## EXECUTIVE SUMMARY

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### Context and recent macroeconomic developments
- Macroeconomic vulnerabilities have declined since 2012, but growth remains subdued and sensitive to volatile agricultural output.
- External imbalances are contained and fiscal consolidation resumed in 2017 after a pause in 2016.
- Employment:
  - Unemployment increased to 10.6 percent in Q3 2017 (from 10.4 percent y-o-y).
  - Youth unemployment is 29.3 percent overall and 45.2 percent in urban areas.
- Social and political:
  - Social tensions increased in 2017 (notably in the Rif); authorities accelerated local social programs and investment projects and dismissed several high-level officials in October 2017.
- Policy and reforms:
  - Government appointed April 2017 remains committed to sound policies; reforms have resumed and strategic coordination enhanced through a commission under the Head of Government.
- Growth composition:
  - Growth recovered in 2017 and is estimated at 4.4 percent, driven largely by a significant rebound in agriculture; non-agricultural activity remained subdued.
  - On the demand side, growth was mainly supported by private consumption; private investment is recovering gradually after declining from 35.4 to 27.4 percent of GDP between 2008 and 2016.

### PLL arrangement and program performance
- Executive Board approved a two-year precautionary and liquidity line (PLL) arrangement in July 2016: SDR 2.5 billion (280 percent of quota), equivalent to US$3.6 billion.
- Staff considers Morocco continues to meet PLL qualification criteria and recommends completion of the third review of the PLL arrangement.
  - Morocco performs strongly in three out of five PLL qualification areas: monetary, financial, and data; does not substantially underperform in fiscal policy and external position and market access areas.
  - Assessment of performance in the external sector was revised downward for this review to reflect a weaker-than-expected external position.
  - Morocco does not face circumstances that would prevent Fund approval of a PLL arrangement.
- End-September 2017 quantitative indicative targets on the fiscal deficit and international reserves were met.
- The authorities have not drawn on the arrangement and continue to treat it as precautionary.

### Fiscal and monetary outcomes in 2017
- Fiscal:
  - Fiscal deficit estimated at 3.5 percent of GDP in 2017 (against 4.1 percent in 2016).
  - End-September 2017 IT under the PLL: deficit of 2.1 percent of GDP vs. indicative target of 2.5 percent, met despite lower-than-expected grant revenues.
  - Cyclically-adjusted fiscal deficit estimated at 1.8 percent of GDP in 2017 (against 2.2 percent in 2016).
  - Public debt estimated at 64.4 percent of GDP at end-2017.
- Prices and credit:
  - Inflation declined to an estimated 0.6 percent in 2017; core inflation was 1.2 percent (y-o-y).
  - Bank-Al-Maghrib policy rate reduced to 2.25 percent in March 2016; lending rates have declined and credit growth recovered to about 4.8 percent in November 2017 (y-o-y).
  - Real estate prices have declined gradually in recent years.

### External sector and reserves
- Current account and trade:
  - Current account deficit estimated at 3.8 percent of GDP in 2017 (against 4.4 percent in 2016).
  - Exports grew 7.2 percent in 2017.
  - Imports estimated to have increased by 5.6 percent in 2017.
  - Tourism receipts and remittances remained strong; net FDI flows increased moderately to 1.9 percent of GDP.
  - Real effective exchange rate remained broadly stable in 2017.
- Reserves:
  - International reserves declined ~US$ 3.8 billion in May–June 2017 to US$ 21.6 billion at end-June, then recovered to US$ 23.4 billion at end-September, meeting the IT target; estimated to reach US$ 25.8 billion by end-2017.
  - Reserves equivalent to six months of imports, or 93 percent of the Assessing Reserve Adequacy (ARA) metric (123 percent of the ARA adjusted for capital controls).

### Financial sector soundness and risks
- Key indicators:
  - Banks’ regulatory capital ratio was 13.7 percent at end-June 2017.
  - Nonperforming loan (NPL) ratio at 7.7 percent (October 2017); specific provisioning levels comfortable at 70 percent and increasing.
- Risks and structural issues:
  - NPLs, credit concentration, and expansion in Africa are significant risks; large credit exposures persist and increased slightly in 2017 despite strict regulatory limits.
  - Continued expansion of Moroccan banks in Africa offers diversification and profit opportunities but is a channel of risk transmission.
- Reforms:
  - Financial sector reforms implemented following 2015 FSAP (strengthened supervisory resources/capacity, new macroprudential policy framework); continued efforts needed.
  - New central bank law expected to be approved by parliament in early 2018.

### Policy implementation and structural reform priorities
- Fiscal reforms to lower public debt and secure space for priority spending:
  - Implement Organic Budget Law (OBL) and recent pension reform while containing public wage expenditures.
  - Comprehensive tax reform to promote fairness, simplification, and revenue mobilization, including measures to:
    - align reduced VAT rates on manufacturing goods and services with the standard VAT rate,
    - reduce tax exemptions,
    - lower corporate tax rates,
    - better enforce tax payments by the self-employed and liberal professions.
  - Civil service reform.
  - Improved public investment management.
  - Sound public financial management at the local level as part of fiscal decentralization.
  - Enhanced financial oversight of state-owned enterprises (SOEs).
- Exchange rate policy:
  - Authorities committed to transition to greater exchange rate flexibility; starting transition as soon as possible, from a position of strength, would reduce uncertainty and help absorb external shocks while preserving price competitiveness.
  - Preconditions cited as in place: adequate reserves on a range of metrics, relatively low external debt, financial sector resilience, and limited currency risk exposures.
  - Protracted postponement may introduce uncertainty and raise doubts about commitment.
- Structural reforms to raise growth potential and reduce unemployment:
  - Business environment and governance: Doing Business ranking improved from 75th in 2016 to 68th in 2017; further efforts needed to reduce chronic payment delays, facilitate SME access to finance, operationalize the competition council created in 2014, and implement the 2015 national strategy against corruption.
  - Education and labor market: authorities prioritizing education (school infrastructure, teachers in remote areas, rural outcomes for girls); finalizing action plan for the 2015–30 national employment strategy.
  - Labor market reform suggestion: relax restrictions on fixed-term contracts to better integrate young workers while establishing adequate safety nets.
- Social spending targeting:
  - Social programs are large but highly fragmented and ineffective at targeting the most vulnerable and the unemployed.
  - Authorities working with international partners to develop a social registry to identify the less well-off and improve allocation of social spending.

### Outlook and risks (projections and conditional assumptions)
- Projections assume sustained implementation of key reforms (business environment, productivity, tax revenue enhancement).
- Growth:
  - Expected to slow in 2018 due to a negative base effect after a strong agricultural season in 2017; growth projected to reach 4.6 percent over the medium term.
- Inflation:
  - Projected increase to 1.3 percent in 2018 and to stabilize around 2 percent over the medium term.
- Fiscal balance:
  - Overall fiscal deficit expected to decline to 3 percent of GDP in 2018 and stabilize around 2.2 percent of GDP in the medium term, consistent with authorities’ objective to reduce public debt to 60 percent of GDP by 2021.
- Current account and FDI:
  - Current account expected to decline to 3.7 percent of GDP in 2018 and reach about 2.5 percent of GDP in the medium term.
  - Foreign direct investment expected to increase to 2.7 percent of GDP in the medium term.
- Reserves:
  - Projected to increase steadily and reach 101 percent of the ARA metric by 2022 (about 133 percent of the ARA metric adjusted for capital controls).

### Risk assessment: balance tilted to the downside
- Domestic risks:
  - Delays in implementing key fiscal and structural reforms could reduce future fiscal space, contribute to social tensions, adversely affect the external sector, and undermine the expected pickup in potential growth.
  - Renewed uncertainty on the transition to greater exchange rate flexibility could lead to market pressures, potentially weakening the external accounts.
- External risks:
  - Weak growth in the euro area could slow economic activity through lower exports, tourism, FDI flows, and remittances.
  - Geopolitical risks could raise oil prices, reduce tourism activity, and weaken investor confidence.
  - Tighter, more volatile financial conditions, global policy uncertainty, and a retreat from cross-border integration could affect global growth, increase borrowing costs, and reduce trade and capital flows.
- Upside channel:
  - Lower energy prices would help narrow external and fiscal imbalances more rapidly.

