## cr1875

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### Recent developments and growth
- Real GDP growth: 4.4 percent in 2017, "mostly driven by a significant rebound in agricultural activity" while non-agricultural activity remained subdued.
- Real agriculture GDP: 15.2 percent (2017).
- Real non-agriculture GDP: 3.0 percent (2017).
- Growth drivers: mainly private consumption; private investment recovering after declining from 35.4 percent to 26.9 percent of GDP between 2008 and 2016.
- Unemployment rate: 10.6 percent in Q3 2017 (year-on-year).
- Youth unemployment: 29.3 percent.
- Headline inflation (year-on-year): expected to decline to 0.6 percent in 2017; core inflation about 1.2 percent in 2017.

### External sector and reserves
- Current account deficit: -3.9 percent of GDP (2017); projected -3.7 percent of GDP (2018).
- Current account excluding official transfers: -4.8 percent of GDP (2017); projected -4.3 percent of GDP (2018).
- Merchandise trade balance: -16.4 percent of GDP (2017); projected -16.0 percent of GDP (2018).
- Exports growth (U.S. dollars): 6.5 percent (2017); projected 7.2 percent (2018).
- Imports growth (U.S. dollars): 5.3 percent (2017); projected 6.0 percent (2018).
- Gross reserves (U.S. dollars, billions): 24.8 (2017); projected 27.6 (2018).
- Reserves in months of next year imports: 5.9 (2017); projected 6.2 (2018).
- Reserve developments: reserves dropped by about US$3.8 billion to US$21.6 billion by end-June 2017; end-September 2017: US$24.4 billion; projected end-2017: US$24.8 billion.
- Reserve adequacy metrics: reserves equivalent to six months of imports; 90 percent of the Assessing Reserve Adequacy (ARA) metric (120 percent of the ARA adjusted for capital controls).

### Fiscal developments and public debt
- Fiscal deficit (budget balance): -3.5 percent of GDP (2017); projected -3.0 percent of GDP (2018); medium-term target ~ -2.5 percent of GDP.
- Key fiscal indicators (percent of GDP, 2017):
  - Revenue: 26.1
  - Expenditure: 29.6
  - Budget balance: -3.5
  - Primary balance (excluding grants): -1.9
  - Cyclically-adjusted primary balance (excl. grants): -1.8
  - Total government debt: 64.3
- Public debt trajectory: rose from 47 percent of GDP in 2009 to 64.7 percent of GDP in 2016; expected to start declining in 2017 to 64.3 percent of GDP; authorities aim to reduce public debt to 60 percent of GDP by 2021.
- 2016 fiscal outcome: deficit 4.1 percent of GDP (2015: 4.2 percent).
- 2017 year-to-date (end-October 2017): tax revenues performed better than projected; grant revenues lower than anticipated (32 percent of expected amounts); public spending on wages and interest below expectations; capital expenditures decelerated by 2 percent y-o-y.
- 2018 budget measures: enhance tax revenues (VAT increases on fuel and insurance; progressive corporate taxation proposed: 10 percent up to 300,000 dirhams, 20 percent between 300.001 and 1,000,000 dirhams, and 31 percent above that), contain current spending, contingency measures for grants shortfalls.

### Financial sector health and supervision
- Banking indicators (end-June 2017):
  - Banks’ Tier 1 capital ratio: 13.7 percent.
  - NPL ratio: 7.9 percent (NPLs stabilized around 7.5–7.9 percent and well provisioned).
  - Provisioning level: 70 percent (and increasing).
- Credit and monetary aggregates (2017):
  - Credit to the economy: 5.7 percent (2017); credit growth 5.1 percent y-o-y in August 2017.
  - Base money growth: 6.0 percent (2017).
  - Broad money growth: 6.0 percent (2017).
- Financial sector actions:
  - Strengthening regulatory limits to reduce credit concentration.
  - Collaboration with cross-border supervisory bodies for banks’ expansion in Africa; supervisory colleges in place for largest banks.
  - Shift toward risk-based and forward-looking supervision; new BAM units for oversight of systemic banks and cross-country exposures.
  - Macroprudential framework: countercyclical capital buffers introduced June 2016; progress on data gaps (loan-to-value, debt-service-to-income).
  - Bank resolution and crisis management: multi-year overhaul initiated; ELA framework to be included in draft central bank law; BAM designation as resolution authority not introduced in the new law expected in 2018.
  - AML/CFT: evaluation scheduled for March 2018 under revised FATF standard.

### External debt sustainability and stress tests
- External debt: 34.1 percent of GDP (2017).
- Structure: about 75 percent owed to official bilateral and multilateral creditors; about 75 percent carries fixed-rate terms.
- Stress-test results:
  - Large one-time real depreciation of 30 percent in 2018 projects external debt up to 50 percent in 2018 and 44 percent by 2021.
- Projections and drivers: external debt projected to decline below 30 percent of GDP in the medium term under steady growth, improving current account, and strong FDI inflows.
- NIIP: moved from -61 percent of GDP in 2015 to about -66.6 percent of GDP in 2017; projected to stabilize around -60 percent of GDP in the medium term.

### Outlook and risks
- Growth:
  - Real GDP projected 3.1 percent (2018); medium-term growth expected to reach 4.5 percent by 2021 under sustained reforms.
  - Real agriculture GDP: projected -1.0 percent (2018).
  - Real non-agriculture GDP: projected 3.6 percent (2018).
- Inflation: consumer prices (period average) 0.6 percent (2017); projected 1.3 percent (2018); stabilize around 2 percent over the medium term.
- External: current account excluding official transfers -4.8 percent of GDP (2017); projected -4.3 percent (2018).
- Nominal GDP (U.S. dollars): 110.0 (2017); projected 117.6 (2018).
- Population: 34.5 million (2016); 35.2 million (2018 projection).
- Elevated risks include: growth in advanced and emerging countries; geopolitical tensions; world energy prices; global financial market volatility; delays in implementing key reforms (exchange rate regime, governance, education, labor market).
- Balance of risks tilted to the downside; authorities broadly agreed with outlook but viewed some risks as less severe.

### Structural reforms and inclusive growth priorities
- Main structural priorities:
  - Strengthen business environment, improve education and vocational training, reduce unemployment (especially youth), increase women’s labor force participation.
  - Improve governance: implement National Anti-Corruption Strategy; operationalize Competition Council.
  - Sustain broad-based structural reforms to raise potential growth: staff baseline assumes reforms would increase potential growth by about one percentage point in the medium term; comprehensive reforms may increase long-term potential growth by about two percentage points.
- Labor market and participation:
  - Labor force participation rate: 46.4 percent (2016) vs 51.3 percent (2006).
  - Female labor force participation: 23.6 percent (2016).
- Business climate: Doing Business ranking improved from 128th (2010) to 68th (2017); 69th in 2018 Report.

### Social safety nets and targeting
- Total non-subsidy SSN spending: 1.8 percent of GDP.
- Subsidy reforms: in 2013 Morocco spent about 4.2 percent of GDP on regressive subsidies; by 2016 remaining subsidies cost about 1.4 percent of GDP while non-subsidy SSN programs rose to about 0.4 percent of GDP.
- Fragmentation and coverage:
  - UNICEF identified 140 different programs; about 50 different administrations involved.
  - Significant coverage gaps and overlaps; targeting weaknesses (e.g., RAMED: in 2014 only 26 percent of beneficiaries were from the poorest quintile; 45 percent from the upper three quintiles).
- Targeting mechanisms and reforms:
  - Only RAMED and DAAM use scoring (proxy means test) plus community targeting.
  - Authorities working with World Bank support to develop a social registry, route applications through the registry, update scoring formula every 2–3 years, and link to a national population registry issuing a unique ID with biometrics to reduce duplicates and false beneficiaries.
- Policy recommendation: pair tax reforms with stronger, better-targeted social safety nets to offset adverse impacts on vulnerable groups.

