## cr1736 ## Source details **Canonical URL:** [cr1736](https://www.imf.org/-/media/files/publications/cr/2017/cr1736.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr1736.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr1736.pdf.json) --- ### Recent developments - Real GDP growth slowed to 1.5 percent in 2016 (after 1.8 percent in 2015) due to a sharp contraction in agricultural output and subdued non-agricultural activity. - Real agriculture GDP: -9.8 percent in 2016. - Real non-agriculture GDP: 3.0 percent in 2016. - Consumer prices (period average): 1.6 percent in 2016; end of period: 1.5 percent in 2016. - Current account deficit increased to 2.9 percent of GDP in 2016 (against 2.2 percent in 2015); current account including official transfers: -2.9 percent of GDP in 2016. - International reserves strengthened to about seven months of imports (In months of next year imports of goods and services: 6.8 months in 2016; text describes about seven months). - Gross reserves: 25.7 billion U.S. dollars in 2016. - Fiscal deficit declined from 4.4 percent of GDP in 2015 to about 4 percent of GDP in 2016 against the objective of 3.5 percent of GDP for 2016. - Public finances in 2016 (percent of GDP): Revenue 26.7; Expenditure 30.2; Budget balance -3.5; Primary balance (excluding grants) -1.8; Total government debt 64.3 percent of GDP. - Banking sector: banks are well capitalized and have stable funding; nonperforming loans are rising and credit concentration risks, while declining, remain elevated. - Moroccan banks’ expansion into Sub-Saharan Africa increases cross-border risk transmission; cooperation with host country supervisors is intensifying and supervisory requirements for cross-border activities are being upgraded. - Political context: Parliamentary elections on October 7, 2016; incumbent Justice and Development Party (PJD) won the highest number of seats; policy continuity expected. ### Outlook and risks - Growth projections: - Growth expected to rebound to 4.4 percent in 2017 and reach 4.5 percent by 2021 (medium-term). - Real GDP projection for 2017: 4.4 percent. - Inflation and external outlook: - Headline inflation projected at 1.2 percent in 2017 and to stabilize at about 2 percent thereafter. - External position expected to continue to improve. - Key downside risks: - Growth slowdowns in advanced and emerging countries. - Geopolitical tensions in the region. - World energy prices. - Global financial market volatility. - Structural prerequisites for stronger medium-term growth: - Continued implementation of comprehensive reforms on labor participation and labor market efficiency, access to finance, quality education, public spending efficiency, and improvements to the business environment. - Continued poverty reduction and lower regional and gender disparities to achieve higher, sustainable and more inclusive growth. ### Executive Board assessment and staff recommendations - Directors’ appraisal: - Commended authorities for sound macroeconomic policies and reforms that reduced domestic and external vulnerabilities, enhanced fiscal and financial policy frameworks, and increased economic diversification. - Welcomed continued policy commitment and encouraged sustained reform efforts to reduce vulnerabilities and promote job creation and inclusive growth. - Fiscal policy guidance: - Commended progress on fiscal consolidation, containment of current spending, energy subsidy reform, and public pension reform. - Encouraged gradual reduction of public debt over the medium term while preserving pro-growth and social spending. - Recommended accelerating tax reforms to broaden the tax base and careful, well-planned implementation of fiscal decentralization to mitigate fiscal risks. - Encouraged civil service reform to help contain the public wage bill. - Monetary and exchange rate policy: - Endorsed currently accommodative monetary stance given moderate inflation and nascent credit growth recovery. - Supported gradual move to a more flexible exchange rate regime and new monetary policy framework; Directors concurred conditions for a successful transition in 2017 are in place. - Encouraged submission to parliament of the draft central bank law to strengthen Bank Al-Maghrib’s independence and expand its roles in financial stability and inclusion. - Financial sector supervision and stability: - Welcomed banking sector soundness and capitalization, but stressed need to monitor rising NPLs, credit concentration risks, and cross-border expansion. - Welcomed BAM’s efforts to strengthen regulatory and supervisory framework per 2015 FSAP recommendations: cross-border bank oversight, more risk-based and forward-looking supervision, stronger macroprudential policy framework, and strengthening supervisory resources. - Structural reform priorities to raise inclusive growth and jobs: - Improve business climate, particularly for SMEs, including enhanced access to financing. - Improve labor market regulations and increase efficiency of public spending on education and vocational training to address skill mismatches. - Reinforce governance and oversight of public enterprises and continue implementing the national anti-corruption strategy. ### Fiscal policy, public debt, and consolidation - Fiscal consolidation achievements and targets: - Fiscal deficit improved from 7.3 percent of GDP in 2012 to 4.5 percent in 2015 and expected 3.5 percent in 2016. - Authorities and staff maintain the objective of reducing public debt to 60 percent of GDP by 2020. - Fiscal consolidation should bring the fiscal deficit to about 2.4 percent of GDP by 2020. - Fiscal reform priorities: - Tax reforms could yield about 1.5–2 percent of additional public revenues over the medium term; priorities include broadening the tax base, fighting fiscal fraud, and reducing VAT and other tax exemptions (especially for large agricultural firms). - Authorities project increased VAT refund from 5.2 billion dirhams in 2016 to 7 billion dirhams in 2017. - Gradually implement fiscal decentralization with safeguards; authorities plan to increase the share of income tax revenues allocated to regions from 1 to 2 percent in 2016 and up to 5 percent by 2020. - Civil service reforms to keep the public payroll below 10.5 percent of GDP over the medium term. - Strengthen governance and oversight of public enterprises; draft law submitted to cabinet; consolidated SOEs balance sheet in progress. - Public debt and DSA: - Public debt rose from 47 percent in 2009 to 64.3 percent in 2016; described as "relatively high" but sustainable and below the debt burden benchmark of 70 percent of GDP for emerging markets. - DSA: debt resilient to various shocks; gross financing needs exceeded 15 percent of GDP in 2014 but declined under that benchmark in 2015 and are expected to decline over the medium term. ### Monetary policy, exchange rate reform, and reserves - Monetary policy: - Bank Al-Maghrib (BAM) lowered its policy rate to 2.25 percent in March 2016. - Current accommodative stance endorsed while inflation expectations remain anchored. - Monetary transmission effective; credit growth nascent recovery. - Exchange rate flexibility: - Authorities entered final preparatory phase for greater exchange rate flexibility in 2017; gradual approach to introduce an adjustable horizontal band to de-anchor the dirham from the current currency basket and deepen FX market. - Preconditions cited: strong macroeconomic buffers, comfortable reserves, enhanced policy frameworks, alignment of exchange rate with fundamentals, limited currency risk exposures, relatively low pass-through to consumer prices. - Fund TA supported operational readiness, communication strategy, legal and market development aspects. - Restrictions on capital outflows by residents should not be eliminated in the short run during initial phases. - Reserves: - Reserves improved to about seven months of imports in 2016 (In months of next year imports: 6.8 months in 2016; table shows 6.8). - Reserves expected to be over 115 percent of the ARA metric (151 percent of the adjusted metric) by 2021. ### Financial sector health, supervision, and risks - Banking sector indicators: - Banks’ regulatory capital ratio: 13.7 percent in 2015. - Nonperforming loans (NPLs): 8 percent in September 2016 (7.4 percent in 2015). - Aggregate large exposures: 302 percent of T1 capital (341 in 2014). - Cross-border exposures to Sub-Saharan Africa: about 20 percent of banks’ assets. - Credit to the private sector (annual percentage change): 4.5 percent (2015), 4.8 percent (2016). - FSAP recommendations and implementation status (selected): - Strengthen on-site supervision capacity; internal reorganization and four net new hirings for on-site supervision since December 2015 (current total staff: 54). - Review loan classification and provisioning rules; circular to be finalized by first semester 2017 (impact study underway). - Advance recovery & resolution plans and define objectives of banking resolution including “least-cost” principle; overhaul of legal framework initiated. - Creation of macro-prudential department at BAM; countercyclical buffers introduced in June 2016. - Separation and clarification of BAM’s ELA function in draft central bank law to be approved in 2017. - Second credit bureau expected to start operating in January 2017. - Crisis management and cross-border supervision: - New units and supervisory colleges established; formal arrangements with BCEAO and CEMAC and host country supervisors. - Stress tests show failure of top three largest corporate exposures (mostly SOEs) could under-capitalize several banks. - AML/CFT: - Preparation for MENAFATF evaluation in 2017; need to strengthen risk-based AML/CFT supervision and beneficial ownership information availability. ### Structural reforms, labor market, and inclusion - Main constraints to growth: - Quality of education, skills mismatches, governance and business environment, and labor market functioning. - Education and labor market priorities: - Increase efficiency of public spending on education, teacher training, recruitment, and evaluation; foster public–private partnerships for curriculum design and apprenticeships. - Consider relaxing restrictions on fixed-term contracts and layoffs to better integrate young workers. - Policies to reduce gender gaps: invest in women’s education, child care facilities, safe transportation, and remove gender discriminatory tax practices. - Labor market indicators: - Q3-2016 unemployment: 9.6 percent overall; youth unemployment 21.8 percent. - Female labor force participation: 24.8 percent. - 20.5 percent of workers receive medical coverage. - Only 12 percent of employed youth had a formal job contract in 2015. - 72 percent of students leave the education system without qualification. - SME finance and insolvency: - Firms with a line of credit: 52 percent in 2013; large enterprises 72 percent, SMEs 50 percent. - Collateral requirements constrain SMEs; draft law on collateral ready for discussion to facilitate extra-judiciary enforcement. - Launch of a second credit bureau expected in January 2017. - Business climate: - Doing Business ranking improved to 68 in 2017 (from 75 in 2016). - Remaining needs: operationalize Competition Council, fight corruption, develop e-regulation platform. ### Selected key statistics and projections (selected exact figures as presented) - Real GDP: 1.8 percent (2015), 1.5 