### External Stress Index (construction and scenarios)
- Purpose: indicator of the evolution of the external environment faced by Morocco; mandated for FCL and PLL countries.
- Main external risks (from July 2017 G-RAM): (i) protracted slow growth in advanced economies, particularly the euro area; (ii) heightened geopolitical risks raising oil prices and disrupting capital flows and tourism; (iii) tighter global financial conditions increasing borrowing costs and disrupting portfolio flows.
- Proxy variables and weights (as of PLL request stage):
  - euro area growth: 0.580
  - change in oil price: 0.324
  - VXEEM: 0.095
- Downside scenario assumptions:
  - euro area growth one percentage point lower than the baseline;
  - a US$15 increase in oil prices relative to the baseline;
  - an increase in the VXEEM by two standard deviations.
- Overall assessment: external pressures under the baseline have abated in recent years, but model may understate geopolitical-related stress.

### PLL qualification, program performance, and capacity to repay
- Qualification:
  - Morocco continues to qualify for a PLL arrangement and meets the PLL qualification criteria.
  - Performs strongly in monetary policy, financial sector and supervision, and data adequacy.
  - Deterioration noted in external sector performance since previous review.
- Program performance:
  - Morocco has met the PLL qualification standard since 2012.
  - The end-September 2017 indicative targets for the fiscal deficit and for net international reserves were met.
- Capacity to repay and Fund exposure:
  - If Morocco were to draw on the entire PLL amount, Fund obligations would represent a maximum of 7.1 percent of total external debt, 13.1 percent of gross international reserves, and nine percent of exports (illustrative ratios).
  - Footnote scenario: after a shock reserves may be 25 percent lower and exports 6 percent lower, raising peak IMF credit ratios in the illustrative example.

### Staff appraisal and reform priorities
- Staff view: the PLL arrangement has served Morocco well and remains on track.
- Reforms delayed in 2016–17 have resumed and need to accelerate to strengthen resilience and achieve higher, sustainable, and inclusive growth.
- Priority reform areas and recommendations:
  - Accelerate fiscal reforms: broaden the tax base by reducing exemptions and simplifying VAT and corporate taxation; implement civil service reform; carefully implement fiscal decentralization; strengthen SOE oversight.
  - Start the transition to exchange rate flexibility as soon as possible to better absorb shocks and preserve price competitiveness.
  - Intensify efforts to improve the business environment and support private sector-led growth: reduce chronic payment delays; make the competition council operational; advance education, governance, and labor market reforms to encourage job creation and women’s labor force participation.

*IMF staff report: EXECUTIVE SUMMARY (January 8, 2018).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and recent macroeconomic developments
- Macroeconomic vulnerabilities have declined since 2012, but growth remains subdued and sensitive to volatile agricultural output.
- External imbalances are contained and fiscal consolidation resumed in 2017 after a pause in 2016.
- Job creation has improved but unemployment remains high: unemployment increased to 10.6 percent in Q3 2017 (from 10.4 percent y-o-y); youth unemployment is 29.3 percent overall and 45.2 percent in urban areas.
- Social tensions increased in 2017 (notably in the Rif); authorities accelerated local social programs and investment projects and dismissed several high-level officials in October 2017 to signal enforcement of accountability.
- Government appointed April 2017 remains committed to sound policies; reforms have resumed and strategic coordination enhanced through a commission under the Head of Government.
- Growth recovered in 2017 and is estimated at 4.4 percent, driven largely by a significant rebound in agriculture; non-agricultural activity remained subdued.
- On the demand side, growth was mainly supported by private consumption; private investment is recovering gradually after declining from 35.4 to 27.4 percent of GDP between 2008 and 2016.

### PLL arrangement and program performance
- Executive Board approved a two-year precautionary and liquidity line (PLL) arrangement in July 2016: SDR 2.5 billion (280 percent of quota), equivalent to US$3.6 billion.
- Staff considers Morocco continues to meet PLL qualification criteria and recommends completion of the third review of the PLL arrangement.
  - Morocco’s economic fundamentals and policy frameworks are sound; the country is implementing and has a track record of implementing generally sound policies and remains committed to maintaining such policies.
  - Morocco performs strongly in three out of five PLL qualification areas: monetary, financial, and data; does not substantially underperform in fiscal policy and external position and market access areas.
  - Assessment of performance in the external sector was revised downward for this review to reflect a weaker-than-expected external position.
  - Morocco does not face circumstances that would prevent Fund approval of a PLL arrangement.
- End-September 2017 quantitative indicative targets on the fiscal deficit and international reserves were met.
- The authorities have not drawn on the arrangement and continue to treat it as precautionary.

### Fiscal and monetary outcomes in 2017
- Fiscal deficit estimated at 3.5 percent of GDP in 2017 (against 4.1 percent in 2016).
  - End-September 2017 IT under the PLL: deficit of 2.1 percent of GDP vs. indicative target of 2.5 percent, met despite lower-than-expected grant revenues.
  - Cyclically-adjusted fiscal deficit estimated at 1.8 percent of GDP in 2017 (against 2.2 percent in 2016).
  - Public debt estimated at 64.4 percent of GDP at end-2017.
- Inflation declined to an estimated 0.6 percent in 2017; core inflation was 1.2 percent (y-o-y).
- Bank-Al-Maghrib policy rate reduced to 2.25 percent in March 2016; lending rates have declined and credit growth recovered to about 4.8 percent in November 2017 (y-o-y), driven by investment lending to public enterprises and household borrowing (mortgage and consumption).
- Real estate prices have declined gradually in recent years.

### External sector and reserves
- Current account deficit estimated at 3.8 percent of GDP in 2017 (against 4.4 percent in 2016).
  - Exports grew 7.2 percent in 2017 (food products and phosphate and derivative exports, and strong recovery in Europe).
  - Imports estimated to have increased by 5.6 percent in 2017 due to higher raw material imports and higher energy prices.
  - Tourism receipts and remittances remained strong; net FDI flows increased moderately to 1.9 percent of GDP.
  - Real effective exchange rate remained broadly stable in 2017.
- International reserves declined ~US$ 3.8 billion in May–June 2017 to US$ 21.6 billion at end-June, then recovered to US$ 23.4 billion at end-September, meeting the IT target; estimated to reach US$ 25.8 billion by end-2017.
  - Reserves equivalent to six months of imports, or 93 percent of the Assessing Reserve Adequacy (ARA) metric (123 percent of the ARA adjusted for capital controls).

### Financial sector soundness and risks
- Banks’ regulatory capital ratio was 13.7 percent at end-June 2017.
- Nonperforming loan (NPL) ratio at 7.7 percent (October 2017); provisioning levels comfortable at 70 percent and increasing.
- Risks: NPLs, credit concentration, and expansion in Africa are significant risks; large credit exposures persist and increased slightly in 2017 despite strict regulatory limits.
- Continued expansion of Moroccan banks in Africa offers diversification and profit opportunities but is a channel of risk transmission.
- Financial sector reforms implemented following 2015 FSAP (strengthened supervisory resources/capacity, new macroprudential policy framework); continued efforts needed given remaining risk exposures and increasing complexity.
- New central bank law expected to be approved by parliament in early 2018.