### Fiscal decentralization and subnational fiscal risks
- Institutional framework: 2011 Constitution and 2015 Organic Laws; 12 new regions defined in 2015.
- Subnational revenue and spending:
  - Share of subnational governments in total revenues: 15 percent in 2016 (own taxes 35 percent of subnational revenues).
  - Subnational expenditures: about 3.5 percent of GDP.
  - Transfers to regions expected to reach 10 billion dirhams by 2021 (1 percent of GDP).
  - Eight regional development plans presented with an annual average investment level of 4.5 percent of GDP.
- Key risks and recommendations:
  - Clearly define expenditure competences and adopt deconcentration chart.
  - Build local capacity before devolving major responsibilities and revenue powers.
  - Establish transparent criteria for transfers and equalization funds.
  - Reinforce controls on borrowing, PPPs, guarantees, SOEs and off-budget units to limit contingent liabilities.
  - Implement program and performance-based budgeting and regional data systems for monitoring.

### Policy recommendations (selected and prioritized)
- Maintain sound fiscal and monetary policies to consolidate gains and promote higher and more inclusive growth.
- Continue fiscal consolidation to ensure debt sustainability; control spending on wages and goods and services to create fiscal space for priority spending.
- Broaden the tax base; reduce exemptions; simplify and make tax system more progressive; raise property tax; consider proposed progressive corporate taxation in 2018 budget draft.
- Carefully implement fiscal decentralization and comprehensive civil service reform; keep public payroll below 10.5 percent of GDP over the medium term.
- Strengthen SOE governance and oversight; prepare consolidated SOE balance sheet data.
- Improve targeting of social spending; develop and implement social registry; better coordinate programs and regionalize to tailor to local needs.
- Move to a more flexible exchange rate regime as soon as practicable; adopt a new monetary policy framework (inflation targeting envisaged at a later stage); maintain capital outflow restrictions in the short run during initial phases.
- Strengthen banking supervision per 2015 FSAP recommendations: risk-based and forward-looking supervision, tighter provisioning requirements, improve credit bureau data, expand macroprudential toolkit, upgrade bank resolution framework.
- Sustain structural reforms to strengthen business environment, governance, education, vocational training, labor market flexibility, and female labor force participation.

*Source: MOROCCO—STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION (cr1875).*

### 4.4 percent, mostly driven by a significant rebound in agricultural activity while non-agricultural

### cr1875 - 4.4 percent, mostly driven by a significant rebound in agricultural activity while non-agricultural

### Recent developments
- Real GDP growth reached 4.4 percent in 2017, mostly driven by a significant rebound in agricultural activity while non-agricultural activity remained subdued.
- Real agriculture GDP: 15.2 percent (2017).
- Real non-agriculture GDP: 3.0 percent (2017).
- Unemployment rate increased to 10.6 percent in Q3 2017 (year-on-year).
- Youth unemployment: 29.3 percent.
- Headline inflation (year-on-year) is expected to decline to 0.6 percent in 2017, reflecting lower food prices.
- Social tensions increased in 2017, notably in the northern region of the Rif, driven by perceptions of corruption and demands for better access to health services, jobs, and public investment.
- Government response: steps to accelerate local social programs and investment projects; dismissal of several high-level officials following a Cour des Comptes report (October 2017).

### External sector and reserves
- Current account deficit projected to improve in 2017 to 3.9 percent of GDP.
- Exports growth: 6.5 percent in 2017, mostly due to the good performance of food product and phosphate and derivatives exports.
- International reserves expected to remain comfortable, at about six months of imports.
- Exports of goods and services (U.S. dollars, percentage change): 6.5 percent (2017); projected 7.2 percent (2018).
- Imports of goods and services (U.S. dollars, percentage change): 5.3 percent (2017); projected 6.0 percent (2018).
- Merchandise trade balance: -16.4 percent of GDP (2017); projected -16.0 percent of GDP (2018).
- Current account excluding official transfers: -4.8 percent of GDP (2017); projected -4.3 percent of GDP (2018).
- Current account including official transfers: -3.9 percent of GDP (2017); projected -3.7 percent of GDP (2018).
- Gross reserves (in billions of U.S. dollars): 24.8 (2017); projected 27.6 (2018).
- Reserves in months of next year imports of goods and services: 5.9 (2017); projected 6.2 (2018).

### Fiscal developments
- Fiscal consolidation resumed; fiscal deficit expected to decline to 3.5 percent in 2017.
- Tax revenues performed better than projected; grant revenues were lower than anticipated.
- Public spending on wages and interest payments was below expectations; capital expenditures decelerated by 2 percent year-on-year.
- Key fiscal indicators (percent of GDP, 2017):
  - Revenue: 26.1
  - Expenditure: 29.6
  - Budget balance: -3.5
  - Primary balance (excluding grants): -1.9
  - Cyclically-adjusted primary balance (excl. grants): -1.8
  - Total government debt: 64.3

### Financial sector and banking
- Banks are well capitalized; risks to financial stability are limited.
- Nonperforming loans remain relatively high but are closely monitored and well provisioned.
- Regulatory limits to reduce credit concentration are being strengthened.
- Collaboration with cross-border supervisory bodies to contain risks related to Moroccan banks’ expansion in Africa is being strengthened.
- Credit to the economy: 5.7 percent (2017).
- Base money growth: 6.0 percent (2017).
- Broad money growth: 6.0 percent (2017).

### Outlook and risks
- Medium-term growth expected to reach 4.5 percent by 2021, assuming sustained reform implementation.
- Headline inflation should remain low in 2018 and stabilize around 2 percent over the medium term.
- Fiscal deficit projected to decline further (budget balance projected -3.0 percent of GDP in 2018).
- External position expected to continue improving.
- Elevated risks include:
  - Growth in advanced and emerging countries.
  - Geopolitical tensions in the region.
  - World energy prices.
  - Global financial market volatility.
  - Delays in implementing key reforms (exchange rate regime, governance, education, labor market).

### Policy discussions and recommendations
- Maintain sound fiscal and monetary policies to consolidate gains and promote higher and more inclusive growth.
- Continue fiscal consolidation to ensure debt sustainability; control spending on wages and goods and services to create fiscal space for priority spending.
- Broaden the tax base and promote greater equity and simplicity through comprehensive tax reforms.
- Carefully implement fiscal decentralization and comprehensive civil service reform.
- Strengthen state-owned enterprise (SOE) oversight.
- Improve targeting of social spending to protect vulnerable segments of the population.
- Move to a more flexible exchange rate regime and adopt a new monetary policy framework to absorb external shocks and remain competitive.
- Continue to strengthen banking supervision (risk-based and forward-looking supervision, tighter provisioning requirements) in line with 2015 FSAP recommendations.
- Sustain broad-based structural reforms to strengthen the business environment, improve education and vocational training, reduce unemployment (especially youth), and increase women's participation in the labor force.
- Implement the national strategy against corruption and operationalize the Competition Council.
- Strengthen the social safety nets system to achieve more inclusive growth.

### Key statistics (selected)
- Real GDP growth: 4.4 percent (2017); projected 3.1 percent (2018).
- Real agriculture GDP: 15.2 percent (2017); projected -1.0 percent (2018).
- Real non-agriculture GDP: 3.0 percent (2017); projected 3.6 percent (2018).
- Consumer prices (period average): 0.6 percent (2017); projected 1.3 percent (2018).
- Gross capital formation: 33.4 percent of GDP (2017); projected 34.5 percent (2018).
- Gross national savings: 29.5 percent of GDP (2017); projected 30.8 percent (2018).
- Foreign direct investment: 1.9 percent of GDP (2017); projected 2.4 percent of GDP (2018).
- Total external debt: 33.5 percent of GDP (2017); projected 33.9 percent of GDP (2018).
- Nominal GDP (in billions of U.S. dollars): 110.0 (2017); projected 117.6 (2018).
- Population (millions): 34.5 (2016); 35.2 (2018 projection).

