6, -1.6, -1.8, -1.6, -2.2, 1.6, 1.4, -0.2
- Total government debt: 63.9, 61.7, 65.5, 63.5, 65.7, 64.1, 65.0, 64.4, 65.1, -0.5, 1.0, 1.5
- Memo: Real GDP: 4.4, 4.5, 3.5, 2.6, 4.7, 4.5, 5.0, 1.8, 1.1, 1.5, -0.7, -2.2

Notes shown in the table:
- Source: IMF staff
- 1/ Projections at the time of the 2014 PLL request.
- 2/ Actuals for year 2016 performance reported at the first review of the 2016 PLL arrangement (May 2017).
- 3/ Projections for year 2016 performance as of July 2016.
- 4/ Excluding grants.
- 5/ Results may not add up precisely due to rounding.

### Fiscal strategy, debt, and the PLL arrangement
- The fiscal strategy aimed to balance bringing down the debt-to-GDP ratio in the medium term with investment, social protection, and inclusive growth.
- The PLL arrangement did not target a reduction in public debt over 2014–16; the focus was on putting the debt-to-GDP ratio on a downward path after its expected peak in 2015, gradually reducing it toward 60 percent of GDP by 2019.
- Total public sector debt increased broadly in line with objectives during the arrangement, and risks to gross financing needs and the debt outlook improved (Figure 1 referenced: DSA Risk Assessment comparison between 2014 and 2016).
- Implicit in the strategy was an assumption of a relatively low fiscal multiplier of current expenditures in Morocco:
  - Impact multiplier varies between 0.095 and 0.3.
  - Cumulative impact is estimated to be around 0.6.
- Staff analysis interpretation: well-designed fiscal consolidation (i.e., tilted to public consumption) would reduce public debt with limited contractionary effect on growth.

### Tax performance and revenue analysis
- The tax-to-GDP ratio declined during the PLL arrangement, reaching an estimated 21.7 percent of GDP by mid-July 2016 compared to a programmed 22.7 percent of GDP in 2014.
- This decline resulted in less fiscal space for social and investment spending.
- Part of the decline is explained by an acceleration of VAT refunds consistent with reform objectives.
- The report notes that more analysis would have been needed to understand the full range of determining factors, including tax administration or policy design.

### Organic Budget Law (OBL): improvements and remaining vulnerabilities
- Adoption of the OBL in 2015 introduced:
  - multi-year and program budgeting,
  - a fiscal “golden rule” (limiting new borrowing to the financing of investment spending and debt amortization),
  - performance management,
  - strengthened transparency,
  - binding ceilings on the wage bill,
  - limits on carry-over of investment appropriations,
  - enhanced fiscal performance management and parliamentary oversight provisions.
- Most OBL provisions entered into force in January 2016 (those related to fiscal performance management, transparency, and parliamentary oversight and approval).
- Remaining provisions (multi-year budget and programming, making ceilings on wage expenditure appropriations binding, limiting carryover of investment appropriations) were to be gradually introduced by 2020.
- To limit fiscal risks further, some OBL provisions could have been more aligned with international best practice:
  - The law allows for a 30 percent limit on roll-over of credit appropriations compared to 3–5 percent internationally.
  - A rule with a more comprehensive fiscal target could be more effective than a golden rule focused on limiting borrowing for investment.
- Authorities have taken steps to address SOE-related fiscal risks outside the OBL; enactment of the draft law to reinforce governance and oversight of SOEs is noted as important.

### Growth and employment policy measures (implementation and outcomes)
- Authorities implemented a program of measures to promote job-rich growth, including:
  - streamlining administrative procedures for enterprises,
  - improving investor protection by amending the law on limited-liability companies,
  - strengthening public-private partnerships,
  - measures to ensure smooth application of the new procurement code,
  - a new national industrial acceleration program to foster new industries,
  - establishment of a Competition Council,
  - reforms of the judicial system to boost independence, effectiveness, and transparency,
  - revamping active labor market policies and discussions with social partners on labor code reforms to support job creation while promoting adequate work conditions.
- Despite these measures, growth turned out to be lower than envisaged.