### Policy implementation and structural reform priorities
- Additional reforms needed to cement macro stability and promote higher, inclusive growth and employment, particularly: tax reform, exchange rate flexibility, business environment, education, and labor market reforms.
- Fiscal reforms required to lower public debt and secure space for priority spending:
  - Implement Organic Budget Law (OBL) and recent pension reform while containing public wage expenditures.
  - Comprehensive tax reform to promote fairness, simplification, and revenue mobilization, including measures to:
    - align reduced VAT rates on manufacturing goods and services with the standard VAT rate,
    - reduce tax exemptions,
    - lower corporate tax rates,
    - better enforce tax payments by the self-employed and liberal professions.
  - Civil service reform.
  - Improved public investment management.
  - Sound public financial management at the local level as part of fiscal decentralization.
  - Enhanced financial oversight of state-owned enterprises (SOEs).
- Exchange rate policy:
  - Authorities committed to transition to greater exchange rate flexibility; starting transition as soon as possible, from a position of strength, would reduce uncertainty and help absorb external shocks while preserving price competitiveness.
  - Preconditions cited as in place: adequate reserves on a range of metrics, relatively low external debt, financial sector resilience, and limited currency risk exposures.
  - Protracted postponement of the announced reform may introduce uncertainty and raise doubts about the authorities’ commitment.
- Structural reforms to raise growth potential and reduce unemployment:
  - Business environment and governance: Doing Business ranking improved from 75th in 2016 to 68th in 2017; further efforts needed to reduce chronic payment delays, facilitate SME access to finance, operationalize the competition council created in 2014, and implement the 2015 national strategy against corruption.
  - Education and labor market: authorities prioritizing education (school infrastructure, teachers in remote areas, rural outcomes for girls); finalizing action plan for the 2015–30 national employment strategy to boost job creation and raise female labor force participation.
  - Labor market reform suggestion: relax restrictions on fixed-term contracts to better integrate young workers while establishing adequate safety nets for the unemployed.
- Social spending targeting:
  - Social programs are large but highly fragmented and ineffective at targeting the most vulnerable and the unemployed.
  - Authorities working with international partners to develop a social registry to identify the less well-off and improve allocation of social spending.

### Outlook and risks (projections and conditional assumptions)
- Projections assume sustained implementation of key reforms (business environment, productivity, tax revenue enhancement).
- Growth: expected to slow in 2018 due to a negative base effect after a strong agricultural season in 2017; growth projected to reach 4.6 percent over the medium term.
- Inflation: projected increase to 1.3 percent in 2018 (as domestic food prices rise) and to stabilize around 2 percent over the medium term.
- Fiscal balance: overall fiscal deficit expected to decline to 3 percent of GDP in 2018 and stabilize around 2.2 percent of GDP in the medium term, consistent with authorities’ objective to reduce public debt to 60 percent of GDP by 2021.
- Current account: expected to decline to 3.7 percent of GDP in 2018 and reach about 2.5 percent of GDP in the medium term, driven by sustained export growth, tourism receipts, and remittances offsetting increasing energy imports.
- FDI: foreign direct investment expected to increase to 2.7 percent of GDP in the medium term.
- International reserves: projected to increase steadily and reach 101 percent of the ARA metric by 2022 (about 133 percent of the ARA metric adjusted for capital controls).

*IMF staff report: EXECUTIVE SUMMARY (January 8, 2018).*

### 17.      The balance of risks remains tilted to the downside. On the domestic front, delays in

### 17. The balance of risks remains tilted to the downside. On the domestic front, delays in

### Risk assessment: balance tilted to the downside
- Domestic risks:
  - Delays in implementing key fiscal and structural reforms could:
    - reduce future fiscal space,
    - contribute to social tensions,
    - adversely affect the external sector (e.g., through lower tourism receipts or remittances),
    - undermine the expected pickup in potential growth.
  - Renewed uncertainty on the transition to greater exchange rate flexibility could lead to market pressures, potentially weakening the external accounts.
- External risks:
  - Weak growth in the euro area could slow economic activity through lower exports, tourism, FDI flows, and remittances, worsening fiscal and external imbalances.
  - Geopolitical risks could raise oil prices, reduce tourism activity, and weaken investor confidence.
  - Tighter, more volatile financial conditions, global policy uncertainty, and a retreat from cross-border integration could:
    - affect global growth,
    - increase borrowing costs,
    - lead to reduced trade and capital flows,
    - weaken investor confidence more generally.
- Upside channel:
  - Lower energy prices would help narrow external and fiscal imbalances more rapidly.

### External Stress Index (Box 1) — construction and scenarios
- Purpose:
  - Indicator of the evolution of the external environment faced by Morocco; mandated for FCL and PLL countries.
- Main external risks (from July 2017 G-RAM):
  - (i) Protracted slow growth in advanced economies, particularly the euro area.
  - (ii) Heightened geopolitical risks raising oil prices and disrupting capital flows and tourism.
  - (iii) Tighter global financial conditions increasing borrowing costs and disrupting portfolio flows.
- Proxy variables:
  - Growth in the euro area (captures exports, remittances, FDI, and tourism receipts from Europe).
  - Oil prices (captures higher oil imports).
  - Emerging markets volatility index (VXEEM) (captures impact of global financial volatility on portfolio flows and borrowing costs).
- Weights (as of PLL request stage):
  - euro area growth: 0.580
  - change in oil price: 0.324
  - VXEEM: 0.095
- Baseline scenario:
  - Uses October 2017 WEO projections for euro area growth and oil prices; VXEEM consistent with VIX futures as of end-October 2017.
  - Indicates that external economic stresses have declined relative to the July 2016 request, reflecting higher oil price path assumptions largely offset by stronger EA growth and improved VXEEM projections.
- Downside scenario (broadly consistent with staff’s adverse scenario):
  - Assumes euro area growth that is one percentage point lower than the baseline.
  - Assumes a US$15 increase in oil prices relative to the baseline.
  - Assumes an increase in the VXEEM by two standard deviations.
  - Suggests that under this downside scenario external stresses are less severe than at the July 2016 request.
- Overall assessment:
  - External pressures under the baseline have abated in recent years, but increased more recently.
  - Model does not include a proxy for geopolitical risk; absent such a proxy, the stress index may understate current geopolitical-related stress.

*Italic: External Stress Index sources: WEO; and IMF staff estimates.*

### PLL qualification — staff assessment and general findings
- Staff assessment:
  - Morocco continues to qualify for a PLL arrangement and meets the PLL qualification criteria.
- General assessment highlights:
  - Macroeconomic developments broadly positive:
    - Fiscal developments in 2017 were favorable, with strong revenue performance and well contained current and capital expenditures.
    - After weakening in 2016, the current account deficit is estimated to have narrowed in 2017.
    - Over the medium term, economic growth is expected to gradually increase in a context of low inflation.
    - Both public and external debts are sustainable.
  - Reform implementation:
    - Authorities have implemented generally sound policies, although reform implementation was delayed in the past year.
    - Executive Board (December 13, 2017) encouraged accelerating reform implementation to reduce vulnerabilities and promote job creation and inclusive growth.
  - Authorities’ commitments:
    - Commit to maintaining sound policies, secure strong revenue performance, contain spending at budgeted levels, and take necessary measures to meet objectives.
    - Aim to reduce public debt to 60 percent of GDP by 2021, which requires stabilizing the fiscal deficit around 2.2 percent of GDP in the medium term.
    - Intend to pursue structural reforms to raise potential growth: improve competitiveness and business environment, strengthen fight against corruption, and raise human capital.
  - Institutional flexibility:
    - Budgetary procedures and practices being enhanced; authorities met fiscal objectives by taking corrective actions when needed (except in 2016).
    - Morocco performs well on fiscal policy countercyclicality measures; scores lower on monetary policy cyclicality, though less relevant given the pegged exchange rate regime.
    - Bank al-Maghrib (BAM) has a clear mandate; authorities are upgrading the monetary policy regime as part of the transition to greater exchange rate flexibility and inflation targeting.
    - Transition to greater exchange rate flexibility should start as soon as possible, since undue delays may raise uncertainty about reform commitment and credibility.
  - Governance and corruption:
    - Morocco is in the mid-range of the World Bank’s anti-corruption and government effectiveness ranking.

