## 1marea2019003 ## Source details **Canonical URL:** [1marea2019003](https://www.imf.org/-/media/files/publications/cr/2019/1marea2019003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1marea2019003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1marea2019003.pdf.json) --- ### A. Exchange rate transition and macroeconomic vulnerabilities - Transition to greater exchange rate flexibility initiated January 2018; dirham fluctuation band widened to ±2.5 percent (from ±0.3 percent) around a reference parity on January 15, 2018. - Central bank (BAM) has not intervened in the foreign exchange market since March 2018. - Economic activity: - Growth weakened in 2018; non-agricultural growth modest; private consumption main driver. - Private investment recovered after declining from 30.7 percent in 2008 to 22.8 percent of GDP in 2015. - Unemployment: 9.8 percent in 2018 (from 10.2 percent in 2017); youth unemployment 26 percent; unemployment among graduates 17.1 percent. - Fiscal developments: - Fiscal deficit stabilized around 3.7 percent of GDP in 2018. - Grants received were 54 percent of budgeted grants for 2018. - Cyclically-adjusted and primary deficits decreased by about 0.3 percent of GDP in 2018. - Public debt: 64.9 percent of GDP in 2018 (from 65.1 percent in 2017). - Monetary and financial sector: - Headline inflation 1.9 percent in 2018 (0.7 percent in 2017); core inflation 1.1 percent. - BAM policy rate unchanged at 2.25 percent since March 2016. - Bank credit growth 4.2 percent (y-o-y) in February 2019. - Regulatory capital ratio 14 percent as of June-2018. - NPL ratio 7.7 percent with provisioning levels about 70 percent. - IFRS9 introduced January 2018; phased in over five years. - International exposures of the three largest Moroccan banks represent about 20-30 percent of their total assets and a third of their profits. - External sector: - Current account deficit widened to 5.4 percent of GDP in 2018 (from 3.4 percent in 2017). - Net FDI increased to 2.5 percent of GDP in 2018. - International reserves dropped by US$1.8 billion to US$24.4 billion (equivalent to 5.2 months of imports and 87.1 percent of the Fund’s ARA metric). - Social and inclusion context: - Progress in business environment, governance, and poverty reduction; shortcomings in education quality, labor market efficiency (youth job creation), and gender equality (low and declining female labor force participation). ### B. Outlook and key projections - Baseline assumes sustained reform implementation (fiscal prudence; greater exchange rate flexibility; taxation, governance, SOE oversight, fiscal decentralization, labor market, business environment reforms; policies to reduce social and regional inequalities). - Growth and inflation: - Growth expected at 3 percent in 2019. - Growth expected to reach 4.5 percent over the medium term, subject to reforms. - Inflation projected to slow to 0.6 percent in 2019 and stabilize around 2 percent over the medium term. - Fiscal outlook: - Fiscal deficit projected to remain at 3.7 percent of GDP in 2019. - Privatization receipts projected to reduce public financing needs to 3.3 percent of GDP in 2019. - Staff and authorities agreed deficit would decline and stabilize around 3 percent of GDP after 2020. - Expected privatization revenues would contribute to reducing public debt to 60 percent of GDP over the medium term. - External outlook: - Current account deficit expected to decline to 4 percent of GDP in 2019 and to 2.8 percent of GDP over the medium term. - FDI expected to remain stable at about 2 percent of GDP; other private flows expected around 2 percent of GDP. - International reserves expected to reach nearly 100 percent of the ARA metric in the medium term (about 128 percent of the ARA metric adjusted for capital controls). ### C. Risks and policy implications - Balance of risks: tilted to the downside. - Domestic risks: delays in fiscal and structural reforms could reduce fiscal space, raise social tensions, weaken external sector, and undermine potential growth pickup. - External risks: higher oil prices, weaker euro area growth, geopolitical risks could slow activity via lower exports, tourism, FDI, remittances. - Financial risks: volatile global financial conditions may increase borrowing costs and weaken investor confidence. - Upside scenarios: - Lower international oil (and butane gas) prices could enhance resilience. - Increased regional integration in the Maghreb could provide added medium-term growth. ### D. Authorities’ assessment and real sector developments - Authorities broadly agreed with the outlook and risk characterization but expected higher medium-term growth and viewed some risks as less severe. - Protectionism impact assessed as not high given trade structure and diversification efforts. - Intensification of security risks assessed as low or medium impact. - Nonagricultural sector growth of 3 to 3.5 percent in current environment considered "not a bad performance." - Upside growth potential if structural reforms raise productivity. - Real sector (2009–19): - Pick-up in non-agricultural growth in 2018 expected to continue in 2019. - Unemployment declined slightly since 2017 but remains high for youth and women. - Demand-side drivers: private consumption and investment remain main growth drivers. - Confidence indicators: strong household confidence; business confidence stable since 2017; tourism activity strong; construction subdued. - 2019 fiscal specifics (authorities’ view): - 2019 fiscal deficit projection: 3.7 percent of GDP; public financing need 3.3 percent of GDP with privatization receipts. - Public investment projected at 6.2 percent of GDP in 2019 (against 7.2 percent in 2018) with increased PPP reliance. - Public debt objective: reduce to 60 percent of GDP in the medium term (target by 2024 noted elsewhere). ### E. Fiscal reform priorities and quantitative targets - Tax reform needs: - Staff projects increase in tax revenues of about 0.7 percent of GDP by 2020 and about 1.6 percent of GDP over the medium term. - Key priorities: broaden tax base (reduce exemptions, fight fiscal fraud), simplify VAT and corporate tax rates, enforce tax payments from self-employed and liberal professions, raise property tax. - National conference on taxation in May 2019 to inform an organic tax law. - Fiscal risks and contingent liabilities: - Potential liabilities from SOEs, PPPs, or fiscal decentralization present but currently not judged major given magnitude and actions underway. - Privatization program: - Multi-year program announced late October 2018: expected to start in 2019, last five years, yield about 4 percent of GDP. - Parliament changed proceeds distribution: half to Hassan II Fund, half to finance government operations. - Government financing needs reduced by 0.4 percent of GDP per year during 2019-21 and 0.2 percent per year during 2022-24. ### F. Financial sector resilience and policy priorities - Banking system: - Well capitalized; regulatory capital ratio 14 percent as of June-2018; ROA historical values around 0.8–1.1 percent. - NPLs moderate-high: NPL ratio 7.7 percent; specific provisions to NPLs about 70 percent. - Liquidity favorable; deposits-to-loans and loan-to-deposit ratios presented in historical series. - Credit to GDP about 61 percent. - Policy and supervision: - IFRS9 adoption January 2018; phased prudential impact over five years with transitional arrangements. - Staff supports move to risk-based, forward-looking supervision and enhanced stress-testing and macroprudential frameworks. - Recommendations: monitor capitalization, NPLs (private businesses and households), provisioning, liquidity, household-driven credit growth; enhance consolidated risk management for cross-border banking