percent (2016), projected 4.8 percent (PL L column) and 4.4 percent (Rev. column for 2017). - Real agriculture GDP: -10.5 percent (2015), -9.8 percent (2016), 13.7 percent (PL L column), 10.8 percent (Rev. column for 2017). - Real non-agriculture GDP: 3.5 percent (2015), 3.0 percent (2016), 3.6 percent (PL L column), 3.5 percent (Rev. column for 2017). - Consumer prices (period average): 1.3 percent (2016), 1.2 percent (2017 projection). - Gross capital formation: 30.2 percent of GDP (2015), 31.2 percent of GDP (2016), projected 30.7 percent (PL L) and 32.1 percent (Rev. for 2017). - Gross national savings: 29.0 percent of GDP (2015), 28.3 percent of GDP (2016), 29.3 percent of GDP (PL L) and 29.8 percent (Rev. for 2017). - Revenue and expenditure (percent of GDP) 2016: Revenue 26.7; Expenditure 30.2. - Budget balance: -3.5 percent of GDP in 2016. - Total government debt: 64.3 percent of GDP in 2016. - Credit to the private sector (annual percentage change): 4.5 percent (2015), 4.8 percent (2016). - Exports of goods and services (U.S. dollars, percentage change): 4.4 percent (2015), 3.0 percent (2016), projected 6.7 percent (PL L) and 5.4 percent (Rev. for 2017). - Imports of goods and services (U.S. dollars, percentage change): 4.5 percent (2015), 6.1 percent (2016), projected 6.5 percent (PL L) and 3.9 percent (Rev. for 2017). - Current account including official transfers: -2.2 percent (2015), -2.9 percent (2016), projected -1.4 percent (PL L) and -2.3 percent (Rev. for 2017). - Foreign direct investment: 2.5 percent of GDP (2015), 2.0 percent of GDP (2016), projected 2.4 percent (PL L) and 2.1 percent (Rev. for 2017). - Gross reserves (in billions of U.S. dollars): 26.7 (2015), 25.7 (2016), projected 30.2 (PL L) and 27.6 (Rev. for 2017). - Reserves in months of next year imports: 7.1 (2015), 6.8 (2016), projected 7.6 (PL L) and 6.9 (Rev. for 2017). - Nominal GDP (in billions of U.S. dollars): 104.9 (2015), 103.6 (2016), projected 111.1 (PL L) and 106.6 (Rev. for 2017). - Unemployment rate: 9.9 percent (2015), 9.7 percent (2016). - BAM policy rate: 2.25 percent as of March 2016. - NPLs: 8 percent in September 2016 (7.4 percent in 2015). - External debt: about 30 percent of GDP (RAM narrative); external debt 32.4 percent of GDP (table). - NIIP: expected to decline slightly to -62½ percent of GDP. - REER appreciation: 3.7 percent (y-o-y) at end-November 2016. - Medium-term credit growth: projected average of 5 percent. - Reserves by 2021: over 115 percent of the ARA metric (151 percent adjusted metric). ### Policy implications and priorities (staff appraisal) - Maintain fiscal consolidation while preserving pro-growth and social spending; accelerate tax reforms to broaden tax base and improve revenue mobilization. - Implement civil service reforms to contain the public wage bill and improve efficiency. - Strengthen financial supervision, complete bank resolution framework overhaul, and enhance macroprudential tools. - Proceed with gradual exchange rate flexibility implementation with careful sequencing, communication, and monitoring of currency risk exposures. - Advance structural reforms to improve business climate, education and vocational training, labor market flexibility, SME finance, and governance to raise potential growth and employment and promote inclusion. *Source: IMF staff report for the 2016 Article IV Consultation (cr1736).* ### 1.6 percent, reflecting higher food and energy prices. ### cr1736 - 1.6 percent, reflecting higher food and energy prices. ### Recent developments - Real GDP growth slowed in 2016 due to a sharp contraction in agricultural output and subdued non-agricultural activity: Real GDP growth was 1.5 percent in 2016 (after 1.8 percent in 2015). - Real agriculture GDP and non-agriculture GDP in 2016: - Real agriculture GDP: -9.8 percent in 2016. - Real non-agriculture GDP: 3.0 percent in 2016. - Inflation: - Consumer prices (period average) were 1.6 percent in 2016. - Consumer prices (end of period) were 1.5 percent in 2016. - Headline inflation is projected to be 1.2 percent in 2017 and stabilize at about 2 percent thereafter. - External position and reserves: - Current account deficit increased to 2.9 percent of GDP in 2016 (against 2.2 percent in 2015). - Current account including official transfers: -2.9 percent of GDP in 2016. - International reserves strengthened to about seven months of imports (In months of next year imports of goods and services: 6.8 months in 2016; about seven months described in text). - Gross reserves were 25.7 billion U.S. dollars in 2016. - External sector drivers: - Strong manufacturing and agriculture exports, and a rebound in tourism and remittances, more than offset increased equipment and food imports and low phosphate prices. - Fiscal developments: - Fiscal deficit declined from 4.4 percent of GDP in 2015 to about 4 percent of GDP in 2016 against the objective of 3.5 percent of GDP for 2016. - Fiscal consolidation reflected resilient tax revenues and well contained current expenditures, offsetting a grant shortfall of about 0.3 percent of GDP and allowing for an increase in investment spending. - Public finances in 2016 (percent of GDP): Revenue 26.7; Expenditure 30.2; Budget balance -3.5; Primary balance (excluding grants) -1.8; Total government debt 64.3 percent of GDP. - Banking sector and financial stability: - Banks are well capitalized and have stable funding. - Nonperforming loans are rising and credit concentration risks, while declining, remain elevated. - Moroccan banks’ expansion into Sub-Saharan Africa opens new channels of risk transmission; cooperation with host country supervisors is intensifying and supervisory requirements for cross-border activities are being upgraded. ### Outlook and risks - Growth projections: - Growth is expected to rebound to 4.4 percent in 2017 and reach 4.5 percent by 2021 (medium-term). - Real GDP projection for 2017: 4.4 percent. - Inflation and external outlook: - Headline inflation projected at 1.2 percent in 2017 and to stabilize at about 2 percent thereafter. - External position expected to continue to improve. - Key downside risks identified: - Growth slowdowns in advanced and emerging countries. - Geopolitical tensions in the region. - World energy prices. - Global financial market volatility. - Structural prerequisites for stronger medium-term growth: - Continued implementation of comprehensive reforms on labor participation and labor market efficiency, access to finance, quality education, public spending efficiency, and further improvements to the business environment. - Continued poverty reduction and lower regional and gender disparities to achieve higher, sustainable and more inclusive growth. ### Executive Board assessment and staff recommendations - Directors’ appraisal: - Commended authorities for sound macroeconomic policies and reforms that reduced domestic and external vulnerabilities, enhanced fiscal and financial policy frameworks, and increased economic diversification. - Noted medium-term outlook is favorable but risks remain elevated; welcomed continued policy commitment and encouraged sustained reform efforts to reduce vulnerabilities and promote job creation and inclusive growth. - Fiscal policy guidance: - Commended progress on fiscal consolidation, containment of current spending, energy subsidy reform, and public pension reform. - Encouraged gradual reduction of public debt over the medium term while preserving pro-growth and social spending. - Recommended accelerating tax reforms to broaden the tax base and careful, well-planned implementation of fiscal decentralization to mitigate fiscal risks. - Encouraged civil service reform to help contain the public wage bill. - Monetary and exchange rate policy: - Endorsed currently accommodative monetary stance given moderate inflation and nascent credit growth recovery. - Supported gradual move to a more flexible exchange rate regime and new monetary policy framework; Directors concurred conditions for a successful transition in 2017 are in place. - Encouraged submission to parliament of the draft central bank law to strengthen Bank Al-Maghrib’s independence and expand its roles in financial stability and inclusion. - Financial sector supervision and stability: - Welcomed banking sector soundness and capitalization, but stressed need to monitor rising NPLs, credit concentration risks, and cross-border expansion. - Welcomed BAM’s efforts to strengthen regulatory and supervisory framework per 2015 FSAP recommendations: cross-border bank oversight, more risk-based and forward-looking supervision, stronger macroprudential policy framework, and strengthening supervisory resources. - Structural reform priorities to raise inclusive growth and jobs: - Improve business climate, particularly for SMEs, including enhanced access to financing. - Improve labor market regulations and increase efficiency of public spending on education and vocational training to address skill mismatches. - Reinforce governance and oversight of public enterprises and continue implementing the national anti-corruption strategy. ### Key statistics (selected exact figures from the text and tables) - Real GDP: 1.8 percent (2015), 1.5 percent (2016), projected 4.8 percent (PL L column) and 4.4 percent (Rev. column for 2017) as presented in table. - Real agriculture GDP: -10.5 percent (2015), -9.8 percent (2016), 13.7 percent (PL L column), 10.8 percent (Rev. column for 2017). - Real non-agriculture GDP: 3.5 percent (2015), 3.0 percent (2016), 3.6 percent (PL L column), 3.5 percent (Rev. column for 2017). - Consumer prices (period average): 1.3 percent (2016), 1.2 percent (2017 projection). - Gross capital formation: 30.2 percent of GDP (2015), 31.2 percent of GDP (2016), projected 30.7 percent (PL L) and 32.1 percent (Rev. for 2017). - Gross national savings: 29.0 percent of GDP (2015), 28.3 percent of GDP (2016), 29.3 percent of GDP (PL L) and 29.8 percent (Rev. for 2017). - Revenue and expenditure (percent of GDP) 2016: Revenue 26.7; Expenditure 30.2. - Budget balance: -3.5 percent of GDP in 2016 (noting footnote that fiscal deficit for end-2016 does not reflect latest estimates). - Total government debt: 64.3 percent of GDP in 2016. - Credit to the private sector (annual percentage change): 4.5 percent (2015), 4.8 percent (2016). - Exports of goods and services (U.S. dollars, percentage change): 4.4 percent (2015), 3.0 percent (2016), projected 6.7 percent (PL L) and 5.4 percent (Rev. for 2017). - Imports of goods and services (U.S. dollars, percentage change): 4.5 percent (2015), 6.1 percent (2016), projected 6.5 percent (PL L) and 3.9 percent (Rev. for 2017). - Current account including official transfers: -2.2 percent (2015), -2.9 percent (2016), projected -1.4 percent (PL L) and -2.3 percent (Rev. for 2017). - Foreign direct investment: 2.5 percent of GDP (2015), 2.0 percent of GDP (2016), projected 2.4 percent (PL L) and 2.1 percent (Rev. for 2017). - Gross reserves (in billions of U.S. dollars): 26.7 (2015), 25.7 (2016), projected 30.2 (PL L) and 27.6 (Rev. for 2017). - Reserves in months of next year imports: 7.1 (2015), 6.8 (2016), projected 7.6 (PL L) and 6.9 (Rev. for 2017). - Nominal GDP (in billions of U.S. dollars): 104.9 (2015), 103.6 (2016), projected 111.1 (PL L) and 106.6 (Rev. for 2017). - Unemployment rate: 9.9 percent (2015), 9.7 percent (2016). *Source: IMF staff report for the 2016 Article IV Consultation (cr1736).