### Specific criteria assessment and track record — key figures and findings
- Overall performance:
  - Morocco performs strongly in three of five PLL qualification areas: financial sector and supervision, monetary policy, and data adequacy.
  - Does not substantially underperform in the other two areas: external position and market access, and fiscal policy.
  - Change since previous review: deterioration in external sector performance.
- External position and market access:
  - Staff assesses that the increase in the current account deficit since the PLL request can no longer be attributed to temporary factors.
  - Current account deficit expected to remain at about 3.7 percent of GDP during 2018–19.
  - External debt:
    - Morocco’s external debt was 33.7 percent of GDP at end-2017.
    - Expected to decline below 30 percent of GDP in the medium term.
  - Transition to greater exchange rate flexibility:
    - Recent weakness in the trade balance supports prompt introduction of greater exchange rate flexibility.
    - Authorities agree conditions offer a window to implement transition gradually and orderly; preparations essentially completed.
- Capital account composition:
  - Private capital flows constitute about 81 percent on average between 2015 and 2017; FDI is the largest component.
  - Private external debt is about 10.7 percent of total debt or 3.6 percent of GDP.
  - Loans from bilateral and development partners constitute the bulk of public capital flows.
- Sovereign market access:
  - Morocco has not issued international bonds since 2014, but authorities plan to issue in 2018.
  - Average maturity of public external debt extended to eight years and six months (against seven years and four months in 2009).
- Reserves and external buffers:
  - Reserves averaged 95 percent of the ARA metric over the last three years (below 100 percent).
  - Reserves are adequate by several metrics: six months of imports, ample coverage of short-term debt and broad money, and 123 percent of the ARA adjusted for capital controls at end-2017.
  - By 2022, reserves are expected to reach about eight months of imports, 101 percent of the standard ARA metric, and 133 percent of the metric adjusted for capital controls.
- Fiscal policy and public debt:
  - A deficit of 3 percent of GDP is expected in 2018.
  - Authorities aim to reduce public debt to 60 percent of GDP by 2021 (against 64.7 percent of GDP in 2016).
  - Achieving the 60 percent target will require bringing the fiscal deficit to about 2.2 percent of GDP in the medium term.
  - Public debt assessed as sustainable with high probability despite high gross financing needs; average maturities lengthened from 6 years and 6 months in 2014 to about 7 years and 3 months in 2017.
  - Fiscal consolidation recommendations:
    - Accelerate tax reforms and adopt a comprehensive approach to broaden the tax base, reduce exemptions, boost VAT revenues, and improve corporate taxation.
    - Civil service reform needed to generate long-term wage-bill savings while strengthening public sector efficiency.
    - Fiscal decentralization should include institutional mechanisms to control regional-level fiscal risks.
    - Authorities intend to submit draft law to reinforce governance and oversight of SOEs in early 2018.
- Monetary policy:
  - Morocco performs strongly in monetary policy area.
  - Low and stable inflation in past five years; inflation expectations well anchored.
  - Policy rate unchanged since March 2016; supported a nascent credit recovery in 2017.
  - Authorities committed to gradually introduce an inflation targeting regime as part of transition to greater exchange rate flexibility, but are still assessing timing.
  - Greater exchange rate flexibility will help absorb external shocks and preserve price competitiveness.
- Financial sector soundness and supervision:
  - Banks have adequate capital buffers and stable funding (mainly non-remunerated deposits).
  - Nonperforming loans (NPLs) remain relatively high at 7.7 percent; provisioning levels are comfortable at 70 percent and increasing.
  - Risks from large credit exposures persist and increased slightly in 2017 despite regulatory limits.
  - Moroccan banks’ expansion into Africa offers diversification and profit opportunities but is also a channel of risk transmission.
  - 2015 FSAP stress tests showed banking system could withstand severe shocks.
  - Bank supervision capacity improving per 2015 FSAP recommendations; macroprudential framework enhanced and oversight of cross-border expansion intensified; supervision moving to more risk-based, forward-looking approach (including AML/CFT).
- Data adequacy:
  - Morocco subscribes to the Special Data Dissemination Standard.
  - Data quality adequate for surveillance and program monitoring despite shortcomings (e.g., household survey timeliness, exclusion of third-party deposits at Treasury from public debt data).
  - Authorities determined to increase coverage of public finance statistics from central to general government with Fund TA support.
  - New fiscal and public debt data expected by the second semester of 2018; intent to align public sector statistics with international standards.

*Italic: Source: IMF staff assessment and Box 1 (External Stress Index) from the provided content.*

### 22.      Morocco has a track record of sound policies. Morocco has met the PLL qualification

### Morocco has a track record of sound policies. Morocco has met the PLL qualification standard

### Program performance and indicative targets
- Morocco has met the PLL qualification standard since 2012.
- The end-September 2017 indicative targets (IT) for the fiscal deficit and for net international reserves (NIR) were met.
  - The end-September 2017 fiscal deficit IT was met without adjustments, and with a substantial margin once the adjustor for grants is considered.
  - The end-September 2017 NIR IT was met, reflecting the moderate narrowing of the current account deficit since July 2017, due in part to strong export performance and the stabilization of import of capital equipment.
- Since 2012, macroeconomic vulnerabilities have declined; the macroeconomic situation improved in 2017, with higher growth and a lower public deficit.

### Balance-sheet and Fund exposure
- If Morocco were to draw on the entire PLL amount, it would have adequate capacity to repay the Fund, and credit and liquidity risks to the Fund would remain low.
- Fund obligations in the event of a drawdown would represent a small share of Morocco’s external accounts over the projection period:
  - a maximum of 7.1 percent of total external debt,
  - 13.1 percent of gross international reserves,
  - nine percent of exports.
- The commitment to Morocco is described as modest; the PLL arrangement reduces the Fund’s forward commitment capacity only marginally.
- Footnote illustrative scenario: since drawing would typically occur after a shock, macroeconomic variables could be worse than the baseline; for example, reserves may be 25 percent lower and exports 6 percent lower, suggesting peak IMF credit ratios of 17.5 percent and 9.7 percent instead of 12.8 percent and 9 percent in the table.

### Safeguards and institutional reforms
- The 2015 assessment found a robust safeguards framework with strong control mechanisms at the central bank.
- The remaining recommendation was to strengthen the Banque Al-Maghrib (BAM) law in areas of autonomy and governance.
- The draft new central bank law was expected to be approved by Parliament in early 2018.
- Continuing to implement the 2015 FSAP recommendations and adopting the new central bank law would further strengthen the financial sector policy framework.

### Exit strategy and external risks
- The authorities’ exit strategy should reflect the strength of macroeconomic buffers and increased policy space, together with the evolution of external risks.
- Under the baseline scenario, by the end of the arrangement:
  - public debt would be on a downward path;
  - the current account deficit would be close to what would be expected for an emerging market country like Morocco despite recent deterioration;
  - reserves would be at a comfortable level.
- Important external risks that may affect Morocco include euro area growth, geopolitical tensions in the region, and tighter and more volatile global financial conditions.
- The authorities’ firm commitment to maintain strong policy and reform implementation (as articulated in W-COM.-¶17) is important to anchor confidence in post-program resilience, contingent on the lowering of external risks.

### Staff appraisal and reform priorities
- The PLL arrangement has served Morocco well and remains on track.
- Reforms that were delayed in 2016–17 have resumed and need to accelerate to strengthen resilience and achieve higher, sustainable, and inclusive growth.
- Priority reform areas and policy recommendations:
  - Accelerate fiscal reforms to provide additional policy space and preserve growth and priority social spending.
    - Broaden the tax base by reducing exemptions and simplifying VAT and corporate taxation.
    - Implement civil service reform to generate long-term savings on public wage expenditures.
    - Carefully implement fiscal decentralization.
    - Strengthen SOE oversight.
  - Start the transition to exchange rate flexibility as soon as possible to better absorb shocks and preserve price competitiveness.
  - Intensify efforts to improve the business environment and support private sector-led growth:
    - Reduce chronic payment delays.
    - Make the competition council operational.
    - Advance education, governance, and labor market reforms to encourage job creation and women’s labor force participation.