expansion. - FSAP recommendations (status as of March 2019) — selected items and status: - Implement recovery & resolution plans for SIFIs: R&R circular examined; three systemic banks submitted recovery plans in Q4 2018. - Implementation of Countercyclical Capital Buffers (CCB): procedure published; level set at 0% so far. - Emergency Liquidity Assistance (ELA): separation and legal clarity in progress; draft BAM law to address ELA and recapitalization processes. - Deposit guarantee fund and resolution framework: reforms in progress; comprehensive overhaul of legal framework initiated. ### G. External sector, reserves, and DSA highlights - External sector: - Exports driven by emerging manufacturing (automobile, aeronautics, chemicals, phosphates); imports increased in energy, capital goods, raw materials. - Current account widened to 5.4 percent of GDP in 2018 (from 3.4 percent in 2017). - Net FDI: 2.5 percent of GDP in 2018; expected to hover around 2 percent of GDP medium term. - Reserves and NIIP: - Gross reserves US$24.4 billion at end-2018 (5.2 months of imports; 87.1–87.2 percent of standard reserve adequacy metric). - Reserves expected to reach nearly 100 percent of the ARA metric in medium term (about 128 percent of adjusted metric). - NIIP: -65.4 percent of GDP in 2018 (from about -61 percent in 2015; -66.1 percent in 2017). - EBA external sustainability approach: a current account deficit of 4.2 percent of GDP would stabilize NIIP at -65.4 percent of GDP; to maintain NIIP at 10-year average (~-50 percent GDP) CA deficit of 3.2 percent of GDP required. - Public debt and DSA: - Gross public debt about 64.9 percent of GDP at end-2018. - DSA: debt resilient under most shocks and remains below 70 percent of GDP benchmark for emerging markets in most scenarios. - DSA baseline projections (selected): - Real GDP growth (percent): 3.9 (2017), 4.1 (2018), 3.0 (2019), 3.0 (2020), 3.8 (2021), 4.1 (2022), 4.3 (2023), 4.4 (2024), 4.5 (endpoint). - Primary deficit (percent of GDP): 1.7 (2017), 0.9 (2018), 1.3 (2019), 1.3 (2020), 0.9 (2021), 0.8 (2022), 0.9 (2023), 0.9 (2024), 1.0 (endpoint). - Total government debt (percent of GDP) series includes "63.7", "64.9", "65.1", "64.9", "65.2", "65.1", "64.5", "63.1", "62.0", "60.9", "60.0". - DSA stress tests: shocks to real GDP growth or primary balance approach benchmark in some cases but debt generally remains manageable. ### H. External Debt Sustainability Analysis (Annex IV) — selected metrics - External debt (percent of GDP): 34.5 (2017); projected decline to 28.2 (2024). - Exchange rate shock: one-time real depreciation of 30 percent would raise external debt-to-GDP to about 45 percent. - Current account (excluding interest, percent of GDP): -4.6 (2018); projected -3.2 (2019), -2.6 (2020), -2.2 (2021), -2.1 (2022), -2.0 (2023–24). - Gross external financing need (percent of GDP): 7.3 (2018); projected 5.9 (2019), 5.3 (2020), 4.8 (2021), 4.4 (2022), 4.2 (2023), 4.1 (2024). ### I. Structural reforms, job-rich growth, and sequencing - Findings from model (Box 3): - Coordinated reforms reducing hiring and entry costs more effective than isolated reforms. - A combined reduction by 10 percent of hiring and entry costs would increase output by 2.5 percent and decrease unemployment by 2.2 percentage points 5 years after reforms. - If sequenced, starting with labor market reforms reduces unemployment more in short run; starting with product market reforms boosts output faster in short run. - Policy priorities: - Improve education (increase years of schooling, teacher training, vocational training). - Reduce labor market rigidities, strengthen labor market policies, consider relaxing firing/hiring regulations with safety nets. - Facilitate SME access to finance; enhance competition and business environment. ### J. Financial development and inclusion, and SNIF - Financial development: - Credit to GDP about 61 percent. - Bank lending to SMEs about 17 percent of GDP. - Only 6 percent of micro-enterprises have access to bank financing; micro-credit 0.6 percent of GDP. - Financial inclusion gaps: - Adults with financial accounts: 29 percent. - Gender gap: 17 percent of women have a bank account versus 41 percent of men. - Mobile money account ownership: 1 percent. - Payments in cash: 90 percent. - Government and regulatory measures: - Public guarantees for MSME loans up to USD100,000; central bank refinancing facility for MSME lending since 2013. - Increase of micro-loan ceiling from USD5,000 to USD15,000. - Law extending assets usable as collateral, including moveable assets. - Bankruptcy law approved April 2018. - National Strategy for Financial Inclusion (SNIF) launched early 2019 (approved March 2019): - Objectives: expand mobile payments, boost microfinance (higher credit ceilings, relaxed interest rate caps), increase bank penetration (postal agencies), develop new credit scoring (utility bill data), accelerate digital payments, promote financial literacy. - SNIF expected to target SMEs, youth, women, rural population and complement reforms to secured transactions law, cooperative law, and microcredit policy. ### K. Governance, public sector efficiency, and inclusion - Public sector governance: - New information access law adopted February 2019. - Organic Budget law implemented as planned; remaining provisions to be implemented by 2020. - Draft law on illicit enrichment and BAM draft law under parliamentary consideration in 2019. - Civil service and fiscal decentralization: - Public wage bill intended to be maintained below 10.5 percent of GDP in the medium term. - Regional Investment Centers (CRIs) strengthened; deconcentration charter implemented late 2018. - Authorities committed to reinforce financial management at all levels and align local taxation with national principles. - Social programs and targeting: - Social programs numerous, fragmented, poorly coordinated; a social registry to be introduced in 2019-20. - Middle-class vulnerabilities noted; staff recommends strengthening business environment and considering middle class in tax and transfer design. ### L. Policy recommendations summary (safeguarding macro stability) - Monetary-fiscal mix: - Maintain accommodative monetary policy and slower fiscal consolidation given moderate inflation, subdued growth, and output slack uncertainty. - Continue gradual move to greater exchange rate flexibility to absorb shocks and preserve competitiveness. - Fiscal actions: - Achieve 2019 deficit objective: 3.7 percent of GDP (public financing need 3.3 percent with privatization receipts). - Contain public spending below budgeted levels and deploy contingency measures for grant shortfalls. - Use PPPs and innovative financing to limit gross financing needs; innovative financing mechanism to finance infrastructure worth about 1 percent of GDP in 2019. - Implement comprehensive tax reforms to raise revenues by about 0.7 percent of GDP by 2020 and about 1.6 percent of GDP over the medium term. - Continue managing fiscal risks from SOEs, PPPs, fiscal decentralization. - Exchange rate sequencing: - Continue gradual and orderly transition to flexible exchange rate regime with communication strategy and outreach, training, information for SMEs and economic agents. - Relaxation of capital outflow restrictions by residents to be gradual and at a later stage. - Financial sector vigilance: - Monitor bank capitalization, NPLs, provisioning, liquidity, and household-driven credit growth. - Strengthen AML/CFT framework and cooperation with host-country authorities for cross-border banking risks. ### Conclusion - Authorities accelerated structural reform pace over the last two years and remain committed to macroeconomic and financial stability. - Continued reform implementation and external