* ### 1. Decisive policies and reforms have helped improve macroeconomic conditions in ### 1. Decisive policies and reforms have helped improve macroeconomic conditions in ### Recent Developments - Decisive policies and reforms have reduced domestic and external vulnerabilities, enhanced the fiscal and financial policy frameworks, and supported economic diversification. - The IMF supports the authorities’ program through the successor two-year precautionary and liquidity line (PLL) arrangement approved in July 2016, which aims to provide insurance against external risks and to support fiscal sustainability, transition toward greater exchange rate flexibility, and higher growth to reduce unemployment. - Political context: - Parliamentary elections on October 7, 2016: the incumbent Justice and Development Party (PJD) won the highest number of seats. - Policy continuity is expected; the current Head of Government will lead the future government; coalition discussions likely to involve the same parties and to maintain current policy and reform commitments. - Growth and labor market: - Growth slowed in 2016; sharp contraction in agricultural output and lower non-agricultural activity reduced growth to 1.5 percent in 2016. - Unemployment: overall unemployment rate decreased to 9.6 percent in Q3-2016 from 10.1 percent in the same period of last year. - Youth unemployment increased to 21.8 percent from 21.4 percent in the same period of last year. - Fiscal developments: - Fiscal deficit expected to be reduced in 2016 to 3.5 percent of GDP. - Deficit history: culminated at 7.3 percent of GDP in 2012; reduced to 4.5 percent in 2015. - Grant revenues (mostly from Gulf countries) were lower than anticipated: 39 percent of expected amount at end-October 2016. - Capital expenditures: 76 percent of budget at end-October 2016. - Public debt expected to peak at 64.3 percent of GDP in 2016. - Monetary and price developments: - Headline inflation: declined to 0.3 percent (y-o-y) in January 2016; reached 1.6 percent in October 2016 due to rising food and energy prices. - Core inflation increased to 1.1 percent. - Average inflation projected to remain around 1.6 percent in 2016. - Bank Al-Maghrib (BAM) lowered its policy rate to 2.25 percent in March 2016 (first reduction since end-2014). - Credit and banking sector: - Credit growth reached 4 percent (y-o-y) in September 2016. - Mortgage lending about 5 percent (y-o-y). - Banks’ regulatory capital ratio stood at 13.7 percent in 2015. - Non-performing loans (NPLs) reached 8 percent in September 2016 (7.4 percent in 2015). - Aggregate large exposures: 302 percent of T1 capital (against 341 in 2014). - Cross-border exposures to Sub-Saharan Africa account for about 20 percent of banks’ assets. - External sector and reserves: - Current account deficit expected to reach 2.9 percent of GDP in 2016 (2.2 percent in 2015). - Reserves should reach 100 percent of the Assessing Reserve Adequacy (ARA) metric by end-2016 (131 percent the adjusted ARA metric). - Net international investment position (NIIP) expected to decline slightly to -62½ percent of GDP. - External debt amounted to 32.4 percent of GDP. - Real effective exchange rate appreciated 3.7 percent (y-o-y) at end-November 2016 due to strengthening of the US dollar. - IMF External Balance Assessment (EBA) preferred current account approach suggests a current account gap of -0.9 percent of GDP and an REER overvaluation of 3.1 percent (compared to 7 percent in Spring 2016), and concludes the dirham is broadly aligned with fundamentals. ### Outlook and Risks - Growth projections: - 2017: growth should rebound to 4.4 percent due mainly to the base effect on agricultural activity. - Medium term: expected to reach 4.5 percent; potential output increasing by an estimated one percentage point relative to 2016, driven by higher capital accumulation and a pickup in productivity. - Inflation: expected at 1.2 percent in 2017 and to increase to about 2 percent over the medium term. - Credit growth: projected to pick up to an average of 5 percent over the medium term. - External outlook: - 2017 current account deficit expected to decline to 2.3 percent of GDP. - Medium term: current account projected to remain in the range of 1.5–2 percent of GDP. - Reserves: expected to be over 115 percent of the ARA metric (151 percent of the adjusted metric) by 2021 given sustained FDI inflows and other factors. - Key risk factors (tilted to the downside): - Susceptibility to agricultural output volatility despite increased diversification. - Weaker growth in the euro area or other emerging and frontier economies affecting external demand. - Adverse geopolitical developments in the Middle East and Europe affecting tourism. - More volatile global financial conditions and protracted uncertainty about global trade policies, potentially affecting investor confidence, banks’ correspondent relationships, trade credit, and remittances. - Outward spillovers: Moroccan banks’ subsidiaries in SSA are systemically important in some host countries. - Domestic political risk: a new coalition government may change some policies. - Authorities’ view: - Broad agreement with IMF on outlook and risks, but authorities view some risks (e.g., rising nationalism in large economies, fragmentation and security dislocation, slower pace of reforms) as less severe. - Authorities note upside growth potential if European activity strengthens and structural reforms increase diversification and value chain integration. - Recognition that a higher growth path requires significant productivity gains. ### Fiscal Policy and Public Debt - Fiscal consolidation achievements: - Budget balance improved from 7.3 percent deficit in 2012 to 4.5 percent in 2015, and expected 3.5 percent in 2016. - Revenues remained resilient; public expenditures broadly contained. - Cyclical and structural fiscal balances have improved. - Public debt dynamics: - Public debt sustainable; projected to decline gradually after peaking at 64.3 percent of GDP in 2016. - Predictive densities show public debt percentiles through 2021 under baseline projections. ### Financial Sector Health and Risks - Bank performance and risks: - Adequate capital buffers: regulatory capital ratio 13.7 percent in 2015. - Profitability declined during 2010–15 but recovered in 2016. - NPLs rising since 2012; 8 percent in September 2016. - Provisioning levels are high; specific provisions to total loans elevated. - Liquidity conditions adequate; loan-to-deposit ratios improving. - Lending rates declined in line with monetary policy rate; lending-deposit rate spreads shown. - Distribution of NPLs indicates concentration in private businesses and other banks exposures. - Stress tests suggest failure of the top three largest corporate exposures (mostly SOEs) could under-capitalize several banks. - Expansion into SSA provides diversification and profit opportunities but increases cross-border risk transmission. ### Structural Reforms and Competitiveness - Improvements and remaining gaps: - Morocco fares relatively well regionally on overall business climate and competitiveness but room remains to improve business regulations. - Doing Business distance to frontier improved between 2010 and 2017, but specific areas need further reform (e.g., getting credit, enforcing contracts, resolving insolvency). - Key reform priorities highlighted: - Business environment: improvements to business regulations, further integration into global value chains, and industrial diversification. - Education: focus on teacher training, secondary education enrollment, and quality of the educational system. - Labor market: increase women’s labor force participation and reduce regulatory rigidities (hiring/firing practices, wage determination, redundancy costs). - Financial market development: facilitate access to finance, improve affordability of financial services, enhance financing through local equity markets, and improve ease of access to loans. - Overall competitiveness: strengthen institutions, infrastructure, macroeconomic environment, education, goods market efficiency, labor market efficiency, financial market development, technological readiness, and business sophistication. ### Key Statistics and Projections (selected) - 2016 growth: 1.5 percent. - Q3-2016 unemployment: 9.6 percent (overall); youth unemployment 21.8 percent. - 2016 fiscal deficit: 3.5 percent of GDP (expected). - Fiscal deficit: 7.3 percent of GDP in 2012; 4.5 percent in 2015. - Grant revenues: 39 percent of expected amount at end-October 2016. - Capital expenditures: 76 percent of budget at end-October 2016. - Public debt peak: 64.3 percent of GDP in 2016 (expected). - Inflation: 0.3 percent (y-o-y) January 2016; 1.6 percent in October 2016; average projected around 1.6 percent in 2016. - BAM policy rate: 2.25 percent as of March 2016. - Credit growth: 4 percent (y-o-y) in September 2016; mortgage lending about 5 percent (y-o-y). - Banks’ regulatory capital ratio: 13.7 percent in 2015. - NPLs: 8 percent in September 2016 (7.4 percent in 2015). - Large exposures: 302 percent of T1 capital in 2015 (341 in 2014). - Cross-border SSA exposures: about 20 percent of banks’ assets. - Current account deficit: 2.9 percent of GDP in 2016 (expected); 2.2 percent in 2015. - Reserves: projected to reach 100 percent of the ARA metric by end-2016 (131 percent adjusted ARA). - NIIP: expected to decline slightly to -62½ percent of GDP. - External debt: 32.4 percent of GDP. - REER appreciation: 3.7 percent (y-o-y) at end-November 2016. - 2017 growth projection: 4.4 percent; medium-term growth 4.5 percent. - 2017 inflation projection: 1.2 percent. - Medium-term inflation: about 2 percent. - Medium-term credit growth: average of 5 percent. - 2017 current account deficit: 2.3 percent of GDP. - Medium-term current account: projected in the range of 1.5–2 percent of GDP. - Reserves by 2021: over 115 percent of the ARA metric (151 percent adjusted metric). *International Monetary Fund — Staff report chapter: “1. Decisive policies and reforms have helped improve macroeconomic conditions in recent years, but important challenges remain in raising growth and employment.”