### Qualification area performance
- Morocco performs strongly in three out of five PLL qualification areas:
  - financial sector and supervision,
  - monetary policy,
  - data adequacy.
- Morocco does not substantially underperform in the other two areas:
  - external position and market access,
  - fiscal policy.
- The Executive Board’s 2017 Article IV assessment of Morocco’s policies was generally positive; Morocco’s economic fundamentals and institutional frameworks are characterized as sound, with a track record of and commitment to sound policies.

*Source: IMF staff report (extract provided).*

### 33.      Against this background, staff recommends the completion of the third review under

### 33.      Against this background, staff recommends the completion of the third review under the PLL arrangement.

### Real and external developments
- Economic activity rebounded significantly in 2017.
- Private consumption was the main driver of growth in the first half of 2017.
- Inflation remains low following the sharp decline in food prices.
- The trade deficit widened in 2016–17, weakening the current account, despite stable tourism and remittances.
- FDI played a key role in financing the current account deficit.
- Reserves coverage is at comfortable levels, despite the temporary fall of international reserves in May-June 2017.
- Morocco and Euro Area Growth (Annual percent change) series shown for 2008–2017 (sources: WEO).
- Inflation (CPI General Index; CPI Core; CPI Food) series shown monthly Jul-12 to Oct-17 (sources: national authorities; IMF staff estimates).
- Current Account Components (US$ billions) series and CA/GDP (RHS) presented for 2007–2017p (sources: national authorities; IMF staff estimates).
- Current Account Financing (US$ billions) shown with components: FDI, Portfolio, Private borrowing, Public borrowing, Current account, Reserves (RHS).
- Contributions to GDP Growth (Annual percent change) shown with series for Public Consumption, Private Consumption, Investment, Net Exports (2009–2017H1).
- Reserve Adequacy Metrics (US$ billions, unless otherwise noted) include:
  - Reserves; 3 months imports; Standard metric 20% of broad money; Adjusted metric Reserves/(ST debt + CA deficit) (RHS).

### Fiscal developments
- Fiscal consolidation resumed in 2017 due to stable tax revenues and contained public expenditures.
- The cyclical and structural fiscal balances improved in 2017.
- Public debt is sustainable and projected to decline gradually.
- Sovereign spreads have further declined in 2017.
- Cyclical and Structural Balance (Percent of GDP) series presented 2000–2017 (IMF staff estimates).
- Evolution of Predictive Densities of Gross Public Debt (Percent of GDP; Symmetric Distribution) with percentiles and baseline projections for 2015–2022.
- CDS Spreads: Markit 5-yr MAR Sov. CDS Spread and EMBI Global Spread (Basis points) series Dec-12 to Dec-17 (sources: Bloomberg; Markit).
- Budget Balance and Public Debt (Percent of GDP) series 2008–2017 (sources: national authorities; IMF staff estimates).
- Government Revenue and Expenditure (Percent of GDP) series 2008–2017 with revenue breakdown (G&S Tax, Income Tax, Other, Grants) and expenditure breakdown (Wages, G&S & Other, Subsidies, Investment).

### Selected economic indicators (highlights from Table 1, 2012–22)
- Real GDP (annual percent change): 2012 3.0; 2013 4.5; 2014 2.7; 2015 4.5; 2016 1.2; 2017 4.8; 2018 4.4; 2019 4.4; 2020 3.1; 2021 4.0; 2022 4.2; subsequent entries 4.5; 4.6.
- Real agriculture GDP (annual percent change): 2012 -9.1; 2013 17.2; 2014 -2.2; 2015 11.9; 2016 -12.8; 2017 16.6; 2018 15.2; 2019 15.2; 2020 -1.0; 2021 6.6; 2022 6.4; later entries 6.4; 6.8.
- Consumer prices (end of period): 2012 2.6; 2013 0.4; 2014 1.6; 2015 0.6; 2016 1.8; 2017 1.1; 2018 0.9; 2019 0.9; 2020 1.6; 2021 2.0; 2022 2.0; subsequent 2.0; 2.0.
- Gross capital formation (percent of GDP): 2012 35.0; 2013 34.7; 2014 32.5; 2015 30.8; 2016 33.1; 2017 33.2; 2018 33.4; 2019 33.9; 2020 35.0; 2021 35.5; 2022 35.9; later 36.0; 36.4.
- Gross national savings (percent of GDP): 2012 25.5; 2013 27.0; 2014 26.5; 2015 28.8; 2016 28.8; 2017 29.2; 2018 29.5; 2019 30.2; 2020 31.3; 2021 31.8; 2022 32.5; later 33.1; 33.9.
- Revenue (percent of GDP): 2012 28.0; 2013 27.8; 2014 28.0; 2015 26.5; 2016 26.1; 2017 25.9; projected 26.1; 26.1; 26.6; 26.0; 26.0; 26.2; 26.3.
- Expenditure (percent of GDP): 2012 35.2; 2013 32.9; 2014 32.9; 2015 30.7; 2016 30.2; 2017 29.4; projections 29.6; 29.7; 29.7; 29.6; 28.8; 28.7; 28.5.
- Budget balance (percent of GDP): 2012 -7.2; 2013 -5.1; 2014 -4.8; 2015 -4.2; 2016 -4.1; 2017 -3.5; projections -3.5; -3.5; -3.0; -2.8; -2.7; -2.4; -2.2.
- Primary balance (excluding grants) (percent of GDP): 2012 -4.8; 2013 -3.2; 2014 -3.6; 2015 -1.9; 2016 -2.4; 2017 -1.9; projections -1.9; -1.9; -1.3; -0.7; -0.5; -0.3; 0.0.
- Total government debt (percent of GDP): 2012 56.5; 2013 61.7; 2014 63.3; 2015 63.7; 2016 64.7; 2017 63.2; projections 64.3; 64.4; 64.1; 62.5; 61.9; 60.0; 58.4.
- Exports of goods and services (US$, percent change): 2012 -0.1; 2013 4.5; 2014 7.4; 2015 -7.0; 2016 2.9; 2017 5.1; projections 6.5; 6.5; 7.2; 7.4; 6.7; 6.5; 6.6; 6.1.
- Imports of goods and services (US$, percent change): 2012 2.2; 2013 4.3; 2014 1.0; 2015 -16.5; 2016 9.6; 2017 4.4; projections 5.3; 5.6; 6.7; 5.3; 5.2; 5.4; 5.0.
- Merchandise trade balance (percent of GDP): 2012 -22.3; 2013 -20.5; 2014 -18.7; 2015 -14.5; 2016 -17.1; 2017 -16.4; projections -16.4; -16.3; -16.1; -15.6; -15.1; -14.7; -14.3.
- Current account excluding official transfers (percent of GDP): 2012 -9.6; 2013 -8.3; 2014 -7.6; 2015 -2.6; 2016 -5.3; 2017 -4.9; projections -4.8; -4.7; -4.4; -4.0; -3.5; -3.0; -2.5.
- Foreign direct investment (percent of GDP): 2012 2.4; 2013 2.8; 2014 2.8; 2015 2.6; 2016 1.6; 2017 1.6; projected 1.9; 1.9; 2.4; 2.6; 2.7; 2.7; 2.7.
- Total external debt (percent of GDP): 2012 28.5; 2013 29.3; 2014 33.3; 2015 33.9; 2016 34.6; 2017 33.5; projections 33.5; 33.7; 34.0; 32.4; 30.8; 29.3; 27.9.
- Gross reserves (in billions of U.S. dollars): 2012 17.1; 2013 18.8; 2014 20.3; 2015 22.8; 2016 25.1; 2017 24.2; projections 24.8; 25.8; 28.3; 29.9; 31.9; 35.0; 39.2.
- In months of next year imports of goods and services: 2012 4.2; 2013 4.6; 2014 5.9; 2015 6.0; 2016 6.3; 2017 5.9; projections 5.9; 6.1; 6.3; 6.4; 6.4; 6.7; 7.9.
- In percent of Fund reserve adequacy metric (based on revised ARA weights): 2012 74.5; 2013 73.3; 2014 79.0; 2015 93.6; 2016 98.4; 2017 90.1; projections 90.3; 92.9; 95.2; 94.2; 93.2; 95.8; 100.5.
- In percent of CA deficit and ST debt at remaining maturity basis: 2012 154.2; 2013 186.2; 2014 244.5; 2015 517.5; 2016 351.3; 2017 374.5; projections 379.1; 402.1; 423.2; 436.0; 467.8; 544.2; 666.2.
- Nominal GDP (in billions of U.S. dollars): 2012 98.3; 2013 106.8; 2014 110.1; 2015 101.2; 2016 103.6; 2017 110.8; projections 110.0; 109.9; 117.8; 125.1; 132.9; 141.0; 149.6.