support (including Fund advice, technical assistance, and PLL arrangements) are expected to support a transition to more private sector-led, inclusive, and job-rich growth. _International Monetary Fund staff report excerpt as provided in the source content._ ### 1. Exchange Rate Transition and Foreign Exchange Market Deepening__________________________ 23 ### 1. Exchange Rate Transition and Foreign Exchange Market Deepening ### A. Recent developments and macroeconomic vulnerabilities - Macroeconomic resilience has been strengthened through reforms of the pension system, energy subsidies, fiscal framework, business environment, and financial sector. The transition to greater exchange rate flexibility was initiated in January 2018. - IMF engagement: four successive two-year Precautionary Liquidity Line (PLL) arrangements since 2012; last arrangement approved in December 2018. - Economic activity: - Growth weakened in 2018, reflecting lower agricultural growth despite a second consecutive year of good cereal harvest; non-agricultural growth remained modest due to slow growth in the tertiary sector. - Private consumption remained the main driver of growth; private investment recovered gradually after declining from 30.7 percent in 2008 to 22.8 percent of GDP in 2015. - Unemployment declined slightly to 9.8 percent in 2018 (from 10.2 percent in 2017); youth unemployment was 26 percent and unemployment among graduates was 17.1 percent. - Social context: protests and social tensions (notably in the Rif region in 2017 and a consumer boycott in early 2018) have abated after steps to accelerate social programs, investment projects, and strengthen public accountability. - Fiscal developments: - Fiscal consolidation slowed in 2018; the deficit stabilized around 3.7 percent of GDP. - Strong VAT revenues and wage bill containment partially offset lower-than-expected corporate tax revenues, grants (54 percent of budgeted grants for 2018), and higher-than-projected subsidies due to elevated international butane prices. - Cyclically-adjusted and primary deficits decreased by about 0.3 percent of GDP in 2018. - Public debt declined to 64.9 percent of GDP in 2018 (from 65.1 percent in 2017). - Monetary and financial sector: - Headline inflation reached 1.9 percent in 2018 (compared to 0.7 percent in 2017); core inflation was 1.1 percent. - Bank-Al-Maghrib (BAM) policy rate has been unchanged at 2.25 percent since March 2016. - Bank credit growth increased slightly to 4.2 percent (y-o-y) in February 2019 after sluggishness in 2018, including for SMEs. Real estate prices are stable. - Bank capitalization: regulatory capital ratio was 14 percent as of June-2018. - Nonperforming loan (NPL) ratio was 7.7 percent with provisioning levels of about 70 percent. - IFRS9 introduced in January 2018; implementation phased in over five years, requiring upgraded loan classification, provisioning practices, and increased capital. - Risks include credit concentration and banks’ expansion in Africa (international exposures of the three largest Moroccan banks represent about 20-30 percent of their total assets and a third of their profits). - External sector: - The current account deficit widened to 5.4 percent of GDP in 2018 (from 3.4 percent in 2017) due to higher imports of energy and capital goods, and lower remittances, official grants from Gulf states, and tourism receipts; exports in automobile and phosphate sectors remained strong. - Net FDI increased substantially to 2.5 percent of GDP in 2018. - International reserves dropped by US$1.8 billion to US$24.4 billion, equivalent to 5.2 months of imports and 87.1 percent of the Fund’s Assessing Reserve Adequacy (ARA) metric. - Exchange rate policy: dirham fluctuation band was widened in January 2018 to +/-2.5 percent (from 0.3 percent) around a reference parity; the central bank has not intervened in the foreign exchange market since March 2018. - Inclusive growth: progress made in business environment, governance, and poverty reduction; shortcomings remain in quality of education, labor market efficiency (especially youth job creation), and gender equality (low and declining female labor force participation). ### B. Outlook and key projections - Baseline expectations assume sustained reform implementation including fiscal prudence, greater exchange rate flexibility, reforms of taxation, governance, SOE oversight, fiscal decentralization, labor market, and business environment, and policies to reduce social and regional inequalities and increase access to quality public services. - Growth and inflation: - Growth is expected to remain at 3 percent in 2019. - Growth is expected to reach 4.5 percent over the medium term, subject to continued reform implementation. - Inflation is projected to slow to 0.6 percent in 2019 and stabilize around 2 percent over the medium term. - Fiscal outlook: - The fiscal deficit is projected to remain at 3.7 percent of GDP in 2019. - Privatization receipts are projected to reduce public financing needs to 3.3 percent of GDP in 2019. - Staff and the authorities agreed the deficit would decline and stabilize around 3 percent of GDP after 2020. - Expected privatization revenues would contribute to reducing public debt to 60 percent of GDP over the medium term. - External outlook: - The current account deficit is expected to decline to 4 percent of GDP in 2019 and to 2.8 percent of GDP over the medium term. - Drivers include sustained growth in exports, tourism receipts, and remittances, as well as lower imports particularly of energy products. - Foreign direct investment is expected to remain stable at about 2 percent of GDP; other private flows (including trade credit) are expected to hover around 2 percent of GDP as well. - International reserves are expected to reach nearly 100 percent of the ARA metric in the medium term (about 128 percent of the ARA metric adjusted for capital controls). ### C. Risks and policy implications - Balance of risks: tilted to the downside. - Domestic risks: delays in implementing key fiscal and structural reforms could reduce future fiscal space, contribute to social tensions, weaken the external sector (e.g., lower tourism receipts and FDI inflows), and undermine the expected pickup in potential growth. - External risks: higher oil prices, weaker growth in the euro area, and geopolitical risks could slow activity through lower exports, tourism, FDI flows, and remittances. - Financial risks: increasingly volatile global financial conditions may increase borrowing costs and weaken investor confidence. - Upside scenarios: - Lower international oil (and butane gas) prices could further enhance resilience. - Increased regional integration in the Maghreb could provide added medium-term growth. _International Monetary Fund staff summary from the Morocco Selected Issues chapter: "Exchange Rate Transition and Foreign Exchange Market Deepening."