* ### 12. Building on recent fiscal and external improvements, the reform momentum needs to ### 12. Building on recent fiscal and external improvements, the reform momentum needs to be maintained to secure longer-term stability and raise growth and employment (Appendix I) ### A. Strengthening Domestic Stability - Fiscal consolidation and outcomes: - Fiscal deficit objective of 3.5 percent of GDP for 2016 is estimated to have been met, despite a grants shortfall of about 0.4 percent of GDP in 2016, aided by spending cuts (such as in wages and subsidies). - In 2017, the deficit is expected to decline further to 3 percent of GDP, reflecting (i) reduced spending (in percent of GDP), primarily through contained spending on public wages and goods and services; and (ii) stable tax revenues, due mostly to weaker growth in 2016 and increased VAT refunds. - Staff encouraged the authorities to identify short-term measures for 2017 to compensate for any grants shortfall. - Public debt and targets: - Public debt rose from 47 percent in 2009 to 64.3 percent in 2016. - Debt remains sustainable and below the debt burden benchmark of 70 percent of GDP for emerging markets. - Authorities and staff agreed to maintain the objective of reducing public debt to 60 percent of GDP by 2020. - Fiscal consolidation should bring the fiscal deficit to about 2.4 percent of GDP by 2020. - Fiscal reform priorities: - Taxation: - Tax reforms could yield about 1.5–2 percent of additional public revenues over the medium term. - Key priorities: broaden the tax base, fight fiscal fraud, reduce VAT and other tax exemptions (especially for large agricultural firms), and improve communication on tax reforms. - Authorities are implementing tax reforms in line with recommendations from the 2013 national tax conference and agreed there is room to broaden the tax base. - Note: authorities project an increased VAT refund from 5.2 billion dirhams in 2016 to 7 billion dirhams in 2017. - Fiscal decentralization: - Authorities are shifting increasing amounts of public resources to the regional level under a regionalization initiative. - Actions taken: strengthen local operational structures for regional development planning and project management; reinforce budgetary and financial procedures and controls for regions. - Staff welcomed authorities’ interest in Fund TA on local taxation, capacity development, and fiscal management. - Civil service: - Authorities intend to keep the public payroll below 10.5 percent of GDP over the medium term. - Reforms pursued include contractual employment and increased personnel mobility across ministries. - Staff stressed need for comprehensive civil service reform (merit-based career progression, changes to public wage structures) to generate savings and improve efficiency. - Public enterprises: - A draft law to reinforce governance and oversight of public enterprises has been submitted to the cabinet. - Authorities are working on a consolidated SOEs balance sheet; staff welcomed plans and urged expeditious advancement. - Monetary policy and SME credit: - The policy rate cut in March 2016 supported the nascent credit recovery; monetary transmission is effective. - Baseline: current monetary policy stance remains appropriate as long as inflation expectations remain well anchored, particularly for 2017 when inflation is expected to remain moderate due to a weather-related decline in food prices while economic activity is above potential. - Staff supported initiatives for SME credit guarantees and addressing obstacles to SME credit access. - Authorities noted BAM’s main objective is inflation, credit growth has started to pick up, and liquidity conditions are adequate. - Financial system risks and reforms: - NPLs: authorities plan in first half of 2017 to align loan classification and provisioning rules with IFRS, and formalize/harmonize supervisory “watch list” criteria with tighter provisioning; future legal framework for collateral execution should help recovery rates. - Concentrated credit exposures: new directive in June 2016 requires corporate groups to prepare consolidated financial statements including all existing debt and specify future borrowing plans; considering further tightening of risk weights for large connected exposures. - Supervisory capacity and resources: recruitment and 2016 organizational changes, creation of specialized units for oversight of systemic banks, cross-country exposures, and bank recovery plans; authorities requested Fund TA to assess banks’ readiness to manage currency risks. - Macro-prudential policy: creation of dedicated department at BAM; CCSRS inter-agency discussions; legal power to impose countercyclical capital buffers; priorities include filling data gaps (sectoral loan-to-value and debt-service-to-income ratios) and designing capital surcharges for systemic banks. - Crisis management and bank resolution: upgrade legal framework for bank resolution consistent with FSAP and Fund TA recommendations (including “least-cost” principle, changes to deposit guarantee scheme, bail-in powers); this will take several months; BAM’s designation as resolution authority will not be introduced in the central bank law to be approved in the next parliament session in 2017, but the new ELA framework will be. - Cross-border supervisory cooperation: formal arrangements with bilateral and regional supervisory bodies (BCEAO and CEMAC) and supervisory colleges for all main banks; upgraded supervisory requirements for cross-border activities. - AML/CFT: - Authorities preparing for MENAFATF evaluation in 2017; reviewing legal frameworks in line with FATF changes. - Need to strengthen risk-based AML/CFT supervision, improve availability of beneficial ownership information, and enhance monitoring tools to mitigate cross-border AML/CFT risks, notably given banking sector expansion to SSA. ### B. Safeguarding External Resilience - Exchange rate flexibility transition: - Authorities entered final preparatory phase for greater exchange rate flexibility in 2017. - Expected benefits: increased shock absorption capacity, preserved competitiveness, and better incentives for resource reallocation between tradable and non-tradable sectors (Box 4). - Window of opportunity and pre-conditions: - Preconditions supporting the transition: strong macroeconomic buffers and comfortable reserves; enhanced fiscal, monetary and financial policy frameworks; alignment of the exchange rate with fundamentals; limited currency risk exposures including low level of foreign currency-denominated public debt; relatively low estimated pass-through of exchange rate movements to consumer prices; and a pre-existing exchange rate market. - Fund technical assistance and operational readiness: - Extensive Fund TA helped prepare macro-economic modelling; forecasting and policy analysis; communication strategy; legal, institutional and regulatory structures; and foreign exchange market development. - Gradual approach and sequencing: - Authorities’ gradual approach: introduce an adjustable horizontal band to progressively de-anchor the dirham from the current currency basket, deepen the FX market, and allow monetary policy decisions increasingly based on inflation forecasts. - Staff emphasized timely communication to manage expectations; authorities’ roadmap includes regular meetings and outreach to banks, corporations and the general public. - Staff agreed that fully-fledged inflation targeting should be envisaged in a later stage of the exchange rate transition; maintaining the current monetary policy regime in the interim will avoid major conflicts. - Restrictions on capital outflows by residents should not be eliminated in the short run to minimize risks during initial phases of the transition. ### C. Raising Potential Growth and Job Creation while Promoting Inclusion - Constraints to growth and potential gains: - Main obstacles: quality of education, skills mismatches, governance and the business environment, and functioning of the labor market. - Impact observed: declining productivity, lower human capital levels, employment and labor force growth compared to emerging market peers. - Baseline: ongoing reforms to improve the business environment and access to finance would increase potential output by about 1 percentage point in the medium term. - More ambitious structural reforms addressing all constraints could increase potential growth by about 2 percentage points. - Business environment: - Recent simplifications: administrative procedures for customs transactions, property rights, and enterprise creation; reduced payment delays from the public to the private sector. - Doing Business ranking improved to 68 in 2017 (from 75 in 2016). - Remaining needs: make the Competition Council operational by appointing all members; fight corruption via implementation of the national strategy; develop an e-regulation platform to further simplify administrative procedures. - Labor market, education, and inclusion: - High youth unemployment and low female labor force participation: female labor force participation is very low, at 24.8 percent, and has declined in the past decade. - Need to increase efficiency of public spending on education, enhance teachers’ training, recruitment, and evaluation, and foster public–private partnerships for curriculum design and apprenticeships. - Authorities highlighted efforts to facilitate teacher deployment and a recently-adopted strategy on vocational training focused on private sector needs. - Staff encouraged consideration of relaxing restrictions on fixed-term contracts and layoffs to better integrate young workers. - Policy measures to reduce gender gaps: invest in women’s education, child care facilities, safe transportation, and remove gender discriminatory tax practices. - SME finance and insolvency: - Firms with a line of credit increased to 52 percent in 2013; large enterprises 72 percent, SMEs 50 percent. - Collateral requirements remain a constraint, particularly for small enterprises. - Launch of a second credit bureau expected in January 2017 welcomed. - Draft law on collateral is ready for discussion to facilitate extra-judiciary collateral enforcement. - Staff encouraged continuing reforms to bring insolvency regime in line with international best practices. ### Staff Appraisal and Policy Recommendations - Macroeconomic assessment: - Sound macroeconomic policies and ongoing reforms have reduced vulnerabilities and increased resilience: external and fiscal imbalances decreased; international reserves are comfortable. - Key reforms implemented: public subsidies, fiscal management, financial oversight, and economic diversification. - Preparations for transition to a new exchange rate and monetary regime have been finalized. - Growth remains sluggish and subject to agricultural volatility but is expected to rebound in 2017 and strengthen gradually in the medium term. - Risks and priorities: - Elevated downside external risks: risk of weaker growth in the euro area and emerging economies, adverse geopolitical developments in the Middle East, and protectionist trade policies in large economies. - Need to accelerate reforms to increase growth potential, achieve higher and more inclusive growth, reduce high unemployment (especially youth), and improve women’s labor force participation. - Priority reform areas: further improvements to the business climate (particularly for SMEs), education, and labor market functioning. - Policy mix: - Current macroeconomic policy mix of fiscal consolidation and accommodative monetary policy is appropriate. - Fiscal deficit decreased in 2016 with short-term measures offsetting lower-than-expected grants and is expected to further consolidate in 2017 with stable tax revenues and contained current spending. - With inflation expectations well-anchored, the current monetary policy stance should remain adequate and support a gradual pick-up in credit growth. *cr1736 - 12. Building on recent fiscal and external improvements, the reform momentum needs to* ### 32. Over the medium term, further fiscal consolidation will be required to put public debt ### 32. Over the medium term, further fiscal consolidation will be required to put public debt ### Fiscal consolidation and public debt - Public debt is described as "relatively high" even if sustainable. - Policy objective: reducing public debt to 60 percent of GDP by 2020 to create fiscal space for social and growth-enhancing expenditures. - Building on recent progress in reining in public spending, including energy subsidy reforms, policy focus should include: - Accelerating tax