*Source: IMF staff (CR/16/265 content provided in the supplied document).*

### 2.7 percent during 2014–16, about 2 percentage points lower than the projected 4.6 percent at the

### cr17265 - 2.7 percent during 2014–16, about 2 percentage points lower than the projected 4.6 percent at the

### Growth performance and sources of underperformance
- Real GDP growth realized at 2.7 percent during 2014–16, about 2 percentage points lower than the projected 4.6 percent at the start of the arrangement.
- Contributory factors to underperformance:
  - Over-optimism about the positive impact of past structural measures on growth and anticipated output from new industries.
  - Difficulties in projecting volatile agricultural output.
  - Fiscal and external developments were judged unlikely to have contributed as significantly.
- External environment and prices:
  - Projected Euro Area growth of about 1.6 percent turned out higher—an average 1.9 percent during the period.
  - Oil price assumptions of US$103 per barrel during 2014–16 versus actual oil prices averaging US$65 per barrel.
- Counterfactual debt dynamics:
  - If the public sector DSA in 2014 had used actual GDP growth during 2014–16 (2.7 percent) and 3.5 percent for the subsequent three years, the projected public debt-to-GDP ratio by 2019 would have been about 7 percentage points higher than projected at the time of the request for the PLL arrangement.

### Labor market, inclusiveness, and business environment
- Unemployment declined between 2014 and 2016; however:
  - Labor force participation remained low, especially among women.
  - Poverty persisted, particularly in rural areas; youth unemployment remained high.
- Recent policy and outcomes:
  - Broader indicators of poverty and living standards improved, reflecting sustained growth and policy action (increased public spending on health, better access to sanitation, greater reach of financial services).
  - Business environment improved in Doing Business rankings, but key reforms still needed (making the Competition Council operational; fighting corruption through implementation of the national strategy).

### External competitiveness, trade composition, and FDI
- Program strategy targeted lifting potential growth by enhancing competitiveness, business climate, governance, exports, and FDI inflows; no move to a more flexible exchange rate was envisaged within the program timeframe.
- Wage policy:
  - IMF staff assessed that a 10 percent increase in the minimum wage, spread over two years, was unlikely to impact competitiveness.
- Exchange rate and competitiveness:
  - Depreciation of the ULC-based REER in 2015 indicated modest price competitiveness gains.
  - By late-2015 the real exchange rate was assessed as broadly in line with fundamentals, erasing moderate overvaluation at the start of the arrangement.
- External balance and trade composition:
  - External balance strengthened as a share of GDP largely due to declining import prices driven by lower oil prices.
  - Goods export basket shifted toward higher-value-added manufacturing exports such as automobiles.
  - Export volume growth remained robust but export prices did not pick up; overall exports of goods and services remained broadly unchanged as a share of GDP.
  - The current account improved by 3.8 percentage point of GDP over two years from Q2 2014, largely related to a declining value of imports owing to the drop in oil prices; the decline in the 12-month sum of energy imports during June 2014 to June 2016 exceeded the decline in total imports.
- FDI flows:
  - FDI inflows strengthened during 2014 and into 2015, supporting exports, but by the end of the program the four-quarter sum of inward FDI had declined about ¾ percentage point of GDP from its peak in 2015.
  - Improvements in competitiveness may take time to materialize and could arise as reform efforts continue.

### Consistency with Fund rules and practices — PLL qualification and access
- Qualification assessment:
  - Morocco met PLL qualification standards at the time of the request and at each of the three reviews.
  - Strong performance noted in: monetary policy (low and stable inflation); financial sector (well-capitalized banks and strengthened supervision in line with Basel III); data adequacy (subscriber to the Special Data Dissemination Standard).
  - No substantial underperformance in external and fiscal areas; fiscal deficit reduced and current account narrowed prior to the request.
- External risks at request:
  - External risks were elevated but moderated relative to the first arrangement; risks included slower growth in trading partners (Europe), global financial market volatility, and geopolitical risks that could increase oil prices.
- Authorities requested a reduction in access:
  - Requested a 21 percent reduction in access to 550 percent of quota (about USD 5 billion) from 700 percent of quota (about USD 6.2 billion) in the 2012 PLL arrangement.
  - International reserves increased toward the end of the first PLL arrangement and reached 97 percent of the Fund’s ARA metric in June 2014 (without considering capital controls), close to the lower bound of the recommended 100 and 150 percent of the metric.
- Exceptional access criteria:
  - All four substantive exceptional access criteria were assessed as met at approval and at each review:
    - Criterion 1: Exceptional balance of payments pressures potential—Met.
    - Criterion 2: High probability of medium-term public debt sustainability—Met (public debt below 65 percent of GDP projected to peak in 2015; stress tests showed sustainability).
    - Criterion 3: Prospects of regaining access to private capital markets—Met.
    - Criterion 4: Policy program provided reasonably strong prospect of success—Met.