_ ### 11. The authorities broadly agreed with the outlook and characterization of risks in the RAM ### 1marea2019003 - 11. The authorities broadly agreed with the outlook and characterization of risks in the RAM ### Authorities’ assessment of outlook and risks - Authorities broadly agreed with the outlook and characterization of risks in the RAM but expected higher growth in the medium term and viewed the impact of some risks as less severe. - Specific assessments: - Potential impact of rising protectionism and retreat from multilateralism: assessed as not high given the structure of Morocco’s trade and ongoing diversification efforts. - Intensification of security risks: assessed as having only a low or medium impact on the economy, as observed in recent years. - Growth of the nonagricultural sector at 3 to 3.5 percent in the current unfavorable global environment: considered "not a bad performance." - Upside growth potential exists if ongoing and future structural reforms raise productivity gains. ### Real sector developments (2009–19) - The pick-up in non-agricultural growth in 2018 is expected to continue in 2019. - Unemployment: declined slightly since 2017 but remains high for youth and women. - Demand-side drivers: private consumption and investment remain the main growth drivers. - Confidence indicators: - Surveys confirm strong household confidence while business confidence remains stable since 2017. - High-frequency indicators show still strong tourism activity and subdued construction activity. - Inflation: has remained moderate despite volatile food prices. - Data notes: - GDP annual percent change series shown for Agricultural, Non-agricultural, and Overall (RHS) for 2009–19 (2019 projected). - Unemployment series (Percent, seasonally adjusted) includes Overall (RHS), Youth, Female, Urban Female LFP (Labor Force Partipation). - Contributions to GDP growth chart shows Net Exports, Investment, Private Consumption, Public Consumption, Total (Annual percent change). ### Fiscal developments and outlook (2009–19 and 2019 outlook) - 2019 fiscal deficit projection: should remain at 3.7 percent of GDP, with privatization receipts reducing the public financing need to 3.3 percent of GDP. - Factors underpinning the 2019 deficit projection: - Stronger tax revenues, including measures to compensate for revenue losses from the introduction of progressive corporate taxation. - Continued efforts to contain public spending below budgeted levels. - Contingency measures to cope with potential grant revenue shortfalls (e.g., potential savings from reduced subsidy spending). - Public investment projection: modest reduction to 6.2 percent of GDP in 2019 (against 7.2 percent in 2018) as authorities increase reliance on public-private partnerships (PPPs) for new projects. - Fiscal stance: as measured by the cyclically-adjusted primary deficit, would remain neutral. - Public debt objective: authorities committed to reducing public debt to 60 percent of GDP in the medium term. - Recent debt path: rose from 47 percent of GDP in 2009 to 64.9 percent of GDP in 2018. - DSA conclusion: public debt remains sustainable, resilient to various shocks, and below the benchmark of 70 percent of GDP for emerging markets. - Target: gradually reduce public debt to 60 percent of GDP by 2024, mostly through improved growth dynamics and a reduced fiscal deficit by 2020. - Tax reform needs and revenue projections: - Accelerated tax reforms needed to bring the fiscal deficit to about 3 percent of GDP to meet the medium-term debt-to-GDP objective. - Staff projections: increase in tax revenues of about 0.7 percent of GDP by 2020, and about 1.6 percent of GDP over the medium term. - Key priorities: - Broaden the tax base, including through reduced tax exemptions and fight against fiscal fraud. - Simplify the VAT regime and corporate tax rates. - Better enforce tax payments from the self-employed and liberal professions. - Raise property tax. - A national conference on taxation in May 2019: intended to take a comprehensive approach and establish broad buy-in; authorities intend to develop an organic tax law based on its outcome. - Fiscal risks and contingent liabilities: - Continued management of fiscal risks important. - Higher-than-expected fiscal deficits could result from slower growth or exogenous factors. - Potential public liabilities may arise from SOEs, PPPs, or fiscal decentralization; currently not judged to pose a major risk given magnitude and actions underway. Authorities’ views on fiscal outlook: - For 2019, authorities confident the deficit objective could be met and noted potential fiscal savings if international butane prices remain below budget assumption. - Tight control over current spending could lead to underutilization of budget appropriations, as in recent years. - Medium-term view: greater reliance on PPPs will help enhance efficiency of public investment while limiting gross financing needs; May 2019 taxation conference seen as anchoring future tax reforms within a multiyear framework law. ### Exchange rate policy - Staff recommendation: greater exchange rate flexibility would benefit Morocco’s economy by: - Preserving reserve buffers and competitiveness. - Better positioning the economy to absorb external shocks. - Allowing Bank Al-Maghrib (BAM) to conduct a more domestically-oriented monetary policy and to move toward a fully-fledged inflation targeting regime. - Improving allocation of productive resources between tradable and non-tradable sectors and encouraging export diversification and SME development. - Rationale for timing: staff recommended using the current window of opportunity to continue transition to a flexible exchange rate regime given: - Comfortable external and fiscal buffers. - Financial sector resilience. - Limited currency risk exposures, including a low external debt level of about 30 percent of GDP. - Relatively low estimated pass-through of exchange rate movements to consumer prices. - EBA (2018 external balance assessment) result: suggests external position is moderately weaker than implied by fundamentals and desirable policies, an improved assessment compared to the 2017 Article IV consultation. - Observed transition effects: the first phase of the transition has not led to any significant realignment of the dirham, while the foreign exchange market is gradually deepening (Box 1 referenced). Authorities’ views on exchange rate reform: - Authorities concurred preparations for the reform essentially completed and conditions remain supportive of a gradual and orderly exchange rate regime transition. - They will wait for the opportune moment to move, with a well-structured communication strategy to ensure economic agents, particularly SMEs, understand and can manage foreign exchange risks. - Ongoing outreach, training, and information efforts planned. - Authorities acknowledged the EBA results but highlighted significant uncertainty associated with the assessment, including a large unexplained residual and conflicting results between methods. - Staff and authorities agreed that relaxing remaining restrictions on capital outflows by residents should be done gradually and at a later stage to minimize transition risks. ### Financial sector developments (2009–19) - Banks: continue to be profitable, but capitalization levels declined slightly. - Non-performing loans (NPLs): remain relatively high for private businesses and household loans. - Provisioning: relatively high. - Liquidity conditions: remain favorable. - Private credit growth: slightly increased in 2019 after lackluster performance of 2018; household lending is driving credit growth. - Lending rates: have decreased slightly since 2018. - Charted indicators and notes: - Bank Profitability and Capitalization: Return on assets (RHS), Interest rate average spread, Cost of risk as a percent of credit, Regulatory capital to risk-weighted assets (Percent), data as of Dec. 2018. - Distribution of NPLs: series for Private Businesses and Households; NPL as percent of total loans (RHS). - Bank Liquidity: Liquid assets to total assets, Specific provisions to total loans, Specific provisions to NPLs (RHS) (Percent). - Loans and deposits series: Private credit growth, Loan to deposit ratio (RHS), Deposit growth (Annual percent change). - Contribution to Credit Growth: Non-Financial Corporates, Households, Public Sector, Private Financial Institutions (Annual percent change). - Bank Lending Rates and Interest Margin: Lending rates, CB policy rate, Lending-deposit rate spread (Percent); sources as of Q3 2018. ### External sector developments (2009–19) - Exports: growth driven by emerging manufacturing sectors. - Imports: increased in energy, capital goods, and raw materials. - Trade deficit: has been increasing since 2016, weakening the current account. - Financing the current account deficit in 2018: FDI and private borrowing played a key role. - Reserves: Morocco’s reserves coverage expected to improve in the medium term. - Exchange rates: the real effective exchange rate (REER) appreciated in 2018. - Charted indicators and notes: - Exports and imports by type of goods (US$, Billions) for 2009–18. - Current Account Components (US$ Billions) including Merchandise balance, Services: Tourism, Income, Services: Other, Transfers: Remittances, Transfers: Other, CA/GDP (RHS). - Current Account Financing (US$ Billions): FDI, Portfolio, Private borrowing, Public borrowing, Current account, Reserves (RHS). - Reserve adequacy metrics for 2010–24 (US$ billions, unless otherwise noted): Reserves, 3M of Imports, Standard metric 20% of broad money, Adjusted metric Reserves/(ST debt + CA deficit), predictive densities shown for 2017–24 with percent of GDP (Gross, Nominal, Symmetric distribution) and baseline percentiles (10th-25th, 25th-50th, 50th-75th, 75th-90th). - NEER and REER indices: Jan. 2010 = 100 series for 2010–19. ### Structural reforms and competitiveness - Morocco fares relatively well in overall business climate and competitiveness. - Recent reforms: new bankruptcy law and further streamlining of administrative procedures. - Areas with limited progress: education system and labor market functioning. - Recommendations on education: - Focus on increasing years of schooling, teachers’ training, and vocational training. - Recommendations on labor market: - Reduce regulatory rigidities and strengthen labor market policies. - Financial sector / SME priority: facilitating SME access to finance is a priority. - Indicators and data sources: - Doing Business & Global Competitiveness indicators and subcomponents presented with scores (0-100, where 100 represents the optimal situation) from World Bank's 2019 Doing Business Report and World Economic Forum's 2018 Global Competitiveness Report. - Specific subindices include: Doing Business indicators (Starting a business; Dealing with Construction Permits; Getting Electricity; Registering Property; Getting Credit; Protecting Minority Investors; Paying Taxes; Trading Across Borders; Enforcing Contracts; Resolving Insolvency), Global Competitiveness components (Institutions; Infrastructure; Macroeconomic environment; Health and primary education; Higher education and training; Goods market efficiency; Labor market efficiency; Financial market development; Technological readiness; Market size; Business sophistication; Innovation), Higher Education and Training subcomponents, Labor Market subcomponents, Financial Development subcomponents. ### Safeguarding macro stability — policy recommendations summary - Monetary-fiscal mix: - Current combination of accommodative monetary policy and slower fiscal consolidation continues to be appropriate given moderate inflation, subdued economic and credit growth, and uncertainties about output slack. - Greater exchange rate flexibility recommended to absorb external shocks and preserve external competitiveness. - Fiscal policy actions: - Achieve 2019 deficit objective: 3.7 percent of GDP (public financing need 3.3 percent of GDP with privatization receipts). - Contain public spending below budgeted levels and deploy contingency measures for grant shortfalls. - Use PPPs and innovative financing to limit gross financing needs; an innovative financing mechanism akin to a PPP will finance infrastructure projects worth about 1 percent of GDP in 2019. - Implement comprehensive tax reforms to increase tax revenues by about 0.7 percent of GDP by 2020 and about 1.6 percent of GDP over the medium term; priority measures listed above. - Continue management of fiscal risks from SOEs, PPPs, and fiscal decentralization. - Exchange rate reform sequencing: - Continue transition to a flexible exchange rate regime gradually and orderly, with communication strategy, outreach, training, and information for SMEs and economic agents. - Relaxation of capital outflow restrictions by residents to be gradual and at a later stage. - Financial sector vigilance: - Monitor bank capitalization, NPLs (especially for private businesses and households), provisioning, liquidity conditions, and household-driven credit growth. - Ensure favorable conditions for credit to support growth while maintaining financial stability. *Italic: IMF staff report excerpt as provided in the source content.* ### 21. The financial system is resilient and continued progress is being made to upgrade the ### 21. The financial system is resilient and continued progress is being made to upgrade the financial sector policy framework ### Financial system resilience and risk factors - Moroccan banks are well capitalized and their liquidity position is favorable. - Strengthened provisioning requirements under IFRS9 introduced in 2018 are expected to be absorbed over a period of five years, without major impact on bank capitalization. - New legal frameworks for bankruptcy and collateral regime are expected to help reduce the relatively high NPL levels. - Monitoring of consolidated financial statements and incentives to rely more on syndicated lending should contribute to lower concentrated credit exposures. - Moroccan banks' cross-border expansion into Africa provides substantial diversification and profitability benefits, but is also a source of risk transmission requiring enhanced consolidated risk management and cross-border crisis management frameworks. ### Policy framework and supervisory improvements - Staff supports continued move toward a risk-based and forward-looking supervisory framework, including preparation for increased exchange rate volatility. - Improvements to BAM's stress-testing and macroprudential policy framework are ongoing with Fund technical assistance. - Staff encouraged authorities to further enhance collection of granular data on household income and on exposures of Moroccan bank subsidiaries abroad. - Cooperation with host-country authorities is ongoing to manage risks from banks' expansion in Africa. ### Exchange rate arrangement note (factual timeline) - After widening of the exchange rate fluctuation band to 2.5 percent on either side of the central parity (reference rate), on January 15, 2018, interbank or retail market transactions could have happened at a rate that differed from the governmental transaction rate by more than 2 percent. - This exchange market arrangement gave rise to an MCP until October 22, 2018, when a new mechanism was introduced that prevented such a potential spread and eliminated the MCP. - The MCP temporarily caused the breach of the continuous performance criterion against introducing or modifying MCP; a waiver would have been required to complete the third review under the previous PLL arrangement. There are no misreporting implications since Morocco made no purchases under the arrangement. ### Central bank governance and safeguards - A January 2019 safeguards assessment mission found that BAM has maintained strong operational controls. - BAM's audit committee (comprising non-executive Board members) is active in oversight of internal and external audit mechanisms, aligned with international standards. - A draft BAM law incorporating some past safeguards recommendations is currently being considered in parliament. - The latest assessment recommends further amendments to the BAM law for consideration later in the year on aspects related to autonomy and governance, and that BAM transitions to IFRS, consistent with national plans to