reforms by broadening the tax base and promoting greater tax efficiency, equity, and simplicity. - Gradually implementing fiscal decentralization in order to introduce all needed safeguards. - Enhancing the governance and financial oversight of public enterprises. - Pursuing civil service reforms aiming to generate savings on the public wage bill while increasing the efficiency of public spending. ### Exchange rate flexibility - Conditions for a successful transition to greater exchange rate flexibility in 2017 are stated as "in place." - Expected benefits: - Increase shock absorption capacity of the economy, particularly given current constraints on fiscal space. - Help preserve competitiveness. - Staff view: Morocco’s current position of strength offers a unique window of opportunity for such a transition. - Policy approach supported: gradual approach to dis-anchor the dirham from the current currency basket and allow monetary policy decisions to be increasingly based on inflation forecasts. ### Financial oversight and banking sector resilience - Ongoing advances in financial oversight will further enhance the financial system’s resilience, including in the context of: - Cross border expansion of Moroccan banks. - The forthcoming introduction of greater exchange rate flexibility. - Noted supervisory improvements: - Increased supervisory resources. - Shift toward more proactive, risk-based and forward looking supervision. - Continued efforts to tighten provisioning requirements. - Continued efforts to strengthen the macro-prudential policy framework, in line with 2015 FSAP recommendations. ### Article IV consultation timing - Staff recommends that the next Article IV consultation be held on the standard 12-month cycle. *Source: IMF staff report text provided.* ### Box 1. Morocco—Low Credit Growth: Supply or Demand Driven? - Historical context: - Credit growth has slowed since the end of the 2006-8 credit (boom and bust) cycle. - The credit downturn was driven by the legacy of a credit boom and overhang mainly in the real estate sector. - Drivers: - Demand side: corporate sector deleveraging, particularly in the real estate sector, could have reduced firms’ willingness to borrow. - Supply side: increasing NPLs and provisioning requirements may have led banks to reallocate credit away from most affected sectors. - Empirical findings: - Estimations using a generalized method of moments with separate sets of exogenous variables indicate that both demand and supply have been significant drivers of credit (with expected signs). - Supply curve estimated from the loan-deposit spread and NPLs. - Demand curve estimated from GDP and real estate prices. - Banks supply more loans when systemic liquidity increases. - Demand increases with lower interest rates and higher real estate prices. - Evidence: credit demand has been affected by slow growth in real estate prices post-financial crisis; supply affected by lower profitability via interest rates and a moderate rise in NPLs. - Since 2013, the supply curve has remained low and predicted demand somewhat higher, but supply cannot be identified as a major constraint for credit growth. - Projections: - Going forward, credit is expected to grow around 5 percent annually over the medium term. - Based on projected inflation and GDP growth, credit growth should be between 2.5 and 7 percent. - Cross-country comparison: projection is around the median expectation of 4.5 percent. - Policy measures to boost credit activity: - Continuing with an accommodative monetary policy. - Government guarantee programs for boosting credit supply to SMEs. - Unlocking payment delays to revert liquidity constraints. - Restructuring corporate debt that are negatively affecting bank balance sheets. ### Box 2. Morocco: Advancing Tax Reforms - Reforms implemented since the National Conference on Taxation in 2013: - Introduction of corporate tax brackets in the 2016 budget (departing from a unique 30 percent corporate income tax rate). - Introduction of VAT deductions in some agro-industrial inputs. - Improvements to the VAT refund system. - Core VAT regime remains unchanged with a regular rate of 20 percent, and several reduced rates. - Revisions introduced on excise tax rates. - Social contribution for the public sector increased on September 2016 with the implementation of the new pension law. - Measures to better enforce tax payments by self-employed and liberal professions. - Actions to simplify administrative procedures related to compliance and settlement of tax disputes. - Cross-country context and risks: - Average VAT statutory tax rates very close among developing and advanced economies (14.7 percent versus 16.2 percent). - Income tax rates can vary significantly and have declined in the past ten years. - Multiple VAT rates could introduce economic distortions, complicate administration, and cause revenue loss. - Risk: isolated reforms of specific taxes may introduce inconsistencies or be perceived as unfair, counter-productive for improving tax system quality, efficiency and acceptance. - Need for strategy and expected revenue gains: - Faster implementation of the 2013 consensus requires a more strategic and pedagogic approach, including coordination, sequence, and timeframe of reforms. - Such an approach could yield about 1.5–2 percent of additional public revenues over the medium term. - Specific reform options noted: - Short term measures to boost VAT revenues based on recommendations from previous TA, specifically the application of 7 percent rate to some exempted products, including inputs to agriculture, and a gradual convergence to a dual VAT rate system. - Consolidation of the corporate tax reform, including prevention of tax avoidance from recently introduced corporate tax brackets, which are expected to yield an additional 0.7 percent of GDP of corporate tax revenues in 2017. - At some point, a full assessment of the benefits and risks from implementing the tiered corporate tax system, which is described as atypical from a cross country perspective, would help guide future corporate tax reforms. - Accelerated reduction of exemptions for large agricultural firms, and better enforcement of tax payments by the self-employed and liberal professions. - Tax rate tables (as presented): - Corporate Income Bracket since January, Non-financial Institutions (in dirhams) — Tax rate: - 0–30,000: 0% - 30,001–50,000: 10% - 1,000,001–5,000,000: 30% - Over 5,000,000: 31% - Personal Income Bracket (in dirhams) — Tax rate: - 0–300,000: 10% - 300,001–1,000,000: 20% - Over 1,000,000: 30% - (Also listed in table format: 50,001–60,000: 20%; 60,001–80,000: 30%; 80,001–180,000: 34%; Over 180,000: 38%) ### Box 3. Morocco: Fiscal Decentralization - Constitutional and legislative framework: - Process of regionalization revitalized with the adoption of the 2011 constitution. - Organic budget law for the regions adopted in June 2015 defines the contours of the process and transposes principles of the OBL at the local level, including modernizing institutional framework and reinforcing governance at the local level. - Revenue sharing and transfers: - Increased share of revenues from personal income tax, corporate tax, housing tax, VAT, and various licenses and fees are assigned to regions. - 2016 budget increased the share of income tax revenues allocated to regions from 1 to 2 percent. - Authorities plan to increase this share gradually up to 5 percent by 2020. - Additional transfers from the central government are possible to ensure regions meet assigned expenditure responsibilities. - Risks and challenges highlighted: - International experience shows fiscal decentralization requires clear revenue and spending responsibilities, sound public financial management, adequate revenue sharing arrangements, mechanisms to limit borrowing (including based on market discipline), and administrative controls. - Morocco’s regional system characterized by significant fragmentation and administrative structures; devolution may be partial and combined with limited implementation capacity, leading to inconsistent development strategies. - Own resources of regions (less than 10 percent of central government resources) may be insufficient, increasing dependence on complex tax revenue sharing mechanisms, equalization grants, central government subsidies, and potentially excessive borrowing, with little incentive to mobilize revenues locally. - Strategy elements and safeguards being put in place: - Strengthened operational structure for regions, including for project management, under high-level administrative oversight. - Reinforced regional legal, budgetary, and financial frameworks, including controls and checks and balances that replicate those in place for central government (e.g., public procurement, performance requirements, strict limits on indebtedness). - Pre-approved regional development plans established through broad consultation aiming to align dedicated public resources with expected service quality. - Ongoing reflection on how to streamline and harmonize tax regimes at local levels (regions, municipalities). ### Box 4. Unit Labor Costs and External Competitiveness - Competitive position: - Low relative unit labor costs (ULCs) are an important source of competitive advantage for Morocco. - Sectors with high relative ULCs, notably the textile and leather sector, have lost global market share, compared to emerging sectors (mechanical and metallurgic manufacturing, chemicals, electronics) with much lower relative ULCs. - Recent trends: - Gap between ULCs in some emerging sectors relative to competitors has somewhat narrowed recently, despite gains in labor productivity (electronics, chemicals). - Low relative ULCs should translate to a depreciation in the ULC-based real effective exchange rate (REER); however, extent of depreciation has been limited by nominal exchange rate movements vis-à-vis competitors. - Export responsiveness: - Regression analysis suggests that a 1pp depreciation in the real exchange rate leads to a 0.2-0.4 pp increase in merchandise exports (see Selected Issues Paper). - This elasticity has weakened slightly since the global financial crisis. - Looking ahead, as exports move up global value chains, this elasticity is likely to weaken to some extent. - Policy implications: - Continued productivity growth and greater exchange rate flexibility will be key in maintaining external competitiveness. - In the long run, productivity growth matching or exceeding nominal wage growth will be central to maintaining low ULCs. - Greater exchange rate flexibility would allow REERs to adjust in response to nominal shocks, playing an important role in preserving competitiveness. ### Box 5. Employment Trends in Morocco - Labor market overview: - Unemployment has hovered about 10 percent. - Labor force participation is low, especially among women. - 65 percent of unemployed have been without a job for at least one year (unemployment largely structural). - Unemployment is much higher than the national rate for first-time job seekers, educated, urban, and young. - 27.9 percent of the youth is neither employed nor in education or training (NEET). - Female labor participation is very low at 24.8 percent and declining. - Job creation and composition: - Morocco has created 55,000 jobs per year over the last five years, which is below the number of market entrants. - Job creation concentrated in construction and service sectors. - Job creation has been negative in agriculture and in low value-added industries such as textiles. - Higher value-added sectors represent a small share of manufacturing employment. - Informality and job quality: - Unpaid work declined to 22.5 percent in 2014 (against 33.9 percent in 2000). - Jobs remain precarious (text cuts off). *Source: IMF staff report text provided.