### Phasing of access, financing scenarios, and reserve drawdown
- Access phasing:
  - PLL phasing allowed up to 500 percent of quota in the first year, with the remainder available at the start of year two; quantitative financing scenarios indicated a potential financing gap of 494 percent of quota in the first year, increasing to 543 percent of quota in the second year.
  - The phasing produced a counterintuitive increase in access from 500 percent of quota in year one to 550 percent in year two despite declining access across back-to-back arrangements.
- External Economic Stress Index (ESI):
  - ESI implemented to assess external risks and support access decisions; variables included: (i) growth in the euro area; (ii) emerging markets volatility index (VXEEM); (iii) oil prices.
  - Morocco’s ESI indicated improvement in external conditions but that downside risks remained.
  - Transparency issues noted:
    - Weights applied to external variables were changed within the PLL arrangement without explanation.
    - Downside scenario shocks were not updated across reviews; omission of the assumed shock to the VXEEM left the downside scenario incompletely specified.
- Reserve drawdown assumptions and alternative scenario:
  - Financing gap defined after drawing down reserves to 90 percent of the ARA metric (larger buffer than prior arrangement which allowed drawdown to 85 percent of ARA).
  - Allowing drawdown to 85 percent of the ARA under the second arrangement would have reduced financing needs by USD 1.1 billion and USD 1.2 billion in the two years, respectively, corresponding to access of 410 percent of quota instead of the requested 550 percent of quota.
  - A clear discussion of the change in the reserve drawdown assumption from the first arrangement would have improved transparency.

### Exit strategy, market reaction, and conditionality
- Exit strategy:
  - Authorities indicated intent to exit the PLL as external risks receded and requested reduced access; this aligned with PLL guidance requiring reference to exit expectations.
  - The reduction in access was not associated with adverse market reaction; EMBI spreads narrowed on the day of the July 28, 2014 press release and were 12 basis points lower two days later.
- Conditionality:
  - Parsimonious use of ex-post conditionality under the PLL was appropriate; PLL arrangements of one to two years include ex-post conditionality in the form of indicative targets and standard performance criteria.
  - Discussion points:
    - It would have been reasonable to consider additional conditionality related to passing the OBL in a timely manner.
    - Given lower-than-expected growth performance, additional ex-post conditionality on measures to boost investment and raise productivity could have been considered, but performance did not suggest such conditionality was critical.
  - Strong authorities’ ownership and corrective actions during this and the first PLL arrangement supported the view that additional ex-post conditionality was not needed and could have been counterproductive.

*Source: IMF staff report content provided in the supplied document excerpt.*

### CONCLUSIONS AND LESSONS

### CONCLUSIONS AND LESSONS

### Overall assessment of the 2014–16 PLL arrangement
- The 2014–16 PLL arrangement with Morocco helped reduce vulnerabilities and provided the authorities with a backstop against potential exogenous shocks.
- The authorities met their objective to reduce vulnerabilities, as the arrangement supported reforms to strengthen macroeconomic stability by continuing to reduce fiscal and current account deficits.
- Growth turned out to be lower than expected; unemployment declined between 2014 and 2016 but much remained to be done to ensure higher and more inclusive growth.
- The macroeconomic strategy, program design, and financing were all in line with Fund policy, including the exceptional access policy. The level and phasing of access were deemed appropriate and well justified under Fund policy.
- The case of Morocco demonstrated that with strong ownership, parsimonious conditionality can be effective in delivering on program commitments.

### Fiscal outcomes and public finance reforms
- Fiscal objective: gradual reduction of the budget deficit to 3 percent of GDP by 2017 to bring the debt-to-GDP ratio down closer to 60 percent in the medium term while allowing for necessary investment and social spending.
- Fiscal balances improved under the program.
- Subsidy reform, a notable success of the first PLL-supported program, continued.
- Several reforms were implemented to address the public payroll and the pensions system; a comprehensive civil service reform remained needed.
- Although one indicative target was missed, the authorities took strong corrective actions when needed to keep the program on track.
- Adoption of the OBL substantially improved the budget framework by introducing multi-year and program budgeting, a fiscal ‘golden rule’, performance management, and strengthened accountability; some provisions could have been more aligned with international best practice.