### Budgetary central government finance (highlights from Tables 2a and 2b)
- Revenue (billions of dirhams): 2012 237.7; 2013 250.0; 2014 259.3; 2015 262.1; 2016 264.9; 2017 278.0; projections 278.3; 278.3; 294.8; 304.9; 323.9; 346.4; 370.6.
- Taxes (billions of dirhams): 2012 202.7; 2013 200.7; 2014 203.8; 2015 208.9; 2016 217.4; 2017 232.9; projections 232.9; 232.9; 244.2; 261.2; 280.3; 300.2; 321.5.
- Grants (billions of dirhams): 2012 0.5; 2013 6.1; 2014 13.8; 2015 5.0; 2016 9.7; 2017 9.8; projections 10.2; 10.2; 8.1; 3.8; 1.2; 1.2; 1.2.
- Expense (billions of dirhams): 2012 252.5; 2013 250.0; 2014 254.5; 2015 248.5; 2016 249.1; 2017 258.2; projections 258.3; 258.3; 267.0; 273.6; 286.7; 300.7; 315.6.
- Compensation of employees (billions of dirhams): 2012 108.9; 2013 112.8; 2014 117.3; 2015 118.5; 2016 120.6; 2017 125.2; projections 125.2; 125.2; 127.3; 129.7; 132.3; 135.0; 137.6.
- Interest (billions of dirhams): 2012 20.7; 2013 23.3; 2014 25.6; 2015 27.3; 2016 27.1; 2017 27.5; projections 27.6; 27.6; 27.1; 28.7; 28.8; 30.1; 31.7.
- Net acquisition of nonfinancial assets (billions of dirhams): 2012 46.1; 2013 45.7; 2014 49.7; 2015 54.7; 2016 54.8; 2017 57.3; projections 57.8; 57.8; 58.8; 61.1; 64.6; 71.0; 78.1.
- Net lending/borrowing (overall balance) (billions of dirhams): 2012 -60.9; 2013 -45.7; 2014 -44.9; 2015 -41.2; 2016 -41.5; 2017 -38.0; projections -37.7; -37.7; -33.3; -33.3; -33.8; -32.3; -30.9.
- Revenue (percent of GDP): 2012 28.0; 2013 27.8; 2014 28.0; 2015 26.5; 2016 26.1; 2017 25.9; projections 26.1; 26.1; 26.6; 26.0; 26.0; 26.2; 26.3.
- Expense (percent of GDP): 2012 29.8; 2013 27.8; 2014 27.5; 2015 25.2; 2016 24.5; 2017 24.1; projections 24.2; 24.3; 24.1; 23.3; 23.0; 22.7; 22.4.
- Net lending/borrowing (overall balance) (percent of GDP): 2012 -7.2; 2013 -5.1; 2014 -4.8; 2015 -4.2; 2016 -4.1; 2017 -3.5; projections -3.5; -3.5; -3.0; -2.8; -2.7; -2.4; -2.2.
- Total government debt (percent of GDP): 2012 56.5; 2013 61.7; 2014 63.3; 2015 63.7; 2016 64.7; 2017 63.2; projections 64.3; 64.4; 64.1; 62.5; 61.9; 60.0; 58.4.

### Balance of payments (highlights from Table 3, 2012–22)
- Current account (billions of U.S. dollars): 2012 -9.2; 2013 -8.1; 2014 -6.5; 2015 -2.2; 2016 -4.5; 2017 -4.4; projections -4.3; -4.2; -4.4; -4.6; -4.5; -4.2; -3.7.
- Trade balance (billions of U.S. dollars): 2012 -21.9; 2013 -21.9; 2014 -20.6; 2015 -14.7; 2016 -17.7; 2017 -17.8; projections -18.0; -17.9; -19.0; -19.5; -20.1; -20.8; -21.4.
- Exports, f.o.b. (billions of U.S. dollars): 2012 17.0; 2013 18.3; 2014 20.0; 2015 18.6; 2016 18.9; 2017 20.3; projections 20.5; 20.7; 22.1; 23.7; 25.4; 27.3; 29.1.
- Imports, f.o.b. (billions of U.S. dollars): 2012 -38.9; 2013 -40.2; 2014 -40.6; 2015 -33.3; 2016 -36.6; 2017 -38.1; projections -38.5; -38.6; -41.1; -43.2; -45.5; -48.1; -50.5.
- Services (net, billions of U.S. dollars): 2012 6.9; 2013 6.4; 2014 7.0; 2015 6.8; 2016 6.8; 2017 6.7; projections 6.9; 6.9; 7.5; 7.9; 8.4; 9.1; 9.7.
- Tourism receipts (billions of U.S. dollars): 2012 6.7; 2013 6.9; 2014 7.1; 2015 6.3; 2016 6.5; 2017 6.8; projections 6.9; 6.9; 7.5; 8.0; 8.5; 9.0; 9.6.
- Transfers (billions of U.S. dollars): 2012 7.7; 2013 8.7; 2014 9.7; 2015 7.7; 2016 8.2; 2017 8.6; projections 8.7; 8.7; 9.2; 9.2; 9.5; 10.0; 10.5.
- Financial account (billions of U.S. dollars): 2012 6.2; 2013 9.4; 2014 8.8; 2015 5.8; 2016 6.5; 2017 2.5; projections 2.2; 2.3; 3.3; 6.6; 5.9; 6.1; 6.9; 7.4.
- Direct investment (billions of U.S. dollars): 2012 2.3; 2013 3.0; 2014 3.1; 2015 2.6; 2016 1.7; 2017 1.7; projections 1.9; 1.9; 2.4; 2.6; 2.7; 2.7; 2.7.
- Reserve asset accumulation (-increase) (billions of U.S. dollars): 2012 3.3; 2013 -1.8; 2014 -2.9; 2015 -4.3; 2016 -2.8; 2017 1.8; projections 2.1; 0.9; -2.2; -1.3; -1.6; -2.7; -3.7.
- Current account (percent of GDP, alternative series) and other items also reported; gross official reserves excluding Fund reserve position: 2012 17.1; 2013 18.8; 2014 20.3; 2015 22.8; 2016 25.1; 2017 24.2; projections 24.8; 25.8; 28.3; 29.9; 31.9; 35.0; 39.2.
- Oil price (US$/barrel; Brent) series: 2012 112.0; 2013 108.8; 2014 98.9; 2015 52.4; 2016 44.0; 2017 52.9; projections 51.4; 54.3; 61.4; 58.9; 57.4; 56.8; 56.6.