*Source: MOROCCO—STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION (cr1875).*

### 4. Growth has recovered and should reach 4.4 percent in 2017, but unemployment

### 4. Growth has recovered and should reach 4.4 percent in 2017, but unemployment

### Growth and labor market
- Growth recovered in 2017, "mostly driven by a significant rebound in agricultural activity", while non-agricultural activity "remains subdued."
- Growth drivers on the demand side:
  - Mainly supported by private consumption.
  - Private investment is recovering gradually after declining from 35.4 percent to 26.9 percent of GDP between 2008 and 2016.
- Unemployment:
  - Increased slightly to 10.6 percent in the third quarter of 2017 from 10.4 percent in the same period last year.
  - Youth unemployment remains high at 29.3 percent.

### Fiscal developments (2016–2017)
- Fiscal outcome:
  - Deficit in 2016 was 4.1 percent of GDP, almost the same level as in 2015.
  - Weaker-than-expected 2016 outcome due primarily to a revenue shortfall and accelerated capital spending.
- Year-to-date 2017 (as of end-October 2017):
  - Tax revenues performed better than projected.
  - Grant revenues (mostly from Gulf countries) were lower than anticipated (32 percent of expected amounts).
  - Public spending on wages and interest payments was below expectations.
  - Capital expenditures decelerated by 2 percent y-o-y.
- Policy objectives (key objectives noted):
  - By 2021: raise economic growth to 4.5-5.5 percent; keep inflation below 2 percent; reduce public debt to 60 percent of GDP and unemployment to 8.5 percent.

### Inflation, credit, and monetary policy
- Inflation:
  - Expected to decline to about 0.6 percent in 2017 due to decreasing food prices.
  - Core inflation estimated at about 1.2 percent in 2017.
  - Projected to increase to 1.3 percent in 2018 and stabilize around 2 percent over the medium term.
- Monetary policy:
  - Bank-Al-Maghrib (BAM) policy rate unchanged at 2.25 percent since March 2016.
  - Lending and deposit rates have decreased.
- Credit:
  - Credit growth recovering: 5.1 percent y-o-y in August 2017.
  - Recovery driven by investment lending to public enterprises and household borrowing (mortgage and consumption).
- Real estate prices have declined gradually in recent years.

### External sector, trade, and reserves
- Current account:
  - Current account deficit expected to reach 3.9 percent of GDP in 2017, down from 4.4 percent of GDP in 2016.
  - Export growth of 6.5 percent in 2017, mostly due to food product and phosphate and derivative exports.
  - Imports expected to increase by 5.3 percent in 2017, mainly higher raw material and energy imports; capital goods imports stabilize at 2016 level.
  - Tourism receipts and remittances remained strong in 2017.
  - Net FDI reached 1.9 percent of GDP in 2017.
  - The real effective exchange rate continued to appreciate gradually in 2017.
- Reserves:
  - International reserves dropped by about US$3.8 billion to US$21.6 billion by end-June 2017.
  - At end-September 2017, reserves were US$24.4 billion.
  - Projected to reach US$24.8 billion by end-2017.
  - Reserves equivalent to six months of imports, or 90 percent of the Assessing Reserve Adequacy (ARA) metric (120 percent of the ARA adjusted for capital controls).
- Events around exchange rate transition:
  - Two months before expected announcement, dirham came under pressure; reserves fell.
  - Market confidence restored in early July when enforcement of foreign exchange controls was tightened and the width of the fluctuation band announced to be initially +/-2.5 percent (from +/-0.3 percent).

### Financial sector health and risks
- Banking system metrics (end-June 2017):
  - Banks’ Tier 1 capital ratio: 13.7 percent.
  - NPL ratio: 7.9 percent.
  - Provisioning level: 70 percent (and increasing).
- Risks and features:
  - Credit concentration and expansion in Africa remain significant risks; large credit exposures persist and increased slightly in 2017 despite regulatory limits.
  - Expansion of Moroccan banks in Africa (e.g., Egypt) provides diversification and profit opportunities but increases transmission of risk due to riskier operating environments and lower regulatory standards in host countries.
  - A national strategy for financial inclusion is being developed by the authorities.

### Outlook and medium-term projections
- Growth:
  - Growth expected to slow in 2018 due to a negative base effect from a particularly good agricultural season in 2017.
  - Projected to reach 4.5 percent over the medium term.
- Inflation and fiscal outlook:
  - Inflation projected at 1.3 percent in 2018 and around 2 percent over the medium term.
  - Overall fiscal deficit expected to decline to 3 percent of GDP in 2018 and stabilize around 2.5 percent of GDP in the medium term, consistent with authorities' objective of reducing public debt to 60 percent of GDP by 2021.
- External outlook:
  - Current account deficit expected to decline to 3.7 percent of GDP in 2018 and to about 3 percent of GDP in the medium term.
  - Foreign direct investment expected to reach 2.6 percent of GDP in the medium term.
  - Reserves projected to increase steadily and reach 100 percent of the ARA metric by 2022 (about 132 percent of the ARA adjusted for capital controls).

### Risks and authorities' views
- Balance of risks tilted to the downside (RAM, Table 1):
  - Domestic risks: delays in implementing key fiscal and structural reforms could reduce fiscal space, contribute to social tensions, adversely affect external sector, and lower pickup in potential growth.
  - Transition-related risks: renewed uncertainty over exchange rate flexibility could cause market pressures and weaken external accounts (lower remittances and reserves).
  - External risks: weak euro area growth, geopolitical risks raising oil prices, tighter/volatile financial conditions, global policy uncertainty, retreat from cross-border integration.
  - Upside: lower energy prices would help narrow external and fiscal imbalances.
- Authorities broadly agreed with the outlook and risk characterization but viewed some risks as less severe and noted upside growth potential from stronger European activity and structural reforms.
- Authorities view the exchange rate as "globally in line with fundamentals."

*Source: IMF staff report text (cr1875).*

### 13. Building on progress in recent years, the reform momentum needs to be stepped up to

### 13. Building on progress in recent years, the reform momentum needs to be stepped up to

### A. Safeguarding Fiscal Sustainability
- Fiscal consolidation resumed despite a shortfall in grant revenues.
- Fiscal deficit objective of 3.5 percent of GDP for 2017 is expected to be met, supported by:
  - strong revenue performance (improved tax enforcement and economic activity);
  - containment of current spending (wages and goods and services);
  - offsetting expected grants shortfall (up to 0.6 percent of GDP).
- Cyclically adjusted primary deficit projected to decrease compared to 2016 by 0.4 percent of the GDP.
- For 2018, the proposed budget aims to reduce the deficit to 3.0 percent of GDP through:
  - measures to enhance tax revenues (e.g., VAT rate increases on fuel products and insurance services which would more than compensate for revenue losses from the introduction of progressive corporate taxation);
  - continued containment of current spending below budgeted levels;
  - contingency measures for grant revenue shortfalls.
- Debt dynamics and targets:
  - Debt-to-GDP ratio expected to start declining in 2017 to 64.3 percent of GDP.
  - Public debt rose from 47 percent of GDP in 2009 to 64.7 percent of GDP in 2016.
  - Public debt remains below the benchmark of 70 percent of GDP for emerging markets.
  - Authorities and staff agreed that gradually reducing public debt to 60 percent of GDP by 2021 would not undermine growth.
- Accelerated fiscal reforms needed to bring the fiscal deficit to about 2.2 percent of GDP over the medium term.
- Key fiscal reform areas and recommendations:
  - Taxation:
    - Comprehensive strategy to: align reduced VAT rates on manufacturing goods and services with the standard VAT rate; reduce tax exemptions; lower and simplify corporate tax rates; and raise property tax.
    - Better targeted social programs to offset adverse impacts on the poor.
    - 2018 budget draft bill proposes progressive corporate taxation: 10 percent up to 300,000 dirhams, 20 percent between 300.001 and 1,000,000 dirhams, and 31 percent above that.
  - Fiscal decentralization:
    - Priorities: clearly define competences; adopt the deconcentration charter; introduce transparent criteria for intergovernmental transfers; mitigate contingent liability risks; enhance local taxation in the long term.
  - Civil service:
    - Authorities intend to keep the public payroll below 10.5 percent of GDP over the medium term.
    - Need for comprehensive civil service reform to generate durable public savings and strengthen service quality.
  - Public enterprises (SOEs):
    - Draft law to strengthen governance and oversight of SOEs to be submitted to parliament during the current session (ending in February 2018).
    - Preparation of consolidated SOE balance sheet data underway.
  - Public investment management:
    - PIMA recommendations: better coordination in project planning and execution; legal enhancements for public-private partnerships; stronger project implementation and risk management capacity.
    - A dedicated unit has been created to coordinate implementation.
- Public finance statistics:
  - Authorities plan to expand coverage from central to general government and produce new fiscal and public debt data in 2018.
  - Incorporation of Treasury deposits (3-5 percent of GDP) and netting out intra-governmental claims may significantly affect public debt levels after consolidation.