### External sector and competitiveness
- Current account deficit improvement: improved by 7.5 percentage points of GDP during 2012–15.
- Reserves were built up to be 94 percent of the Fund’s ARA metric—and accounting for capital controls would put reserve adequacy well into the recommended adequacy range.
- The initial overvaluation of the REER had been erased by the end of the arrangement, but competitiveness gains were assessed as quite modest.
- The economy experienced a compositional shift in exports towards higher-value-added products, such as automobiles.
- The current account improvement as a share of GDP was largely related to the significant drop in oil prices.

### Key lesson on growth projections and program realism
- Important lesson: need for greater realism in growth projections.
- In Morocco’s case, the projected increase in the potential growth rate could have been better motivated in staff reports by elaborating links between investment, productivity, and reform implementation to clarify how reforms could affect growth prospects.
- More conservative growth assumptions would have highlighted the need for further measures to support higher and more inclusive growth and would have facilitated a more realistic discussion of the fiscal strategy—particularly valuable given underperformance of revenue outcomes.
- The 2016 Article IV staff report addressed some of these issues; a recently-developed toolkit on macro-structural issues is being piloted in the Fund and could help support future work.

### Phasing of access under PLL
- The phasing policy, while safeguarding Fund resources, can produce an irregular access path in contexts of back-to-back declining access arrangements for countries addressing vulnerabilities.

### Views and reactions of the Moroccan authorities
- Authorities broadly agree with the main conclusions and welcome the report’s recognition of improved macroeconomic fundamentals and continued PLL eligibility.
- Authorities contest the report’s implication of over-optimism in growth projections, noting the need for comprehensive comparison of exogenous assumptions with actual developments; they highlight the role of slowdown in domestic demand, notably investment, in non-agricultural growth deceleration.
- Authorities argue that competitiveness gains were understated when measured by exports-to-GDP, noting that competitiveness is relative and many indicators (including the volume index of world demand addressed to Morocco and the country’s absolute market share in world trade) improved during the period.
- Authorities emphasized commitment to continued fiscal and structural reforms to achieve higher and more inclusive growth.

### Authorities’ reported macro outcomes and near-term projections (as stated by the authorities)
- Projected total growth in 2017: 4.8 percent (up from 1.2 percent in 2016).
- Credit recovery supported by accommodative monetary policy; inflation should decline to less than 1 percent.
- Current account deficit projection for 2017: 4 percent of GDP.
- Fiscal deficit projected to decline to 3.5 percent of GDP in 2017 from 4.1 percent last year, and to fall further to the PLL target of 2.1 percent of GDP in 2021.
- Public debt to GDP ratio expected to decline from 64.7 percent in 2016 to 63.2 percent in 2017 (against 64.3 percent projected under the PLL), on a declining trend to reach under 60 percent of GDP by 2021.
- Authorities reported significant overperformance in tax collection and current spending control through June 2017 and expected additional tax measures to be identified for the 2018 budget process.
- Structural reform priorities reaffirmed: implementation of the Organic Budget Law, tax reform, subsidy reform, responsible decentralization, improved public investment management and oversight/performance of public enterprises, civil service reform, business environment improvement, education reform, governance, and human development/inclusiveness.
- Transition to more exchange rate flexibility: planned start end-June 2017 postponed after demand for hedging led to a significant decline in official reserves and increase in commercial banks’ foreign assets; official reserves stabilized subsequently and the authorities remain committed to moving to a more flexible exchange rate regime at an appropriate time.

### Conclusion by the authorities
- The authorities expressed gratitude for Fund support and technical assistance and reaffirmed commitment to sound policies and reforms to unlock the economy’s potential and achieve higher, more inclusive, and job-rich growth.
- They intend to continue treating the PLL as a precautionary instrument and will assess the need for continued engagement under precautionary arrangements at the expiration of the current PLL.

*Source: CONCLUSIONS AND LESSONS (cr17265) — Ex-Post Evaluation of the Precautionary and Liquidity Line Arrangement with Morocco, as provided in the supplied content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17265.pdf_