* ### 20.5 percent of workers receive medical coverage and only ### cr1736 - 20.5 percent of workers receive medical coverage and only ### Labor market, education, and formalization - 20.5 percent of workers receive medical coverage. - Only 12 percent of employed youth had a formal job contract in 2015. - 72 percent of students leave the education system without qualification. - Skill mismatches, high labor costs and rigid regulations remain important constraints on job creation and formalization, especially for women and youth. - Moroccan student performance: scores at international tests are low; dropout rates are high. - Literacy rates in rural areas are particularly low, especially among women. - The majority of Moroccan students follow studies in social sciences at the expense of technical careers, contributing to skills mismatches. - Labor market regulations are inflexible for hiring and layoffs. - Compared to neighboring countries, Morocco has one of the highest ratio of minimum to average wages, which has an adverse impact on employment and job formalization for women and youth. - Angel-Urdinola et al., Aug. 2016, find that Morocco could reduce unemployment rates for youth and women by 5–20 percent and informal workers by 20–75 percent, through the implementation of a 10–25 percent decrease in minimum wages and 5–15 percent decrease in payroll taxes. ### Manufacturing: labor costs, value-added, and employment (summary) - Data sources: Ministry of Industry, Trade, Investment, and the Digital Economy; and IMF staff estimates. - Note: Share of employment is calculated from total employment in the manufacturing sector. - Manufacturing sub-sectors highlighted: Textile and Leather; Chemical; Mechanic and Metalurgic. - Graphical indicators in source compare: Labor Costs per Worker; Value-added per worker; Share of employment (figures presented visually in source). ### Unemployment and employment dynamics - Unemployment rate by age and location (visual): series shown for Youth (Ages 15-24), Ages 25+, Total, split Urban / Rural (figures shown in source visual). - Change in labor force and employment by age group presented for periods 2002-6, 2007-11, 2012-15 (visual series in source). ### Risk Assessment Matrix (highlights) - Structurally weak growth in key advanced and emerging economies: Relative Likelihood High/Medium; Time Horizon Medium Term; Expected Impact High. Policy response: Diversify export composition and markets, implement structural reforms to boost competitiveness. Greater exchange rate flexibility can help absorb external shocks. - Significant slowdown in other large EMs/frontier economies: Relative Likelihood Medium; Time Horizon Short Term; Expected Impact Low. - Rise in populism and nationalism in large economies: Relative Likelihood High; Time Horizon Medium to Short Term; Expected Impact High. - Heightened risk of fragmentation/security dislocation in parts of the Middle East, Africa, and Europe: Relative Likelihood High; Time Horizon Short Term; Expected Impact High. - Tighter, more volatile global financial conditions, including a sharp rise in risk premia with a flight to safety: Relative Likelihood Medium; Time Horizon Short Term; Expected Impact Low. RAM note: "External debt is only about 30 percent of GDP, with long maturities, and foreign portfolio investments are moderate." - Reduced financial services by global/regional banks ("de-risking"): Relative Likelihood High; Time Horizon Medium Term; Expected Impact Low. Policy response: Continue to strengthen bank supervision and resolution frameworks; build external and fiscal buffers to increase policy space. - Persistently lower energy prices: Relative Likelihood Low; Time Horizon Medium Term; Expected Impact High. Policy response: Preserve gains from lower oil prices; reduce long term reliance on energy imports. - Slower than expected pace of reforms: Relative Likelihood Low; Time Horizon Medium Term; Expected Impact Medium. Policy response: Build consensus on reforms needed to reduce vulnerabilities and foster higher and more inclusive growth (such as improved governance). ### Selected macroeconomic indicators (selected numeric excerpts from source tables) - External debt: "External debt is only about 30 percent of GDP" (RAM narrative). - Gross reserves (in billions of U.S. dollars) (table excerpts visible in source). - Current account indicators and trade balance dynamics are presented in detailed tables and charts in the source (figures and series shown for multiple years). ### Budgetary and fiscal indicators (selected points from tables) - Revenue and expenditure levels, budget balance, primary balance, and total government debt are provided in detailed multi-year tables in the source. - Net lending / borrowing (overall balance) series and percent-of-GDP presentations are included in the source tables. ### Balance of Payments (selected highlights) - Current account and trade balance series are presented in the source tables for 2012–22 (figures and subcomponents such as Exports, Imports, Energy, Tourism receipts, Transfers, and Financial account items are tabulated across years). - Tourism receipts and workers' remittances are specifically shown as components of Services and Transfers. ### Monetary and financial sector indicators - Monetary survey and financial soundness indicators are tabulated in the source (including Net foreign assets, Net domestic assets, Broad money, Credit to the economy, Regulatory capital ratios, NPLs, provisioning ratios, profitability metrics, liquidity ratios). - Financial Soundness Indicators table includes: Regulatory capital to risk-weighted assets, Tier 1 capital to risk weighted assets, Nonperforming Loans (NPLs) to total loans, Specific provisions to NPLs, Return on assets (ROA), Return on equity (ROE), and other liquidity and sensitivity metrics (multi-year series presented in tables). ### FSAP Key Recommendations—status as of November 2016 (selected items) - Banking Regulation and Oversight - Address banking supervisor’s capacity constraints; strengthen on-site supervision capacity. Priority: I. Implementation status: In progress. Internal reorganization implemented. Four net new hirings for on-site supervision since December 2015 (current total staff: 54). - Review loan classification and provisioning rules on a solo basis; conduct an impact study for implementing the relevant IFRS in coordination with tax authorities. Priority: NT. Implementation status: In progress. Impact study underway. Circular to be finalized by first semester 2017, and currently in consultation phase with industry. - Advance recovery & resolution plans; more frequent comprehensive assessments for SIFIs. Priority: I/NT. Implementation status: In progress. Circular on R&R currently in consultation phase with industry, and expected to be issued by year end. New units dedicated to oversee individual SIFIs. - Macroprudential Oversight - Clarify the powers, instruments and voting arrangements of the CCSRS. Priority: I. Implementation status: In progress. New decree in preparation that will clarify the CCSRS’s role in issuing recommendations and following up on implementation (“complain & explain” approach), and its voting arrangements. - Implementation countercyclical buffer; expand data coverage for the risk map; include more targeted sectoral instruments. Priority: NT. Status: Countercyclical buffers introduced in June 2016. Data coverage being expanded, including as regards real estate risks, household sector data, and payment delays for enterprises. - Emergency Liquidity Assistance (ELA) - Separate BAM’s ELA function clearly from government solvency support. Priority: I. Status: In progress. Amendment included in the draft central bank law to be approved in 2017. - Early Intervention/Bank Resolution Framework - Define the objectives of banking resolution; incorporate “the least-cost principle”. Priority: I. Status: In progress. Comprehensive overhaul of legal framework for resolution has been initiated with TA support and with help from legal firm (in process of hiring). Estimated time frame for completion: up to three years. - Deposit Insurance and Financial Market Infrastructures - Remove any type of open bank assistance via the deposit guarantee fund (DGF). Priority: NT. Status: In progress. Part of above overhaul of legal framework for resolution. - Implement guarantee scheme and default handling procedures for securities transactions. Priority: I. Status: In progress. A new legal body is being introduced, which will provide more flexibility in the use of collateral and reduce costs. - Financial Inclusion - Establish a well-resourced governance and a robust monitoring and evaluation framework. Priority: I. Status: In progress, with GTZ and World Bank assistance. - Improve credit bureau data quality; expand data providers to non-financial institutions. Priority: I/NT. Status: In progress. Second credit bureau to start operating in January 2017. New services introduced, including enterprise scoring and portfolio surveillance. - Review blanket ceiling on lending rates. Priority: NT. Status: Partially done. Micro-credit institutions allowed higher-than-ceiling rates according to risk level. *Italicized source attribution: IMF staff and Moroccan authorities (source content from the supplied IMF chapter PDF).