### B. Implementing the Exchange Rate Transition
- Monetary policy:
  - Accommodative stance remains adequate; policy rate unchanged since March 2016.
  - Monetary stance supported a nascent credit recovery in 2017; transmission appears effective.
  - Continued SME credit guarantees and addressing SME access obstacles supported.
- Benefits of gradual transition to more flexible exchange rate regime:
  - Helps absorb external shocks and preserve price competitiveness.
  - Improves allocation of resources between tradable and non-tradable sectors.
  - Allows Bank Al-Maghrib (BAM) to conduct a more domestically oriented monetary policy.
- External position and readiness:
  - 2017 external balance assessment (EBA) current account approach shows a gap of -2.2 percent of GDP above the norm, suggesting REER overvaluation.
  - Other methods may suggest undervaluation but are less reliable for Morocco.
  - Reserves assessed as adequate on a range of metrics.
  - External debt is 34.1 percent of GDP and expected to decline in the medium term.
  - Preconditions in place: improved fiscal buffers; financial sector resilience; limited currency risk exposures; relatively low estimated pass-through of exchange rate movements to consumer prices.
  - Preparations for the reform have essentially been completed.
- Timing and sequencing:
  - Staff recommended starting the transition as soon as possible to reduce uncertainty and pre-empt further deterioration in the current account.
  - Adoption of fully-fledged inflation targeting should be envisaged in a later stage of the transition.
  - In the interim, maintain the current monetary policy regime to avoid conflict between a formal inflation target and a still narrow exchange rate band.
  - Restrictions on capital outflows by residents should not be eliminated in the short run during initial phases.
- Technical assistance:
  - Extensive Fund TA provided in recent years on: macro-economic modelling; forecasting and policy analysis; communication strategy; legal, institutional and regulatory structures; and foreign exchange market development.

### C. Strengthening Financial Sector Soundness
- Overall assessment:
  - Financial system is resilient but significant risk exposures remain.
  - Policy framework should be strengthened per 2015 FSAP recommendations.
  - Financial system changes (increasing complexity, cross-border bank expansion, forthcoming exchange rate flexibility) require continuous improvements.
- Key areas and actions:
  - NPLs:
    - Reforms: align loan classification and provisioning with IFRS; formalize and harmonize criteria for supervisory "watch lists" with tighter provisioning.
    - New legal framework for collateral execution expected to be approved in early 2018 to accelerate NPL resolution and increase recovery rates.
  - Concentrated credit exposures:
    - Since June 2016, corporate groups required to prepare consolidated financial statements including all existing debt and future borrowing plans.
    - Risk weights raised for large connected exposures.
  - Supervisory capacity:
    - Shift toward risk-based and forward-looking supervision; Fund TA to strengthen internal capital adequacy assessments.
    - New BAM units for oversight of systemic banks, cross-country exposures, and bank recovery plans are operational.
  - Macroprudential policy:
    - New framework includes countercyclical capital buffers.
    - Progress to address data gaps (loan-to-value and debt-service-to-income ratios) and to design capital surcharges for systemic banks.
  - Crisis management and bank resolution:
    - Multi-year initiative to upgrade bank resolution framework consistent with FSAP and TA recommendations (including the “least-cost” principle, changes to the deposit guarantee scheme, and bail-in powers).
    - Given need for comprehensive legal overhaul, BAM’s designation as resolution authority will not be introduced in the new central bank law expected in 2018—but the new emergency liquidity assistance (ELA) framework will be.
  - Cross-border supervision:
    - Strengthened oversight of Moroccan banks expanding in Africa.
    - Formal arrangements established with host-country and regional supervisory bodies (BCEAO and CEMAC); supervisory colleges in place for largest banks.
    - Crisis resolution frameworks and supervisory requirements for cross-border activities have been strengthened.
- AML/CFT:
  - Evaluation of Morocco’s AML/CFT regime scheduled for March 2018 based on revised FATF standard; assessment report to be published by end of year.
  - Authorities reviewing framework, strengthening capacity to assess money laundering and terrorist financing risks, improving beneficial ownership information availability, and enhancing risk-based AML supervision.

### D. Macro-Structural Reforms: Promoting Higher and Inclusive Growth
- Policy priority:
  - Raising potential growth and reducing unemployment are top government priorities requiring accelerated reform implementation.
- Productivity and labor market:
  - Total factor productivity (TFP) is low relative to emerging market peers.
  - Contribution of employment to growth has declined despite rising working-age population.
  - Labor force participation rate was 46.4 percent in 2016, against 51.3 percent in 2006.
  - Female labor force participation is very low at 23.6 percent (2016).
  - Staff analysis: reforms in education, labor market, and business environment could significantly increase potential growth medium to long term; short-term costs limited.
  - Baseline scenario assumes ongoing reforms would increase potential growth by about one percentage point in the medium term; comprehensive reforms addressing all major constraints may increase long-term potential growth by about two percentage points.
- Structural transformation:
  - Institutional factors (governance, labor regulations, trade restrictions, quality of education, infrastructure, access to finance) impede movement of labor and job creation in high-productivity sectors.
  - Authorities pursuing reforms including to increase women’s labor force participation; more is needed to address rigidities and improve labor allocation.
  - Action plan underpinning 2015–30 National Employment Strategy is being finalized.
- Business environment:
  - Improvements made: simplifying customs procedures, property rights, enterprise creation.
  - Doing Business ranking improved from 128th in 2010 to 68th in 2017.
  - Remaining priorities: reduce chronic payment delays (which increased last year); facilitate SME access to finance; strengthen insolvency regime.
  - Governance improvements needed: implement National strategy against corruption (criminalization of corruption offenses and enhancements to asset disclosure); make the Competition Council operational.
  - Authorities indicated a status report on the National strategy against corruption would be presented to the Head of Government in December 2017, and appointment of Competition Council members was imminent.

*MOROCCO — INTERNATIONAL MONETARY FUND.*

### 28. Better targeting of social programs is key to further reduce poverty and inequalities

### 28. Better targeting of social programs is key to further reduce poverty and inequalities

### Main diagnosis: fragmentation and inadequate coordination of social programs
- Existing social programs are large but highly fragmented, and their coordination and evaluation are inadequate.
- The social safety net is ineffective, especially in targeting the most vulnerable and the unemployed.
- The authorities agreed and are working with international partners to address these shortcomings, including through the development of a social registry.
- Ongoing regionalization is an opportunity to better coordinate and adapt national policies and programs to local needs, address the still large urban-rural gap in poverty rates, and improve access to public services and infrastructure.