converge the Moroccan accounting standards. ### AML/CFT framework - Morocco’s AML/CFT framework needs to be strengthened. - Morocco was assessed by MENAFATF in 2018; the report will be discussed during the MENAFATF Plenary in April 2019. - Staff encouraged authorities to address weaknesses expeditiously to avoid categorization by the FATF as a country with strategic AML/CFT deficiencies. - Stronger AML/CFT supervision and effective implementation of targeted financial sanctions can improve mitigation of cross-border risks from bank expansion in Africa. ### Authorities’ views on financial sector issues - Authorities highlighted progress in enhancing banks' consolidated risk management via data exchange, supervisory colleges, and discussions to strengthen cross-border crisis management frameworks in collaboration with host countries. - Regarding the safeguards assessment, authorities will consider latest staff recommendations after approval of the BAM draft law by parliament, taking account of Morocco’s circumstances. - Authorities stated the BAM draft law is at a late stage of parliamentary discussion and is already in line with international best practices on key aspects of autonomy and governance, and requires government cash contributions to fill any shortfalls in BAM’s capital. - Implementation of IFRS standards will be considered within a national project of convergence towards these standards. - Authorities emphasized action to address weaknesses identified in Morocco's AML/CFT framework. ### Raising growth and inclusion — overview - Morocco’s economy needs higher and more private sector-led growth and job creation to reduce unemployment decisively. - Weaknesses in the business and competition environment have limited SME development and middle-class entrepreneurship. - Authorities have accelerated reform implementation to improve public sector governance and efficiency, enhance competition, lower hiring costs, and increase SME financial inclusion, while reducing inequalities. - Sustained implementation of these reforms will be key to boost job-rich growth. ### Public sector governance and efficiency — governance, transparency, anti-corruption - Progress includes simplifying administrative procedures, promoting e-government, increasing transparency, and reducing vulnerabilities to corruption. - A new information access law was adopted in February 2019 and digital platforms have been introduced to facilitate public feedback. - The Organic Budget law is implemented as planned, including measures to strengthen oversight role of parliament and the Cour des Comptes. - Increased communication on implementation of the National Strategy Against Corruption would reinforce public trust. - The first implementation report for the national strategy is expected to be published in 2019. - A draft law on illicit enrichment is in preparation and could be adopted in 2019, supporting the Cour des Comptes in identifying and pursuing cases of illicit enrichment, including via new digitalized procedures. ### Public sector efficiency — priorities and targets - Civil service reform: - Morocco’s public wage bill (including social contributions) is intended to be maintained below 10.5 percent of GDP in the medium term. - Authorities have introduced measures to support contractualization and mobility. - Staff recommended accelerated and additional reforms to secure durable public savings while strengthening efficiency and quality of public services, including simpler and more flexible statutes and salary structures, and merit-based career progression (in line with Cour des Comptes 2017 recommendations). - Fiscal decentralization: - Strengthened role of Regional Investment Centers (CRIs) and implementation of a deconcentration charter in late 2018. - Adoption of transparent criteria for transfer of public resources to regions. - With transfers becoming increasingly large, essential to reinforce sound financial management at all levels, clarify local competences, mitigate contingent liability risks, and in the longer term enhance local taxation. - Public enterprises: - Authorities are revising draft law to strengthen SOE governance and oversight and plan to submit it to parliament in 2019. - A privatization plan starting this year will be part of a strategic approach to the state’s role, including refocusing SOEs on core missions. - Ongoing IMF technical assistance supports efforts to strengthen assessment and mitigation of SOE-related fiscal risks. - Public investment management: - A 2017 IMF/World Bank PIMA recommended raising public investment efficiency via better coordination in project planning and execution, legal enhancements for PPPs, and stronger project implementation and risk management capacity. - Authorities have a comprehensive strategy to implement these recommendations and to further develop PPPs. ### Authorities’ views on governance and decentralization - Authorities expect the recently-activated anti-corruption agency (ICPC) to support cross-department reforms. - They reported digitization of public services is yielding results and improving governance and administrative efficiency. - Civil service reform is a priority and significant progress has been made toward design of a comprehensive reform strategy. - Authorities committed to continue reinforcing sound financial management at all levels in fiscal decentralization and to reform local taxation aligned with national tax system principles within a unified tax code. ### Private sector and SME development — reform sequencing and impacts - Staff analysis of reform scenarios suggests a comprehensive and properly-sequenced reform package maximizes impact. - Coordinated reforms to reduce hiring costs and barriers to entry, especially for SMEs, could lead to: - a 2.5 percent increase in output over the medium term, and - a 2.2 percent reduction in unemployment over the medium term. - Coordinated reforms would have stronger impact than uncoordinated or isolated reforms over both the short and medium term. ### Labor market, education, and inclusion measures - Labor market: - More efforts needed to reduce youth unemployment and facilitate labor movement toward high-productivity sectors. - Specific measures under the 2015-30 National Employment Strategy are still being finalized. - Recent initiatives include creation of a labor market observatory, increased support to vocational training, and strengthening active labor market policies. - Mission encouraged enhanced monitoring and evaluation, and consideration of relaxing firing and hiring regulations together with appropriate unemployment safety nets. - Female participation: - Female labor force participation is low and declining despite improved access to education and public services. - Authorities implement plans to increase women's access to credit and reduce gender inequality. - Staff emphasized need for further efforts to improve female schooling and increase access to affordable childcare. - Public education: - Spending on education is high but educational achievements remain disappointing. - Efforts under the national strategy for education and a related framework law submitted to parliament in September 2018 are starting to bear fruit. - Staff emphasized focusing on performance-based criteria to improve efficiency of public spending in education. ### Business environment and SME financial inclusion - Business environment: - Morocco’s Doing Business ranking rose from 128 in 2010 to 60 in 2019. - Recent reforms include new bankruptcy law approved in April 2018, and dematerialization of administrative procedures for starting a business, transferring property, and customs. - The Competition Council became operational in November 2018. - Authorities are developing a