* ### Annex I. Morocco: Implementation of Past Fund Advice ### Annex I. Morocco: Implementation of Past Fund Advice ### Fiscal policy - Continued fiscal consolidation; met the 2015 fiscal deficit target of 4.5 percent of GDP. - Authorities remain committed to reducing public debt to 60 percent of GDP by 2020. - Most new organic budget law provisions entered into force in January 2016; remaining provisions (including triennial budget and programming, making ceiling on wage appropriations binding, limiting the carryover of investment appropriations) planned for gradual implementation by 2020. - Parliament approved in July 2016 the parametric reform of the main public pension plan, which has started to be implemented. - Authorities plan to gradually reduce certain remaining food subsidies (for wheat and sugar). - Tax reforms continued with the removal of some exemptions and the introduction of corporate tax brackets; the authorities prefer to assess the impact before revisiting these changes. ### Monetary policy - Inflation remains low and inflation expectations are well-anchored. - Bank Al-Maghrib (BAM) reduced its main policy interest rate to 2.25 percent in March 2016. - Authorities decided to introduce greater exchange rate flexibility and inflation targeting starting in 2017. ### Financial policies - Solid progress in upgrading the financial policy framework, including implementing Basel III and FSAP recommendations. - Most regulations to implement the new banking law have been introduced; exceptions include the crisis management and bank resolution frameworks. - Authorities plan to submit the new central bank law for parliament approval in 2017. ### Structural reforms - Continued progress in the Doing Business ranking and in improving access to finance. - Remaining structural priorities include improving the business environment, competition, governance, job market functioning, and the quality of education outcomes and vocational training. - Need to speed up implementation of key structural reforms. *Source: cr1736 - Annex I. Morocco: Implementation of Past Fund Advice* ### Annex II. External Sector Assessment ### Current account and exchange rate - Trade deficit has improved markedly due to favorable oil prices and growth in emerging export sectors; tourism receipts about 6½ percent–7 percent of GDP. - Oil import share fell from 28 percent in 2012 to 18 percent in 2015. - Composition of exports shifted toward higher value-added sectors; automobile exports overtook phosphate and textiles in 2015. - Trade deficit highly sensitive to external demand, particularly Eurozone (2/3 of export market), and to oil price movements. - REER trend: - Dirham pegged to euro (60 percent of the basket) and US dollar (40 percent). - Dirham depreciated by nearly 5½ percent by late 2012 (since mid-2009); REER has appreciated since mid-2012. - As of November 2016, pace of appreciation was 3.7 percent y-o-y due to US dollar strengthening and higher domestic food prices from the year’s drought. ### External position assessment (EBA-based) - CA method: current account gap of -0.9 percent of GDP (down from 1.7 percent in April 2016); corresponds to an over-valuation of the REER of 3.1 percent. - Policy gap of 0.9 percent of GDP comprising: - Fiscal: -0.5 percent of GDP - Health: -0.3 percent of GDP - Credit: 0.3 percent of GDP - Reserves: 0.6 percent of GDP - Sizeable residual: -1.9 percent of GDP. - REER method suggests an under-valuation of 6.4 percent, but estimate affected by limited underlying series on the home bias variable for Morocco. - Over the medium term, planned fiscal consolidation, a recovery in credit growth, and a move to exchange rate flexibility should help close the current account gap. ### Capital and financial accounts - FDI about 2.5 percent of GDP; directed mainly toward emerging industrial sectors (30 percent of all FDI in 2013–15) and real estate (25 percent). - Medium-term FDI expected to increase, driven by aeronautics, chemicals, and automobile sectors. - Government and corporates recently issued bonds in international markets at favorable rates. - External debt contained at about 30 percent of GDP; structure poses limited risks at present. ### Reserves - Reserve coverage improved significantly as current account deficits narrowed; reserves currently amount to seven months of imports. - Medium-term reserve coverage expected to improve to nearly 115 percent of the standard reserve adequacy metric (151 percent of the adjusted metric). ### External balance sheet and scenarios - NIIP weakened from -51 percent of GDP in 2011 to about -64 percent of GDP in 2013, then strengthened to -62½ percent of GDP driven by reserve accumulation offsetting FDI increases. - Projected medium-term NIIP expected to strengthen to about -55 percent of GDP as trade deficits narrow notwithstanding FDI growth. - EBA external sustainability approach suggests current account stronger than level required to stabilize the IIP, implying an REER undervaluation of 9.7 (from 11.7 percent in April 2016). - Scenarios for CA and REER gaps: - Scenario 1: Stabilizing net IIP at -61.3 percent of GDP — CA: -4.2; Underlying CA: -1.4; CA Gap: 2.8; REER Gap: -9.7 - Scenario 2: Stabilizing net IIP at -55.0 percent of GDP — CA: -3.8; Underlying CA: -1.4; CA Gap: 2.4; REER Gap: -8.3 - Scenario 3: Reaching net IIP at -55.0 percent of GDP in 2026 — CA: -3.4; Underlying CA: -1.4; CA Gap: 2.0; REER Gap: -7.0 - Estimates sensitive to choice of base year and IIP targets. ### External competitiveness - ULC-based REER has been on a depreciating trend since 2000 due to relatively low unit labor costs, suggesting gains in external competitiveness; recent nominal ER movements have caused ULC-based REER appreciation. - Unit labor costs lower than main trading partners in the Eurozone and most competitors. - Structural measures to increase labor productivity and improve labor market efficiency needed to preserve competitiveness. - Rankings and indicators: - World Economic Forum Global Competitiveness Index: Morocco ranks 70 out of 138 countries (2016-2017), with low scores in higher education and training, innovation, and labor market efficiency. - World Bank Ease of Doing Business Indicators: Morocco ranks 68 in 2017 (up from 75 in 2016). *Source: cr1736 - Annex I. Morocco: Implementation of Past Fund Advice* ### Annex III. Raising Morocco’s Growth Potential ### Growth performance and drivers - Growth weakened since 2011; decline reflects adverse external environment and declining productivity, human capital and employment levels relative to emerging market peers. - 2000s average growth: 5.1 percent; since 2011 average growth: 3.9 percent. - PPP-adjusted GDP per capita growth lower relative to average emerging market countries. ### Productivity and employment - TFP improved but remains below many peers (TFP levels shown relative to Spain=1). - Contribution of employment to growth declined since 2008 despite increase in working-age share of population. - Morocco lags benchmark countries on labor force and employment growth; deterioration reflects lower employment rates and declining labor force participation. ### Human capital - Average years of schooling rising, but Morocco displays a sizeable gap compared to benchmark countries. - Human capital stock significantly lower than other benchmark countries based on Barro and Lee (2013) data and Psacharopoulos (1994) methodology. ### Economic diversification - “Plan Emergence” (2008) widened production and export bases; new industries (automobile, aeronautics, electronics) increased share of exports. - Economic diversification remains lower than MENA oil importers average; economy less complex than many emerging markets. - Policies should stimulate new tradable sectors via horizontal and vertical diversification and deeper integration into global value chains. ### Growth scenarios and reform impacts - Baseline scenario: potential growth would increase by about 1 percentage point in 2021 compared to 2016, assuming ongoing structural reforms raise productivity and capital accumulation. - Structural reforms could boost potential growth by more than 2 percentage points; Mitra and others (2016) estimate overall 2.5 percentage gains in potential growth if key reforms implemented, including: - More competitive business environment (streamline business regulations, tax codes, reduce bureaucratic red tape, promote competition, discourage corruption). - Improving workers’ skills. - Raising financial market development. - Greater labor market flexibility (improved hiring and firing practices) and increased female labor force participation. - Increasing potential growth would speed convergence with higher income countries: - Under IMF baseline, convergence half-life to OECD per capita income around 50 years. - With 1 percent higher growth than baseline, half-life reduced to around 33 years. *Source: cr1736 - Annex I. Morocco: Implementation of Past Fund Advice* ### Annex IV. Public Debt Sustainability Analysis (DSA) ### Key findings - Public debt remains sustainable. - Gross debt-to-GDP ratio declined between 2000 and 2010, then rose; at about 64.1 percent of GDP at the end of 2015. - DSA shows debt is resilient to various shocks; vulnerabilities linked to level and profile of debt are moderate for the most part. - Gross financing needs exceeded the benchmark of 15 percent of GDP in 2014 but are now declining, mitigating rollover risks. *Source: cr1736 - Annex I. Morocco: Implementation of Past Fund Advice* ### 1. This DSA updates the analysis conducted at the request for an arrangement under the ### cr1736 - 1. This DSA updates the analysis conducted at the request for an arrangement under the ### Update summary and baseline - This DSA updates the analysis conducted at the request for an arrangement under the Precautionary and Liquidity Line. - The overall analysis is largely unchanged, and public debt remains sustainable. - A slight downward revision to the real output growth projections for 2016–21 has not affected the debt to GDP ratio significantly given that: - the authorities maintain their deficit target for 2016-17 unchanged (3.5 percent and 3 percent of GDP respectively), - they plan to finance a portion of those deficits through deposits and privatization proceeds (for 2016), - and they intend to put the debt to GDP ratio on a downward path over the medium term. ### Historical debt dynamics and medium-term path - After declining in the previous decade, Morocco’s public debt to GDP ratio started rising in 2010 following a deterioration in its macroeconomic performance. - Public debt rose from 48 percent of GDP in 2009 to about 64.1 percent in 2015. - About half of this increase occurred in 2012, when the economy was most affected by the crisis in Europe and higher oil prices, and the authorities encountered difficulties in containing the fiscal deficit. - The increase in public debt to GDP over the past three years has been mostly driven by the levels of the primary deficit and higher-than-expected real interest rate/growth differential. - The authorities’ ongoing fiscal consolidation efforts are expected to help bring the debt ratio down to 60 percent of GDP by 2020. ### Risks, vulnerabilities, and resilience - Public debt is generally resilient to shocks, but there are residual risks linked to financing needs and, to a lesser extent, to shocks to growth and the primary balance. - Baseline projections are realistic when compared to a group of market access countries. - Morocco’s projected fiscal consolidation efforts, aimed at lowering the overall deficit to about 2.4 percent of GDP in the medium term, do not appear exceptional relative to the distribution of other country cases. - Under various shocks, the debt level remains well below the debt burden benchmark of 70 percent of GDP for emerging markets, except in cases of shocks to real GDP growth or to the primary balance where it slightly approaches the benchmark. - Vulnerabilities linked to the profile of debt are mostly moderate: - Short-term debt still represents a very small part of the total debt (about 5 percent). - Relevant indicators exceed the lower early-warning benchmarks but not the upper risk assessment benchmarks. - Gross financing needs: - exceeded the benchmark of 15 percent in 2014, - declined under that benchmark in 2015, - and are expected to continue declining over the medium term due to a lengthening of average maturities through improved debt management. - Although gross financing needs could increase under the shock scenario, the nature of the investment base (mostly local investors, many of whom are long-term investors) mitigates the associated risks. ### Policy implications and priorities - Continue on the path of fiscal consolidation to reduce debt-financed deficits. - Carefully manage the maturity profile of public debt to sustain declining gross financing needs and mitigate rollover and market risks. - Maintain realistic baseline projections and monitor shocks to real GDP growth and the primary balance, which could push debt closer to