### Current social spending and recent reforms
- In 2013, Morocco spent about 4.2 percent of GDP on largely regressive subsidies for energy and food products.
- By 2016, the cost of the remaining subsidies (food and LPG) fell to about 1.4 percent of GDP, while spending on non-subsidy SSN programs went up to about 0.4 percent of GDP.
- Current programs support: education, through conditional cash transfers (Tayssir); health (Ramed); vulnerable groups (e.g., widows, orphans, and disabled persons); and the development of local infrastructure and revenue-generating activities (National Initiative for Human Development).

### Links with tax reform and redistribution (Box 1: Distributional Effects of Tax Reforms)
- Morocco’s tax to GDP ratio declined from almost 24 percent of GDP in 2012 to 21.5 percent in 2016.
- Key features of the tax system: (i) a narrow and skewed tax base, (ii) high tax rates, (iii) a low level of tax expenditure in aggregate but numerous exemptions that introduce distortions, and (iv) a large untaxed informal sector.
- Staff simulations using a DSGE model find that a comprehensive tax reform strategy combined with better targeted social programs would:
  - Broaden the tax base and remove tax distortions.
  - Make the tax system more progressive and reduce inequalities (especially for rural workers).
  - Boost growth by 1 percent.
  - Enhance government revenue by 1.8 percent.
- Components of the comprehensive approach include: aligning the VAT rate on manufacturing goods and services to the standard VAT rate; reducing tax exemptions; raising property tax; and lowering corporate tax rates. Better targeting of social programs is a key complement to mitigate adverse distributional effects.

### Public investment management (Box 2: PIMA) — relevance to social outcomes
- Public investment: 60 percent is realized by state-owned enterprises (SOEs) and 20 percent by local governments (a share expected to increase with decentralization).
- Strengths: strong institutional framework for PIM, robust practices for sectoral investment planning and budget execution.
- Shortcomings: selection, appraisal, and management of investment projects during implementation.
- Key recommendations:
  - Reinforce central coordination and project monitoring, with the Budget Directorate providing strategic guidance and convergence in sectoral priorities for large projects.
  - Design and disseminate common tools and methodologies for central government PIM; introduce a central public investment database.
  - Improve risk management practices and develop a framework for risk analysis and management of investment projects.
  - Introduce standardized tools and mandatory milestones for project implementation; disseminate guidance on calculating project costs and triggers for implementation evaluation.
  - Increase capacity to support the Ministry of Finance’s leading role in PIM and develop homogenous skills across line ministries, SOEs, and local administration.

### Structural and macro priorities linked to social targeting
- Sound policies have improved resilience, but further reforms are needed to achieve higher and more inclusive growth; unemployment remains high.
- Key priorities identified:
  - Preserve fiscal space.
  - Start the transition to greater exchange rate flexibility as soon as possible.
  - Raise job creation and growth potential through structural reforms.
- Fiscal reform priorities to support social spending for the most vulnerable:
  - Enhance public revenues by broadening the tax base and reducing exemptions and tax evasion.
  - Civil service reform to generate long-term savings on public wage spending.
  - Careful implementation of fiscal decentralization.
  - Strengthened SOE oversight.
- Financial sector priorities:
  - Strengthen financial oversight to safeguard financial soundness and support credit and growth, including increased supervisory capacity, more risk-based and forward-looking supervision (including on AML/CFT), and tighter provisioning requirements.
  - Adopt the new central bank law soon.
- Structural reforms to raise inclusive growth and reduce unemployment:
  - Strengthen the business environment, including better governance and reduced corruption, and make the Competition Council operational without further delay.
  - Improve education and vocational training.
  - Stimulate job creation and women’s participation in the labor force.
  - Better coordinate and target the various social programs toward the poorest population groups and regions.

### Policy recommendations specific to social program targeting (Box 3 and main text)
- Develop and implement a social registry to improve beneficiary identification and program coordination.
- Better coordinate and target existing social programs toward the poorest and most vulnerable, including the unemployed and rural populations.
- Use regionalization to tailor programs to local needs and reduce urban-rural poverty gaps.
- Pair tax reforms with stronger, better-targeted social safety nets to offset adverse impacts on vulnerable groups.

*International Monetary Fund — Country Report chapter: "28. Better targeting of social programs is key to further reduce poverty and inequalities"*

### 1.8 percent of GDP, Morocco is close to the worldwide median level.

### 1.8 percent of GDP, Morocco is close to the worldwide median level.

### Social safety net (SSN) system: structure and weaknesses
- Total non-subsidy SSN spending: 1.8 percent of GDP.
- The non-subsidy SSN system lacks:
  - a coherent strategy,
  - a simple institutional framework,
  - concentration on few core programs to cover key life-cycle risks.
- Program fragmentation:
  - A recent UNICEF study identified 140 different programs, many small and focused on niche target groups.
  - About 50 different administrations (ministries, departments, institutions, commissions) are in charge of programs’ governance, implementation or financing.
- Coverage gaps and overlaps:
  - Significant gaps (e.g., for non-school children or the disabled).
  - Some programs have overlapping mandates (e.g., focusing on the same population subgroups).

### Targeting mechanisms and performance
- Only two programs (RAMED and DAAM) use a scoring (proxy means test) formula to identify beneficiaries in addition to community targeting.
- Targeting accuracy concerns:
  - In 2014, only 26 percent of RAMED beneficiaries were from the poorest population quintile, while 45 percent were from the upper three quintiles.
  - Factors contributing to loss of RAMED targeting accuracy:
    - (i) the RAMED formula was estimated about eight years ago and has not been updated;
    - (ii) current eligibility mechanisms give significant discretion to community councils to include non-poor families in the program.
- Haut-Commissariat au Plan scoring model assessment:
  - The best model, applied to a target group of 20 percent of the population (i.e., similar in size to RAMED), correctly identifies 61 percent of the people in the poorest quintile.

### Government response and planned reforms
- World Bank support: the government is working with World Bank support to address SSN deficiencies.
- Key reform actions:
  - Improve the targeting accuracy of three large social assistance programs (RAMED, Tayssir and DAAM).
  - Route applications to these programs through a new social registry to:
    - help identify consumption-poor households based on a new scoring formula and the most recent household survey,
    - coordinate with a new national population registry that will issue a unique ID linked to biometrics.
  - To maintain targeting accuracy, the authorities intend to update the scoring formula every 2–3 years.
  - The unique ID and biometric linkage are expected to reduce duplicate or false beneficiaries.

*Italic: Source: cr1875 - 1.8 percent of GDP, Morocco is close to the worldwide median level.*

### conclusions of which will make it possible to

### cr1875 - conclusions of which will make it possible to

### Financial sector supervision, resolution, and macroprudential oversight
- Circular (19) will be finalized in 2018 after finalizing consultation with industry.
- Advance recovery & resolution plans; more frequent comprehensive assessments for SIFIs.
- The circular R&R was examined by the CEC in July 2017. It is in the process of publication in the Gazette.
- New units dedicated to oversee individual SIFIs since January 2016.
- Clarify the powers, instruments and voting arrangements of the CCSRS.
  - Priority: I
  - Status: Finalized. The draft decree, taking into account the recommendations of the FSAP mission (clarifying the CCSRS’s role in issuing recommendations and following up on implementation (“complain & explain” approach), and its voting arrangements), was adopted by the Government Council in September 2017. This project will be published shortly in the Gazette.
- Amend laws governing regulators for capital markets, and insurance and pensions to include financial stability objective.
  - Priority: I/NT
  - Status: In progress. Legal framework addressing overlap among various regulatory bodies being designed.
- 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 for real estate risks, household sector data, and payment delays for enterprises.

### Emergency Liquidity Assistance and central bank governance
- Separate BAM’s ELA function clearly from government solvency support.
  - Priority: I
  - Status: In progress. Amendment included in the draft of Bank Al-Maghrib’s Act to be approved in 2018.
- Strengthen BAM’s recapitalization process; review its profit distribution mechanism.
  - Priority: NT
  - Status: In progress.