new Small Business Act and an Investment charter. - Authorities are clearing the stock of VAT repayments owed to public and private enterprises (about 4 percent of GDP) and working to reduce payment delays. - SME financial inclusion: - A comprehensive financial inclusion strategy was launched in early 2019 and approved in March 2019. - Bank lending to SMEs is about 17 percent of GDP and is relatively high by regional standards but stagnant in recent years. - Collateral requirements can be very high for smaller enterprises; access to finance remains a major constraint. - The financial inclusion strategy aims to increase financial education, expand electronic payment infrastructures and credit bureau coverage, and relax constraints on microcredit activities. - A new law adopted in parliament extends the array of assets that can be used as collateral, including moveable assets, to facilitate SME access to finance. ### Authorities’ views on employment, inclusion, and education - Authorities emphasized the National Plan on Employment for 2017–2021 in addressing youth unemployment, female participation, and regional disparities. - They highlighted the Plan on Equality for 2017-2021 prioritizing financial autonomy of women and support for women-run businesses. - Authorities were confident about positive long-term impacts of the National Strategy for Financial Inclusion and ongoing education reforms. - A draft framework law on the education system, training and scientific research is being debated in Parliament. ### Reducing inequalities — targeting and middle-class vulnerabilities - Poverty rates have declined substantially in the last decade, but large regional and social discrepancies remain. - Social program targeting: - Social programs are numerous, highly fragmented, and poorly coordinated. - Despite relatively high aggregate social spending, distributional impact is unsatisfactory and in some cases regressive. - Authorities will introduce a social registry in 2019-20 to enhance coordination and targeting of social programs. - Ongoing decentralization should allow better coordination of social spending at the local level. - Middle-class vulnerabilities: - The middle class has faced reduced subsidies, higher property costs, and expensive alternatives to public services (education, transportation, poor public health coverage). - The lower middle-class segment is particularly vulnerable. - Staff noted need to strengthen business environment and opportunities for entrepreneurs and SMEs, and to consider this population in design of tax and transfer policy reforms. - Authorities’ views: - Based on expenditure data, authorities consider inequalities have been reduced and concurred that priority should be on reforms to reduce regional disparities, including in access to public services. - Authorities noted better data are being developed, particularly through household income surveys, to assess challenges and vulnerabilities facing the middle class. *IMF staff assessment excerpt from the chapter provided.* ### 36. Morocco benefits from sound economic fundamentals and institutional policy ### 36. Morocco benefits from sound economic fundamentals and institutional policy frameworks, and policy and reform implementation has been generally positive ### Macroeconomic outlook and policy mix - Macroeconomic vulnerabilities have been reduced in recent years despite a challenging external environment. - Continued efforts are needed to enhance macroeconomic resilience and move towards more private sector-led, broad-based and job-rich growth to achieve higher, sustainable, and more inclusive growth. - The policy mix of accommodative monetary policy and slower fiscal consolidation is assessed as adequate in a context of subdued economic and credit growth and low inflation. - Further exchange rate flexibility would benefit the economy by helping absorb potential external shocks and preserving external competitiveness. - The initial phase of the transition to greater exchange rate flexibility has been initiated and described as successful. ### Fiscal and public sector reforms - Fiscal and public sector reforms should continue to: - Secure policy space. - Enhance the efficiency and impact of social and growth-enhancing spending. - Fiscal sustainability will benefit from a comprehensive tax reform to boost revenues while increasing fairness, based on the outcome of the May 2019 national tax conference. - Improvements needed in the efficiency and quality of public investment and services require: - Overhauling public sector governance and modernizing the civil service. - Careful implementation of fiscal decentralization. - Increasing project implementation and risk management capacity, including in the SOE sector. ### Financial sector resilience and policy priorities - The financial system is resilient, but increasing complexity requires continued efforts to upgrade the financial sector policy framework. - Cross-border expansion of Morocco’s banks and further exchange rate flexibility introduce additional risk factors. - Key policy priorities: - Implement tighter provisioning requirements under the newly introduced IFRS9. - Transition toward risk-based and forward-looking supervision (including on AML/CFT). - Further coordination with host-country authorities in Africa. ### Structural reforms, labor, and inclusion - Authorities are advancing structural reforms; more is needed to raise human capital, job opportunities, and reduce inequalities. - Recent reforms in the business environment and financial inclusion aim to move toward more private sector-led growth and job creation. - Mutually-reinforcing reforms needed: - Improve quality of the education system. - Improve functioning of the labor market. - Increase female labor force participation. - Ensure social programs are better targeted at the most vulnerable groups. ### Exchange rate transition and foreign exchange market deepening (Box 1) - On January 15, 2018, Bank Al-Maghrib widened the dirham fluctuation band to ±2.5 percent around the reference parity (against ±0.3 percent previously). - Since then, the dirham has been stable and moved well within the ± 2.5 percent fluctuation band. - International reserves declined slightly in 2018 as BAM stopped intervening in the foreign exchange market; the decline was driven by execution of Treasury transactions, mainly servicing external public debt. - Since mid-2017, banks have maintained large long positions in foreign currency, which, together with strong export and FDI revenues, allowed them to comfortably serve foreign exchange demand of their clients in 2018. - Deepening of foreign exchange markets is underway: - Following BAM’s withdrawal (non-intervention), the interbank market functioning has been effective and turnover is increasing. - Better enforcement of existing foreign exchange regulations and banks’ long foreign exchange positions have tended to limit foreign exchange demand and deepening of the market in the short run, especially in futures market segments. - Suggested regulatory adjustments to deepen the market include lower surrender requirements for exports, higher limits to purchase foreign currency by Moroccan residents, and future progress towards capital account liberalization. ### Privatization program (Box 2) - Morocco has a legal and regulatory framework to support privatizations based on the 1989 privatization law with a tripartite structure. - A multi-year privatization program announced in late October 2018: - Expected to start in 2019. - Expected to last five years and to yield about 4 percent of GDP. - Parliament approved a change in distribution of privatization proceeds: half allocated to the Hassan II Fund and the other half to finance government