the 70 percent of GDP benchmark in adverse scenarios. *International Monetary Fund* ### 4. Risks to external debt sustainability are contained. Morocco’s external debt to GDP is ### 4. Risks to external debt sustainability are contained. Morocco’s external debt to GDP is ### External debt outlook - External debt to GDP is expected to decline slightly to 32.4 percent of GDP in 2016, and decline to 27.2 percent of GDP in the medium term due mainly to steady GDP growth, as well as strong FDI inflows reducing the need for external borrowing. - The external debt position remains resilient to a range of shocks; in the event of a large depreciation, external debt is projected to increase from 27 to 40 percent of GDP by 2021 (Figure 6). ### Structure and vulnerabilities of external debt - Creditor composition and terms: - 75 percent is owed to official bilateral and multilateral creditors with long maturities. - About 75 percent carries fixed-rate terms. - These features entail limited vulnerabilities given long maturities and predominance of fixed rates. ### External debt sustainability stress tests and scenarios (Figure 6) - Baseline and scenario averages (selected excerpts): - Baseline external debt: 27 (percent of GDP) in projections shown. - Historical scenario projection: 40 (percent) under a specified historical shock in one panel; other panels show scenario increases (e.g., to 36, 32, 40) under CA shock, combined shock, and real depreciation shock respectively. - Specific shocks illustrated: - Interest Rate Shock: baseline 27 rises (illustrated up to 28 under an i-rate shock panel). - Non-interest Current Account Shock (CA shock): historical box shows 36 vs baseline 27. - Combined Shock: combined shock panel shows 32 vs baseline 27. - Real Depreciation Shock: one-time real depreciation of 30 percent occurs in 2016; corresponding box shows historical 40 vs baseline 27. - Growth Shock: baseline 27 with scenario and historical values indicated (growth-related boxes note Baseline: 2.9; Scenario: 3.2; Historical: 3.6 and elsewhere Baseline: 3.7; Scenario: 2.9; Historical: 4.4). - Methodology notes from figure captions: - Individual shocks are permanent one-half standard deviation shocks. - For historical scenarios, historical averages are calculated over the ten-year period and used to project debt dynamics five years ahead. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - One-time real depreciation of 30 percent occurs in 2016 (real depreciation shock). ### Public debt dynamics, composition, and fiscal projections (selected data) - Nominal gross public debt trajectory (selected years, percent of GDP from table/figures): - 2014: 53.1 - 2015: 63.5 - 2016: 64.1 - 2017: 64.3 - 2018: 63.8 - 2019: 62.9 - 2020: 61.5 - 2021: 60.0 (table headings indicate "Nominal gross public debt" with these values) - Public gross financing needs (in percent of GDP, selected years): - 2014: 13.6 - 2015: 16.6 - 2016: 13.6 - 2017: 9.9 - 2018: 11.0 - 2019: 10.2 - 2020: 8.8 - 2021: 7.4 and 6.1 (table lists 7.4 and 6.1—retain as presented) - Real GDP growth (in percent) projections shown in table: - 2014: 4.6 - 2015: 2.6 - 2016: 4.5 - 2017: 1.5 - 2018: 4.4 - 2019: 3.9 - 2020: 4.1 - 2021: 4.4 and 4.5 (table lists 4.4 and 4.5—retain as presented) - Inflation (GDP deflator, in percent) shown: - 2014: 1.4 - 2015: 0.3 - 2016: 1.7 - 2017: 1.6 - 2018: 0.3 - 2019: 1.0 - 2020: 1.5 - 2021: 1.5 - Effective interest rate (in percent, defined as interest payments divided by debt stock at end of previous year): - 2014: 5.3 - 2015: 4.6 - 2016: 4.7 - 2017: 4.3 - 2018: 4.2 - 2019: 4.1 - 2020: 3.9 - 2021: 3.7 and 3.8 (both appear in tables/figures) - Composition and maturity: - Public debt by maturity shows predominance of medium and long-term instruments over short-term across projections (figures present by-maturity charts). - By currency: local currency-denominated debt predominates over foreign currency-denominated debt in projection charts. ### Macro-fiscal stress tests (selected assumptions and shocks) - Stress tests considered include: - Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, Adverse Scenario. - Example baseline and shock values (from stress-test tables): - Baseline Real GDP growth: 1.5, 4.4, 3.9, 4.1, 4.4, 4.5 (yearly sequence as presented). - Primary Balance (percent of GDP) baseline: -0.9, -0.4, -0.1, -0.2, -0.2, -0.2 (by year sequence). - Effective interest rate under shocks (examples): 4.3, 4.7, 4.8, 4.9, 4.6, 4.4 (various shock rows in stress-test table). - Risk-assessment benchmarks noted (Figure 5): - Bond spreads: 200 and 600 basis points. - External financing requirement: 5 and 15 percent of GDP. - Change in the share of short-term debt: 0.5 and 1 percent. - Public debt held by non-residents: 15 and 45 percent. - Share of foreign-currency denominated debt: 20 and 60 percent. ### Policy stance and implications - Fiscal policy: - Implementation of the medium-term fiscal consolidation plan has helped significantly reduce the deficit and stabilize public debt. - The fiscal deficit target of 3½ percent of GDP in 2016, down from 7.3 percent in 2012, is within reach, with lower grants expected to be offset mainly through stronger tax revenue and savings on current spending, including wages. - The draft 2017 Budget aims at further reducing the deficit to 3 percent of GDP. - Monetary policy: - In view of relatively moderate growth, low and stable inflation, and comfortable reserves, the policy mix of further fiscal consolidation along with monetary policy accommodation is described as appropriate. - External resilience: - Strong FDI inflows and higher other private capital inflows have strengthened external reserves to close to 7 months of imports, or about 130 percent of the Fund adjusted-ARA metric (100 percent of the standard metric). *Source: IMF staff report (Staff Report for the 2016 Article IV Consultation — informational annex, Morocco).* ### 2020. Active debt management operations within strengthened debt management strategy ### 2020. Active debt management operations within strengthened debt management strategy ### Structural fiscal reforms and debt management - Active debt management operations within a strengthened debt management strategy have contributed to improving the structure of the debt and reducing costs and risks. - Significant progress in implementing the ambitious structural fiscal reform agenda aimed at strengthening institutions and the policy framework. - Implementation of the 2015 Organic Budget Law (OBL) is proceeding according to schedule. - Progress on fiscal decentralization under the Advanced Regionalization program, with gradual roll-over of financial and human resources to territorial entities to support local growth and enhance efficiency within sound budget management practices. ### Pension, subsidy, and tax reforms - Entry into effect of a bold parametric pension reform has reduced the actuarial deficit of the public pension fund by close to 60 percent. - The new OBL and the landmark reform subsidy, together with the pension reform, have significantly reduced budget vulnerabilities and risks. - Implementation of the tax reform is advancing, with objectives to simplify the system, enhance equity, and make it more business-friendly. - While agreement on the pension reform took longer than expected, enactment and start of implementation immediately before the general elections indicate strong government commitment. ### Monetary policy, inflation, and credit - With inflation well under control, monetary policy aims to support the recovery by promoting adequate financing of the economy, including SMEs, while maintaining focus on keeping inflation low. - BAM reduced the policy rate by 25 bp in March 2016, the third such reduction since September 2014. - The current accommodative monetary policy has led to a significant decline in lending rates by a total of 99 bp over the last 2 years, reflecting effective monetary transmission and helping reinvigorate credit. - Continued moderate credit growth, comfortable reserves, and prudent fiscal policy complement monetary policy objectives. ### Financial sector resilience and supervision - The financial system is well-capitalized, with adequate liquidity and profitability. - Nonperforming loans (NPLs) have increased somewhat but are mainly confined to a few sectors affected by the global economic slowdown and are well provisioned. - Authorities continue to closely monitor credit concentration risks, which have declined recently; limits set by the regulator are tighter than standard practice and are effectively enforced. - Strengthened supervisory resources, including oversight of Moroccan banks’ subsidiaries in Africa, and maintained close cooperation with host countries to identify and mitigate potential risks. - Continued strengthening of financial sector regulation and pro-active, risk-based supervision, including implementation of FSAP recommendations. ### Exchange rate reform and preparedness - Preparation for gradually moving to a flexible exchange rate regime has been virtually completed, with extensive technical support from MCM and RES departments. - A roadmap of the reform has been prepared and discussed with staff. - Authorities requested Fund technical assistance to help assess banking sector preparedness to manage currency risks and to adapt public debt management to the new exchange rate regime. - Finalizing a communication strategy and confident to announce the policy change and start implementation in the second half of this year. - Later in the transition, when the fluctuation band will be large enough, BAM will abandon the nominal exchange rate as an anchor and shift to an inflation targeting regime. ### Business climate, productivity, and employment initiatives - Authorities continue efforts to improve the business climate, raise productivity and growth potential, and accelerate job creation by strengthening the financial sector, deepening markets, easing access to credit, and enhancing financial inclusion. - Strengthening support to SMEs to enhance their contribution to growth and reduce informality. - Streamlining regulations and upgrading infrastructure to positively affect productivity and access to services. - As a result of these reforms, Morocco gained 7 notches in the Doing Business ranking to 68 between 2016 and 2017, with significant advances in registering property, getting credit, protecting minority investors, and trading across borders. - Implementation of the National Strategy for Employment and the Strategic Vision for Education is expected to boost productivity and alleviate employment constraints by improving education and vocational training and enhancing labor market policy effectiveness. - The large renewable energy program, particularly in solar energy, is advancing as planned and should help meet ambitious climate mitigation undertakings while reducing dependency on fuel imports. ### Policy continuity and cooperation with the Fund - Authorities are confident that current policy and reforms will be continued and consolidated going forward. - The reappointment of the current Head of Government to form a new coalition government provides further assurance due to his strong commitment to sound policy implementation. - Authorities look forward to continued close cooperation with the Fund. *IMF staff report content.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1736.pdf_