### Early intervention, bank resolution, deposit insurance, and FMIs (FSAP Key Recommendations — status as of November 2017)
- Define the objectives of banking resolution; incorporate “the least-cost principle”.
  - Priority: I
  - Status: In progress. Comprehensive overhaul of legal framework for banking resolution has been initiated with TA support and with help from legal firm that has been hired in April 2017. Estimated time frame for completion: up to three years, approximately by the end of 2018.
- Formalize the hierarchy of creditors’ claims; introduce bail-in powers.
  - Priority: I/NT
- Designate an explicit bank resolution authority; limit its legal liabilities in this mandate.
  - Priority: I/NT
- 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.
- Grant DGF a priority over uninsured depositors and general creditors.
  - Priority: NT
- Implement guarantee scheme and default handling procedures for securities transactions.
  - Priority: I
  - Status: In progress. A new legal framework should be introduced soon to provide more flexibility in the use of collateral and to reduce costs.
- Strengthen BAM’s oversight of the payment systems.
  - Priority: NT
  - Status: In progress.
- Publish all policies applicable to FMIs and the disclosure framework of the SRBM.
  - Priority: NT

### Securities market regulation, enforcement, and financial inclusion
- Apply consistent regulations and supervision to all participants in securities markets.
  - Priority: NT
  - Status: In progress, as part of the ongoing revision of the legal framework for capital markets. Main issue being evaluated is the competencies of different supervisory authorities.
- Strengthen enforcement in sanctions and fines imposed on individuals.
  - Priority: NT
- Improve valuation of government securities and review valuation rules of mutual funds.
  - Priority: NT
- Establish a well-resourced governance and a robust monitoring and evaluation framework for financial inclusion.
  - 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 started operating in November 2017. New services introduced, including enterprise scoring and portfolio surveillance.
- Review blanket ceiling on lending rates.
  - Priority: NT
  - Status: Partially done. Still being assessed as part of draft law on micro-credit. Micro-credit institutions already allowed higher-than-ceiling rates according to risk level.

### Macroeconomic and external sector findings (Annex I & II highlights)
- Fiscal policy
  - The deficit in 2016 was 4.1 percent of the GDP (2015: 4.2 percent of the GDP). Authorities’ objective: 3.5 percent of the GDP.
  - Authorities remain committed to reducing public debt to 60 percent of GDP by 2021.
  - New organic budget law provisions on making ceiling on wage appropriations binding entered into force in January 2017; remaining provisions to be gradually implemented by 2020.
  - Parametric reform of the main public pension plan approved by parliament in July 2016 is being implemented.
- Monetary and exchange rate policy
  - BAM has kept its main policy interest rate unchanged at 2.25 percent since March 2016.
  - Authorities reassessing timing of introduction of greater exchange rate flexibility following reserve losses during May–June 2017.
- Financial sector policies
  - Solid progress in upgrading financial policy framework, including implementing Basel III and FSAP recommendations.
  - Most regulations to implement the new banking law introduced, except for crisis management and bank resolution frameworks.
  - Authorities submitted the new central bank law for parliament approval in 2018.
- Structural reforms
  - Continued progress to improve business climate and access to finance, but need to accelerate reforms to facilitate job creation and improve education and vocational training to raise productivity and potential GDP.

### External sector assessment — current account, reserves, and NIIP
- Current account
  - Actual CA (2017): -4.0%
  - Cyclically adjusted CA: -4.6%
  - CA Norm: -2.4%
  - CA Gap: -2.2%
  - CA Gap decomposition: Policy gap -0.7 percent of GDP; Residual -1.6 percent of GDP.
  - Policy gap components: Fiscal -0.5; Health -0.3; Reserves -1.1; Credit 0.4; Capital controls 0.9.
  - REER gap (CA method): 7.6%
  - REER method suggests an under-evaluation of 1 percent (noted robustness caveat).
  - Current account deficit expected to temporarily stabilize in 2019 at 3.7 percent of GDP, and to decrease to 2.6 percent in the medium term.
- Trade and sector composition
  - Share of oil imports: 28 percent in 2012; 13.3 percent in 2016; 15.7 in 2017.
  - Tourism receipts: about 6½ percent of GDP.
- Capital and financial accounts
  - Net FDI: about 1.8 percent of GDP in 2016–17 (down from 2.6 percent average during 2011–15).
  - Medium term FDI expected to recover to 2.6 percent of GDP.
  - External debt: 34.1 percent of GDP.
  - Government expects three large sovereign bond issuances between 2018 and 2022.
- Reserves
  - Reserve losses in May–June 2017: about US$3.8 billion.
  - Reserves expected to account for six months of imports by end-2017, or 90 percent of the standard reserve adequacy metric (against 99 percent in 2016).
  - Reserve coverage expected to reach 93.5 percent of the standard reserve adequacy metric in 2018 and 100 percent (132 percent of the adjusted metric) in the medium term.
- Net International Investment Position (NIIP)
  - NIIP moved from -61 percent of GDP in 2015 to about -66.6 percent of GDP in 2017.
  - Projected NIIP to stabilize over the medium term to about -60 percent of GDP.
  - Scenario results:
    - Scenario 1: Stabilizing net IIP at -66.6% of GDP — CA = -4.2% (Underlying CA -2.6%); REER undervaluation 5.6
    - Scenario 2: Stabilizing net IIP at -50.0% of GDP — CA = -3.3% (Underlying CA -2.6%); REER gap 0.7
    - Scenario 3: Reaching net IIP at -50.0% of GDP in 2027 — CA = -2.1% (Underlying CA -2.6%); REER gap -0.5
- External competitiveness and productivity
  - ULC-based REER has been on a depreciating trend since 2000, indicating gains in external competitiveness.
  - Morocco ranks 71 out of 137 countries in the 2017-2018 World Economic Forum’s Global Competitiveness Index.
  - According to the 2018 World Bank Ease of Doing Business Indicators, Morocco ranks 69 out of 190 countries.
  - Access to credit ranking: 105th.

### Fiscal decentralization (Annex III highlights)
- Advanced regionalization is enshrined in the 2011 Constitution and the 2015 Organic Laws for each government level.
- In 2015, 12 new regions were defined (previously 16), and local democratically-elected political structures were introduced.
- Recommendations:
  - Gradual devolution conditioned by subnational capacity to ensure efficient expenditure and tax management.
  - Clarify scope and sequence of devolution to build expectations and develop human and financial capacities.
  - Continuously adapt governance mechanisms to mitigate new sources of subnational fiscal risks, such as contingent liabilities.

*International Monetary Fund. cr1875 - conclusions of which will make it possible to*

### 3. Fiscal risks commonly emerge in decentralization reforms. International experience

### 3. Fiscal risks commonly emerge in decentralization reforms. International experience

### Fiscal risks and general lessons
- International experience shows that the risk of weakening fiscal discipline is embedded in decentralization if some preconditions are not met.
- As expenditure pressures emerge and elected governments are accountable for their programs, a lack of adequate financial and human resources may lead to:
  - lower quality of service provision;
  - circumvention of controls by means of state-owned enterprises (SOE) and other off-budget units;
  - inadequate borrowing conditions or accumulation of arrears.
- To mitigate these risks a comprehensive fiscal decentralization strategy should be in place, combining:
  - clear spending responsibilities;
  - intergovernmental transfers (grants, shared taxes);
  - own revenues sufficient to finance those needs;
  - adequate human resources.

### Morocco: institutional changes and implementation status
- Key steps taken:
  - 2015 Organic Budget Law and the Organic Laws for each subnational level to extend competences and good governance.
- Implementation status by November 2017:
  - Most implementation decrees had been approved (69 on total) and a few were being finalized.