### Monetary survey (highlights from Table 4)
- Net International Reserves (billions of dirhams): 2011 170.0; 2012 141.4; 2013 146.5; 2014 179.6; 2015 222.1; 2016 249.2; 2017 230.4; 2017 (alternate) 239.1.
- Gross reserves (of which) (billions of dirhams): 2011 173.2; 2012 144.5; 2013 153.2; 2014 183.3; 2015 225.4; 2016 253.5; 2017 236.3; 2017 (alternate) 245.0.
- Broad money (billions of dirhams): 2011 949.3; 2012 992.2; 2013 1,022.8; 2014 1,086.2; 2015 1,148.0; 2016 1,202.4; 2017 1,278.1; 2017 (alternate) 1,274.6.
- Credit to the economy (billions of dirhams): 2011 696.2; 2012 729.6; 2013 757.2; 2014 776.4; 2015 792.0; 2016 968.9; 2017 1,012.6; 2017 (alternate) 998.7.
- Broad money (annual change percent of broad money): 2012 4.5; 2013 3.1; 2014 6.2; 2015 5.7; 2016 4.7; 2017 6.0; alternate 6.0.
- Credit to the economy (annual percentage change): 2012 4.8; 2013 3.8; 2014 2.5; 2015 2.0; 2016 4.4; 2017 5.7; alternate 4.4.
- Velocity (GDP/M3) positions: 2011 0.86; 2012 0.85; 2013 0.88; 2014 0.85; 2015 0.86; 2016 0.85; 2017 0.83; 2017 (alternate) 0.84.
- Credit to economy/GDP (percent): 2011 84.9; 2012 86.0; 2013 84.3; 2014 83.9; 2015 80.2; 2016 81.3; 2017 81.9; 2017 (alternate) 81.0.

### Financial soundness indicators (highlights from Table 5)
- Regulatory capital to risk-weighted assets: 2010 12.3; 2011 11.7; 2012 12.3; 2013 13.3; 2014 13.8; 2015 13.7; 2016 13.7; 2017 (provisional/Basel III) na; 2017 14.2; 2017 na; 13.7.
- Tier 1 capital to risk-weighted assets: 2010 9.7; 2011 9.6; 2012 10.2; 2013 11.1; 2014 11.6; 2015 11.4; 2016 11.1; 2017 provisional na; 2017 11.5; 2017 na; 11.0.
- Capital to assets: 2010 8.3; 2011 8.1; 2012 8.5; 2013 8.6; 2014 8.8; 2015 9.1; 2016 9.2; 2017 9.4; 2017 9.3; 2017 9.1; 9.1.
- Nonperforming Loans (NPLs) to total loans: 2010 4.8; 2011 4.8; 2012 5.0; 2013 5.9; 2014 6.9; 2015 7.4; 2016 7.8; 2017 Mar 7.7; Jun 8.0; Sep 7.6; Dec 7.8; Mar 7.5; Jun 7.5.
- Specific provisions to NPLs: 2010 70.1; 2011 68.7; 2012 67.8; 2013 64.0; 2014 65.0; 2015 68.0; 2016 67.0; 2017 67.0; 2017 67.0; 2017 68.0; 69.0; 70.0; 70.0.
- Liquidity: Liquid assets to total assets series: 2010 12.0; 2011 11.4; 2012 10.5; 2013 12.5; 2014 13.3; 2015 16.1; 2016 14.3; 2017 13.0; 2017 13.1; 14.5; 13.5; 12.0.
- Deposits to loans: 2010 104.0; 2011 99.0; 2012 96.0; 2013 96.1; 2014 96.2; 2015 100.8; 2016 104.3; 2017 106.6; later entries 105.4; 105.0; 105.0; 105.1; 104.2.

### Capacity to repay (highlights from Table 6)
- GRA credit to Morocco (SDR million): 2016 0.0; 2017 0.0; 2018 2,504.0; 2019 2,504.0; 2020 2,504.0; 2021 1,565.0; 2022 313.0.
- GRA credit to Morocco (in percent of quota): 2016 0.00; 2017 0.00; 2018 2.80; 2019 2.80; 2020 2.80; 2021 1.75; 2022 0.35.
- Charges due on GRA credit: 2016 0.0; 2017 0.0; 2018 59.5; 2019 60.5; 2020 60.5; 2021 54.6; 2022 18.7.
- Debt and debt service ratios (selected):
  - Total external debt (percent of GDP): 2016 33.6; 2017 34.4; 2018 37.1; 2019 35.6; 2020 34.1; 2021 31.9; 2022 29.5.
  - Public external debt (percent of GDP): 2016 29.9; 2017 30.7; 2018 33.5; 2019 32.2; 2020 30.8; 2021 28.7; 2022 26.5.
  - Total external debt service (percent of GDP): 2016 3.1; 2017 3.1; 2018 2.8; 2019 2.7; 2020 2.5; 2021 3.3; 2022 3.3.
- In percent of gross international reserves:
  - Total external debt: 2016 138.6; 2017 146.3; 2018 154.4; 2019 149.0; 2020 142.2; 2021 128.6; 2022 112.7.
  - Public external debt: 2016 123.2; 2017 130.7; 2018 139.4; 2019 134.6; 2020 128.4; 2021 115.7; 2022 100.9.
- Memorandum items:
  - Nominal GDP (in billions of U.S. dollars): 2016 103.6; 2017 109.9; 2018 117.8; 2019 125.1; 2020 132.9; 2021 141.0; 2022 149.6.
  - Gross international reserves (in billions of U.S. dollars): 2016 25.1; 2017 25.8; 2018 28.3; 2019 29.9; 2020 31.9; 2021 35.0; 2022 39.2.
- Note: Upon approval of the second review of the PLL arrangement Morocco can draw up to 280 percent of quota. The Moroccan authorities have expressed their intention to treat the arrangement as precautionary.

*Source: IMF staff estimates and Moroccan authorities as presented in Country Report tables and figures.*

### Appendix I. Written Communication

### Appendix I. Written Communication

### Economic outlook and macroeconomic performance
- Growth: "about 4.5 percent", supported by a particularly good agricultural season.
- Inflation: "0.6 percent" (decrease due to decline of some food prices).
- Unemployment: "10.6 percent" in Q3 2017 (increased slightly despite a net amelioration in job creation).
- Current account: deficit should narrow to "about 4 percent of GDP in 2017" from "4.4 percent in 2016" (due to strong exports, despite a higher energy bill and stabilization of goods imports at a high level).
- Foreign exchange reserves: should reach "nearly 6 months of imports at end-2017" and are expected to strengthen in the medium term.

### PLL arrangement, external position, and reserve management
- The PLL arrangement approved on July 22, 2016, is being treated as precautionary; authorities intend to draw on it only if unforeseen exogenous shocks occur.
- The arrangement provides insurance against external shocks and strengthens investor confidence.
- The indicative targets for the fiscal deficit and international reserves set in the PLL arrangement for end-September 2017 "were comfortably met."
- Compliance: authorities state they "have complied and will continue to comply with the standard criteria related to trade and exchange restrictions, bilateral payment arrangements and multiple currency practices and non-accumulation of external debt payment arrears."
- Table 1 of the communication contains quantitative indicative targets for Net International Reserves (NIR) of Bank Al-Maghrib (BAM) and the fiscal deficit (cumulative since beginning of fiscal year, eop, in millions of dirham), and memorandum items including adjustors on NIR and on the fiscal deficit.

### Fiscal policy, public finances, and public debt objectives
- Fiscal consolidation progress:
  - Fiscal deficit declined to "4.1 percent of GDP in 2016".
  - Objective of reducing the fiscal deficit to "3.5 percent of GDP in 2017" should be met.
  - Government targets a deficit of "3 percent of GDP" for 2018.
  - Public debt ratio target: reduce to "60 percent by 2021".
- Revenue-side reforms and tax policy priorities:
  - Continue tax reform in line with 2013 national tax conference recommendations to make taxation "simpler, more equitable and more favorable to competitiveness."
  - Priorities: reduce tax exemptions (notably those granted to large agricultural firms), simplify VAT by reducing the number of rates, improve tax collection, expand the tax base, modernize tax administration, and gradually integrate the informal sector.
  - "The 2018 draft budget includes some measures in these directions."
- Expenditure priorities and wage bill:
  - Continue to control spending while prioritizing investment in infrastructure and human capital, strengthen social programs and targeting toward the most vulnerable.
  - Determined to reduce the civil service wage bill, including social contributions, and to bring it back to "10.5 percent of GDP in the medium term."