### Expenditure responsibilities
- Expenditure competences are not yet clearly defined by levels of government:
  - Some own competences are clear but other transferred or shared competences are more discretionary.
  - Loopholes in delineation of roles (notably in health and education) have been filled asymmetrically by local governments, putting pressure on resources and potentially on borrowing.
- Policy actions underway:
  - Government working on a deconcentration chart to define delimitation of expenditure responsibilities, resource and capacity needs by levels.
  - Emphasis on subsidiarity and on deconcentrated central government acting in parallel or partnership with subnational governments.
  - Need for coordination within levels, including regrouping ministries by sectors and avoiding overlaps.

### Revenues and fiscal capacity
- International evidence: fiscal discipline is better ensured when subnational governments have tax powers (own taxes, shares or surcharges over general taxes collected in their territories).
- Morocco fiscal statistics and features:
  - Share of subnational governments in total revenues was 15 percent in 2016 (own taxes representing 35 percent of subnational revenues).
  - Share in total investment and other spending was 16 and 10 percent, respectively.
  - Current own taxation potential is low, with tax collection and part of tax policy dependent on the central government.
  - Dysfunctionalities exist between regional and local levels, with the regional level more dependent on central government transfers (only 18 percent of regional revenue comes from own taxes).
- As spending responsibilities increase, subnational revenue capacity will need to grow.

### Distribution mechanisms (transfers and equalization)
- Transfers correct vertical and horizontal imbalances and need to be transparent and predictable.
- Morocco specifics:
  - Intergovernmental transfers (share of general taxes) to regions incorporate criteria based on population and surface, and consider some non-observable criteria related to fiscal effort and potential — these criteria entail a discretionary component and need updating.
  - 2015 Organic Law for the regions envisaged creation of an equalization fund and a solidarity fund, expected to take into account social and development indicators.
- Noted figures:
  - To date, eight regional development plans have been presented with an annual average investment level of 4.5 percent of GDP.
  - Transfers to the regions have increased and are expected to reach 10 billion dirhams by 2021 (1 percent of GDP).
  - Subnational government expenditures currently amount to about 3.5 percent of GDP.

### Local capacity and human resources
- Building up human capacity is essential; accelerating devolution without adequate local capacity is a core risk for expenditure efficiency, service quality, and local tax administration.
- Morocco approach:
  - Decentralization process allows for gradual build up in human resources.
  - Need to better define scope for future resource needs and civil service incentives while preserving fiscal discipline.
  - A new statute for the civil service is being considered and the deconcentration chart is expected to include new incentives (e.g., for mobility).

### Public Financial Management (PFM) and controls
- PFM institutions at subnational level protect fiscal discipline via mechanisms such as Fiscal Responsibility Laws.
- Morocco specifics:
  - 2015 Organic Budget Law set procedural rules transposed to subnational Organic Laws.
  - Tight controls through tutelage of the Interior Ministry and external control by the Cour des Comptes.
  - Recent regulations provide for multiannual expenditure frameworks, quarterly reporting, harmonized budget classification, and program and performance budgeting to allow targeted monitoring.
  - Public investment management is expected to improve at subnational level, important for accountability.

### Contingent liabilities and borrowing risks
- Contingent liability risks increase in decentralization: regional and local governments face investment pressures and may use PPPs, guarantees, SOEs, or off-budget agencies that create contingent liabilities.
- Morocco specifics:
  - Regional Development Plans envisage an increase in overall investment expected to be financed by PPPs, concessions, development societies, guarantees, and bank lending — these entail contingent liabilities and fiscal risks that will need to be limited.
  - Loans to local governments used to be provided only by the FEC under strict controls; new Organic Laws have opened other borrowing channels.
- International lessons:
  - Subnational borrowing is a source of fiscal risk; strict controls are needed.
  - Debt ceilings are useful to anchor discipline; foreign bank lending and market issuance are not recommended when capacity is weak.
  - Prudential regulations can be used to limit the cost of bank lending.
- Decrees related to subnational borrowing practices are in preparation and should address these risks.

### Public debt and macro-fiscal context (selected figures)
- Public debt dynamics and outlook:
  - Public debt was about 64.7 percent of GDP at the end of 2016.
  - Public debt had risen from 48 percent of GDP in 2009 to about 64.7 percent in 2016.
  - Increase driven by the levels of the primary deficit and higher-than-expected real interest rate/growth differential.
  - Authorities’ fiscal consolidation efforts are expected to help bring the debt ratio down to at most 60 percent of GDP by 2021.
- Vulnerabilities and financing:
  - Debt level remains well below the debt burden benchmark of 70 percent of GDP for emerging markets when various shocks are assumed, except in shocks to real GDP growth or to the primary balance where it slightly approaches the benchmark.
  - Short-term debt represented about 3 percent of total debt at end-2016.
  - Gross financing needs exceeded the benchmark of 15 percent of GDP in 2014, declined under that benchmark in 2015, and are expected to continue declining over the medium term.
  - Projected fiscal consolidation aimed at lowering the overall deficit to about 2.1 percent of GDP in the medium term.
- Policy implication: continue fiscal consolidation and carefully manage the maturity profile of public debt.

### Policy issues and recommendations
Short-term priorities (2017–18)
- Define clearly the competences of each government level:
  - Map competences to levels of provision; identify gaps; and quantify cost of public services provision.
- Deconcentrate powers:
  - Approve and implement the deconcentration chart, extending it to off-budget units (établissements publics) and improve coordination.
- Build capacity as a precondition for increasing revenue transfers and own taxation:
  - Including through civil service reform and incentives for fiscal discipline.
- Establish transparent criteria for revenue-sharing transfers and the new solidarity and equalization funds:
  - Provide the methodologies and a timetable for revenue transfers.
- Reinforce controls on borrowing and contingent liabilities:
  - Establish limits, reporting obligations and controls over off-budget units, SOEs, development societies, PPPs and implicit guarantees.

Longer term issues
- Establish program and performance-based budgeting:
  - Prepare integrated information systems at subnational levels, including performance indicators.
- Elaborate sound data by regions:
  - Regional indicators should be used for access to the solidarity and equalization funds, and for performance-based budgeting.
- Revise local and regional taxation:
  - Enhance own taxation powers (tax policy) and revenue administration incentives and cadaster.
- Establish a monitoring and evaluation system for public policies:
  - To evaluate the results and monitor the impact of policies and programs at the regional level.
- Improve the Public Investment Management cycle including at the regional and local levels:
  - Reinforce planning, coordination, evaluation, selection, project management and monitoring of public investment at subnational levels.

*Source: cr1875 - 3. Fiscal risks commonly emerge in decentralization reforms. International experience*

### 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 projections and drivers
- External debt projected to increase slightly to 34.1 percent of GDP in 2017 due mainly to the widening current account deficit.
- External debt expected to decline below 30 percent of GDP in the medium term due mainly to:
  - steady GDP growth,
  - improving current account, and
  - strong FDI inflows reducing the need for external borrowing.
- In the event of a large depreciation, external debt is projected to:
  - reach 50 percent in 2018, and
  - increase from 30 to 44 percent of GDP by 2021.

### Structure of external debt and key features
- 75 percent is owed to official bilateral and multilateral creditors with long maturities.
- About 75 percent carries fixed-rate terms.
- These structural features are highlighted as limiting vulnerabilities.

### Stress tests and scenario outcomes (Figure 6 and related scenarios)
- Individual shocks are permanent one-half standard deviation shocks; combined shocks and specific scenarios include:
  - Combined Shock 3/: shown in Figure 6 (combined application of shocks to real interest rate, growth rate, and current account balance).
  - Real Depreciation Shock 4/: one-time real depreciation of 30 percent occurs in 2018.
- Baseline and alternative scenario averages (as presented in Figure 6 boxes):
  - Baseline growth and current account indicators and ten-year historical averages are shown for comparison (specific numeric baseline averages presented in Figure 6: Baseline: 3.0; Scenario: 3.2; 3.4 in different panels; Baseline: 4.1; Scenario: 3.4; Historical: 3.9; Baseline: -2.4; Scenario: -3.5; Historical: -4.8).
- Under baseline and adverse scenarios, shaded areas represent actual data and projections through 2021 (external debt percent of GDP series shown for 2013, 2015, 2017, 2019, 2021).