### Public finance statistics and governance
- Coverage of public finance statistics will be extended beyond central government to include "the entire general government."
- Consolidation and production of new statistical data, including public debt, intended to be completed "by the end of the second half of 2018."
- Request for IMF technical assistance from specialized services to support consolidation.
- Implementation of the Organic Budget Law (OBL):
  - Provisions implemented in 2016 and 2017; others to be phased in "gradually by 2020 in conformity with the OBL."
  - Provision limiting personnel appropriations entered into force on "January 1, 2017."
  - Provision limiting carry-forward of investment appropriations effective since "January 1, 2018."
- A draft law to strengthen governance and auditing of public enterprises is being examined and "should be submitted to Parliament during the April 2018 session."

### Public investment, PPPs, and administrative coordination
- Public investment will be maintained at a high level while ensuring compliance with fiscal consolidation objectives, increasing effectiveness, and better supporting private investment.
- Commitments:
  - Implement an integrated system for management of public investments.
  - Develop public-private partnerships (PPPs) to strengthen supply and quality of infrastructure while limiting costs and budget risks.
- Institutional arrangements:
  - A national committee under the Head of Government was created to coordinate and evaluate public policy implementation.
  - A national charter of administrative deconcentration is being prepared to group ministry activities at the regional level and ensure consistency.

### Civil service reform and pensions
- A comprehensive civil service reform is being developed to strengthen efficiency, productivity, and reduce fiscal costs.
  - Legislative and regulatory texts concerning mobility and contractual employment have been promulgated and are being enforced.
- Pension reform:
  - Gradual implementation began in "September 2016" with extension of coverage and shift toward a bipolar (private sector/public sector) system.
  - A law creating a pension scheme for self-employed and non-salaried workers was adopted by Parliament on "November 13, 2017."

### Fiscal decentralization and regionalization
- Advanced regionalization and fiscal decentralization are being implemented carefully to preserve fiscal sustainability.
- Subnational governments have been assigned more responsibilities, including fiscal ones, while public resources are being transferred and expected to increase gradually.
- Government finalizing in 2017 a comprehensive strategy for fiscal decentralization; plans to build capacity, improve transparency and accountability, and strengthen subnational own resources.

### Monetary policy, exchange rate transition, and central bank reform
- Bank Al-Maghrib (BAM) has maintained an accommodative monetary policy in a context of limited growth in non-agricultural activity and lending, moderate inflation, and comfortable foreign exchange reserves.
- BAM priorities: promote appropriate financing of the economy, particularly for SMEs.
- A draft central bank law was submitted to Parliament in July 2017 and should be adopted by "early 2018"; the new law will "further reinforce BAM’s independence" and expand its missions to contribute to financial stability and promote financial inclusion.
- Exchange rate regime transition:
  - Authorities are "determined to introduce gradually more flexibility in the exchange rate regime" and transition the monetary policy framework toward inflation targeting.
  - Announcement timing: "The government will announce at the appropriate time the beginning of this reform."
  - Requirements for successful transition cited as largely met: improved fiscal and external buffers, resilience of the financial sector, alignment of the exchange rate with fundamentals, and gradual diversification of the economy.

### Financial sector resilience and supervision
- Banking sector described as "sound and resilient"; ongoing strengthening of prudential framework and surveillance, including implementation of FSAP recommendations.
- Nonperforming loans (NPLs) "remain at a moderate level and are well provisioned."
- BAM actions and regulatory measures:
  - Strengthened regulations for granting and supervising loans to conglomerates.
  - Continue to complete loan classification and provisioning rules.
  - Intensify coordination with supervisory authorities in African countries where Moroccan banks are established.
  - Adapting oversight systems for risks, particularly market risks, in the context of transition to a more flexible foreign exchange regime.
  - Adopted regulations introducing counter-cyclical capital buffers.
  - Enacted in Q3 2017 regulations to guide recovery plans for systemically important institutions.
  - Authorities will strengthen the macro-prudential framework and reinforce the bank resolution framework by establishing a legal framework for resolution in line with Financial Stability Board standards, including designating BAM as the resolution authority.

### Structural reforms, labor market, and competitiveness
- Government intends to accelerate structural reforms to strengthen competitiveness, increase growth potential and reduce unemployment, especially youth unemployment.
- Education, training, and research:
  - A draft law setting out guidelines and objectives for education, training and scientific research, in line with the "2015-2030 Vision," to be finalized in "early 2018."
- Business environment reforms:
  - Implement national strategy to fight corruption, improve public service quality, continue dematerialization of administrative procedures, and provide the Competition Council with adequate means.
- Employment strategy:
  - In the context of the National Strategy for Employment finalized in 2015, an action plan for "2017-2021" to promote job creation was adopted in "September 2017."
  - Working groups have been created to propose operational measures to be presented to the government by "early 2018" aiming to boost youth employment and increase labor force participation of women, including strengthening active labor market policies and vocational training.

### Exchange rate flexibility implementation (staff and authorities statements)
- Staff Representative statement (January 19, 2018):
  - Authorities announced greater exchange rate flexibility to be introduced on "January 15, 2018": dirham fluctuation band widened to "+/-2.5 percent" from "0.3 percent" around a reference parity still determined by the central bank based on a basket comprising the euro and US dollar (weights "60 and 40 percent, respectively").
  - Initial market reaction: currency markets were calm on "January 15 and 16"; dirham remained close to central parity and well within the new range.
  - Staff view: transition to a more flexible exchange rate arrangement will allow better absorption of shocks, preserve competitiveness, and improve the monetary policy framework; it is a positive signal to investors.
- Statement by Mr. Mohammed Daïri, Alternative Executive Director on Morocco (January 18, 2018):
  - Authorities broadly share staff assessment but have diverging views on the exchange rate and the strength of the external position.
  - Exchange rate implementation details and market reaction:
    - Authorities moved to flexible exchange rate regime on "Monday, January 15."
    - Although the new band was "+/- 2.5 percent", the exchange rate fluctuated within the old band of "+/- 0.3 percent."
    - Central bank auction activity reported as "$3.5 million purchased against $20 million offered."
    - Minimal central bank sales; no sign of exchange rate pressures during the first two days of transition; similar trends in the offshore market.
  - Authorities will monitor forex market developments closely and assess progress in the initial phase to prepare for next phases and introduction of inflation targeting.
  - Reservations on staff assessment of the external position:
    - Authorities contend that more recent data and a new EBA exercise would support their view of the external position.
    - Report notes the level of reserves for end-2017 projected in the communication is "$1 billion higher" than in the November 2017 Article IV report, and actual reserves were "even higher by another $0.4 billion."
    - Authorities note that the decline in official reserves in mid-2017 (resulting from sales to domestic banks for hedging transactions ahead of the announced start of the transition) was fully recouped, with the level of reserves increasing by "$0.8 billion compared to 2016."
  - Authorities' assessment of risks: consider the report's risks should be better balanced given ongoing efforts on diversification and stronger global growth; recent improvement in weather conditions could boost growth in 2018.
  - PLL stance: authorities continue to value PLL role as precautionary; will assess need for further recourse to Fund financial support under the PLL or other arrangements and the size of access prior to expiration of the arrangement next July, in close consultation with the Fund.

*Appendix I. Written Communication (Rabat, Morocco; November 30, 2017) — signed by Mohammed Boussaïd (Minister of Economy and Finance) and Abdellatif Jouahri (Governor, Bank Al-Maghrib).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1858.pdf_