### Resilience assessment and risk indicators
- The external debt position is described as resilient to a range of shocks (Figure 6).
- Debt profile vulnerabilities mitigated by:
  - high share owed to official creditors (75 percent),
  - long maturities, and
  - high share of fixed-rate instruments (about 75 percent).
- Stress-test outcomes cited:
  - Large depreciation scenario projects external debt up to 50 percent in 2018 and 44 percent by 2021 (from 30 percent baseline by 2021).

### Implications for financing and policy
- Strong FDI inflows are expected to reduce the need for external borrowing in the medium term.
- Steady GDP growth and an improving current account are core drivers of the projected decline in external debt below 30 percent of GDP in the medium term.
- The composition of creditors and fixed-rate instruments is emphasized as limiting external vulnerability despite near-term increases in the debt ratio under shock scenarios.

*Source: IMF staff report excerpt (Figures and text provided in the informational annex).*

### 1.6 percent (75 percent of the CA gap), which significantly reduces the quality of the

### cr1875 - 1.6 percent (75 percent of the CA gap), which significantly reduces the quality of the

### Exchange rate assessment and policy
- Staff estimated an “appreciation” of 1.6 percent (75 percent of the CA gap), which the authorities argue significantly reduces the quality of the assessment.
- Other methods point to undervaluation but were dismissed by staff.
- REER method considered of limited reliability because of:
  - lack of long-time series on the home bias;
  - large unexplained residual.
- Data points cited by the authorities:
  - size of domestic currency debt held by nonresidents estimated at about 1 percent of total domestic currency debt;
  - residual seems to be very small (0.1 percent), and in any case much smaller than under the CA method.
- External sustainability method dismissed by staff because it is very sensitive to the net foreign assets benchmark; authorities believe this should not preclude its use.
- Authorities requested adding the usual language regarding the small size of the “appreciation” and the limitations of such calculations used in similar cases.
- Authorities were disappointed that staff did not include their assessment during the discussion that the exchange rate is globally in line with fundamentals; that assessment was included in the agreed Written Communication for the Third Review of the PLL signed on November 30.
- Authorities remain committed to moving to greater exchange rate flexibility and inflation targeting and have completed preparatory work with Fund TA.

### Reserves, transition timing, and band width
- Post-loss of reserves: gross international reserves expected to recover to close to their level of 6.4 months of imports reached at end-2016.
- The announcement by the Head of the Government that the width of the band in the early phase of the transition will be limited to +/- 2.5 percent helped stabilize pressures on reserves.
- Postponement of the start of the transition:
  - Attributed to the new government needing time to reassess the roadmap and impact (including large size of hedging operations), not to indecision or reversal of commitment.
  - The episode should not be seen as pressure on the exchange rate, which was not subject to volatility and continued to reflect the evolution of the two currencies in the basket under the peg.
- No tightening of exchange regulations occurred; the Exchange Office enhanced monitoring of existing regulations.
- Authorities intend to seize the most appropriate opportunity for starting the transition but note that undue doubts cast by the Fund on the strength of the external position or the alignment of the exchange rate with fundamentals would make the task more challenging.

### Financial sector policies and stability
- Significant progress made in strengthening soundness of the financial system, including implementation of the 2015 FSAP recommendations.
- System resilience and bank health:
  - Moroccan financial system is resilient;
  - banks are well capitalized;
  - NPLs have stabilized at about 7.5 percent and are well provisioned.
- Bank Al Maghreb (BAM) is aligning loan classification and provisioning with IFRS.
- Credit concentration risks:
  - Closely monitored;
  - Have significantly declined over the past several years;
  - Remain below the relatively tight prudential limits.
- Moroccan banks’ expansion to other parts of Africa presents opportunities; stress tests during the FSAP concluded transmission channels of risks in this area are limited.
- Authorities actions:
  - Remain vigilant and strengthen oversight;
  - Develop cooperative arrangements with host countries’ supervisory authorities;
  - Strengthen the macro prudential toolkit;
  - Upgrade crisis management and bank resolution frameworks;
  - Develop a national strategy for further promoting financial inclusion.

### Structural reform implementation
- Staff’s indication that the pace of reforms has slowed should have noted the prolonged political transition following the September 2016 general election, which slowed legislative processes.
- Structural reform implementation continued during the transition and gained momentum under the new Cabinet, including in new areas.
- Authorities’ objectives:
  - Accelerate structural reform implementation to achieve higher and more inclusive growth;
  - Significantly reduce unemployment, which remains high, in particular for the youth;
  - Improve living conditions, particularly in rural areas.
- Priorities and initiatives:
  - Upgrading infrastructure;
  - Improving the business climate.
- Achievements and near-term expectations:
  - After gaining close to 60 positions in the Doing Business ranking since 2010 to reach the 69th rank in the 2018 Report, Morocco’s rating is expected to improve significantly in the near term following the adoption of a revised Commerce Code on the insolvency regime and of a law on securitization to facilitate access to credit (both at the final phase of preparation).
- Diversification efforts to create new niches for growth, move up the value chain, and improve competitiveness.
- Human capital reform:
  - Recent launch of the reform of education and training (Vision 2015-30) to upgrade skills and improve employability and productivity.
- Employment strategy:
  - In the context of the National Strategy for Employment, an action plan for 2017-21 was adopted by the Government in September 2017;
  - Several working groups tasked with presenting specific recommendations to the government by early 2018.

### Governance and social tensions
- Recent social tensions in Al-Huceima brought attention to accountability and good governance.
- Auditor General’s Report indicated tensions mainly due to delays and indecisiveness in execution of the regional development program; prominent Cabinet members and senior officials were dismissed or sanctioned.
- Measures taken:
  - Accelerated program implementation and swift responses to population needs to ease tensions;
  - Measures applied beyond the northern region to other regions;
  - Appointment of a high-level committee chaired by the Head of Government to coordinate and evaluate public policies and their implementation and enhance effectiveness and accountability.
- Outcome: measures resulted in a significant easing of social tensions.
- Staff statement that “the situation remains precarious” is judged unfounded by the authorities.
- Anti-corruption and AML/CFT initiatives:
  - Ongoing efforts to reduce red tape and streamline regulations, including through an e-government platform;
  - Adoption of a National Anti-Corruption Strategy; a status report on implementation will be presented to the Head of Government this month;
  - Pending the upcoming evaluation of the AML/CFT framework in March 2018, authorities are strengthening capacity to assess money laundering and terrorist financing risks under the revised standards.

### Conclusion: policy priorities and strategic direction
- Authorities cognizant of remaining constraints and determined to address them to:
  - Strengthen foundations for stronger and more inclusive growth;
  - Further reduce unemployment;
  - Improve living conditions;
  - Achieve a more balanced distribution of opportunities and welfare across regions and social groups.
- Concurrent policy stance:
  - Maintain macroeconomic and financial stability;
  - Further build buffers and strengthen the macroeconomic policy framework to improve resilience to shocks.
- Key actions identified:
  - Accelerate structural reforms to attract private investment and improve productivity and competitiveness;
  - Enhance efficiency of public policies, including through strengthened governance.
- Long-term planning:
  - Authorities recently embarked on the design of a new development model to be subject to a broad consultative process with domestic and international partners.
- Closing acknowledgement: authorities thank staff for their hard work and Selected Issues Paper, and for high quality technical assistance; also thank management and the Executive Directors for guidance and support.

*Source: cr1875 - 1.6 percent (75 percent of the CA gap), which significantly reduces the quality of the assessment (PDF).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1875.pdf_