operations. - Government financing needs would be reduced by 0.4 percent of GDP per year during 2019-21, and 0.2 percent of GDP per year during 2022-24. - The list of public enterprises for divestment was amended in late 2018 to add enterprises in the tourism, hotel, and energy sectors. - The privatization program aims to improve SOE performance, refocus SOEs on core activities, and converge with reforms to strengthen SOE governance and improve public investment and services. ### Promoting job-rich growth through well-sequenced structural reforms (Box 3) - Background: - Growth has remained volatile and insufficient to significantly reduce unemployment, partly due to relatively low total factor productivity (TFP) growth, which has slowed since the global financial crisis. - Methodology: - A small open-economy dynamic general equilibrium model with informal product and labor markets was calibrated for Morocco using quarterly data between 2000 and 2017. - Analysis focused on: (i) reduction of firm’s barriers to entry, and (ii) improvement in labor market policies and human capital. - Assessed benefits and costs of isolated, sequenced, and coordinated reform scenarios on output and unemployment. - Main findings: - A coordinated set of reforms reducing hiring costs and entry barriers is more effective in boosting growth and job creation than isolated reforms. - A combined reduction by 10 percent of hiring and entry costs would: - Increase output by 2.5 percent. - Decrease the unemployment rate by 2.2 percentage points 5 years after the reforms. - If reforms need to be sequenced: - Starting with labor market reforms is more effective in reducing unemployment in the short run. - Starting with product market reforms would boost output faster in the short run. ### Institutional recommendation - Staff recommends that the next Article IV consultation be held on the standard 12-month cycle. *Source: International Monetary Fund* ### Box 3. Promoting Job-Rich Growth Through Well-Sequenced Structural Reforms ### Box 3. Promoting Job-Rich Growth Through Well-Sequenced Structural Reforms ### Reaction of Output and Employment to Reform Sequencing - Text Figure 2 assesses the "Reaction of Output and Employment to Labor and Product Market Reform Sequencing (10 percent decrease in entry costs first/hiring costs first)". - GDP (Initial steady state = 100): chart range shows values from "96" to "106" with series labeled "Hiring costs first" and "Entry costs first". - Unemployment (Initial steady state = 100): chart range shows values from "50" to "100" with series labeled "Hiring costs first" and "Entry costs first". - Source: IMF staff estimates. ### Risk Assessment Matrix — Key Risks, Likelihoods, Impacts, and Policy Responses - Weaker than expected global growth, including in Europe. - Relative Likelihood: High - Time Horizon: Medium Term - Expected Impact: High. "Weak external demand for Morocco’s exports, particularly from the euro area, could weaken growth and the external position." - Policy Response: "Diversify export composition and markets, implement structural reforms to boost competitiveness. Greater exchange rate flexibility can help absorb external shocks." - Intensification of security risks in parts of the Middle East, Africa, and Europe. - Relative Likelihood: High - Time Horizon: Short and Medium Term - Expected Impact: High. "Negative sentiment could reduce Morocco’s tourism receipts, and impair investor confidence, reducing FDI and other capital inflows. Disruptions in oil production may create upside risks for oil prices." - Rising protectionism and retreat from multilateralism. - Relative Likelihood: High - Time Horizon: Short and Medium Term - Expected Impact: High. "The policy shifts could reduce the cross‐border flows of trade, labor, and remittances, with adverse effect on external sector sustainability, longer‐term growth and poverty reduction." - Sharp tightening of global financial conditions, sustained rise in risk premium. - Relative Likelihood: Medium - Time Horizon: Short Term - Expected Impact: Low. "External debt is about 30 percent of GDP, with long maturities, and foreign portfolio investments are moderate. The effect of surges in the US interest rate and a stronger dollar could harm competitiveness. Foreign exchange exposures in the corporate and banking sectors are limited." - Policy Response: "Increase policy responsiveness by building fiscal and external buffers. Greater exchange rate flexibility can help absorb external shocks." - Large swings in energy prices. - Relative Likelihood: Medium - Time Horizon: Short and Medium Term - Expected Impact: High. "A reduced oil import bill would improve Morocco’s external position; lower domestic fuel prices would boost consumption. On the other hand, an increase in the oil bill would worsen Morocco’s external position." - Policy Response: "Continue to preserve gains from lower oil prices; reduce long term reliance on energy imports." - Slower than expected pace of reforms. - Relative Likelihood: Low - Time Horizon: Medium Term - Expected Impact: Medium. "Increase in fiscal vulnerabilities, low potential growth, and potential drop in domestic and foreign investor confidence." - Policy Response: "Build consensus on reforms needed to reduce vulnerabilities and foster higher and more inclusive growth." ### Selected Economic Indicators and Projections (Highlights from Table 2) - Real GDP (annual percent changes and projections): entries in source are presented in a concatenated format; key projection horizon labeled "Proj. 2019" and columns for 2020–2024 included in table. - Real agriculture GDP: historical and projected series are presented (table cells show values such as "11.9", "-13.7", "15.4", "3.9", "0.7", "0.1", "3.3", "3.7", "4.0", "4.3", "4.5"). - Real non-agriculture GDP: series includes values "3.7", "3.1", "2.7", "2.8", "3.6", "3.4", "3.9", "4.2", "4.3", "4.4", "4.5". - Consumer prices (end of period): values include "0.6", "1.8", "1.9", "0.1", "1.4", "0.6", "1.1", "2.0", "2.0", "2.0", "2.0". - Gross capital formation (percent of GDP): values include "30.8", "32.6", "32.6", "33.2", "36.9", "34.0", "34.4", "34.8", "35.2", "35.6", "35.9". - Gross national savings (percent of GDP): values include "28.8", "28.4", "28.9", "27.8", "32.9", "30.0", "30.9", "31.8", "32.2", "32.8", "33.1". - Budget balance (percent of GDP): series includes "-4.2", "-4.5", "-3.5", "-3.7", "-3.7", "-3.7", "-3.3", "-3.0", "-3.0", "-3.0", "-3.0". - Total government debt (percent of GDP): values include "63.7", "64.9", "65.1", "64.9", "65.2", "65.1", "64.5", "63.1", "62.0", "60.9", "60.0". - Exports of goods and services (U.S. dollars, percent change): series includes "-7.0", "3.3", "12.7", "11.2", "5.5", "5.4", "7.1", "7.0", "6.7", "6.7", "6.0". - Imports of goods and services (U.S. dollars, percent change): series includes "-16.5", "9.5", "9.3", "12.2", "3.4", "2.1", "5.4", "5.4", "6.3", "6.2", "5.8". - Gross reserves (in billions of U.S. dollars): values include "22.8", "25.1", "26.2", "24.4", "26.8", "26.0", "27.4", "29.6", "32.5", "35.9", "39.9". - Nominal GDP (in billions of U.S. dollars): values include "101.2", "103.35", "109.7", "118.6", "122.9", "120.7", "127.3", "135.4", "144.3", "153.8", "164.0". - Unemployment rate (in percent): historical values include "9.7", "9.9", "10.2", "9.8" (table shows further entries as "..."). ### Fiscal and Budgetary Indicators — Central Government (Table 3a and 3b) — Selected Figures - Revenue (billions of dirhams): "262.1", "264.0", "282.4", "289.8", "301.6", "302.1", "317.7", "337.0", "361.2", "385.4", "413.1". - Taxes (billions of dirhams): "208.9", "216.9", "232.1", "242.5", "259.0", "254.3", "273.5", "292.2", "313.6", "335.1", "359.7". - Compensation of employees (billions of dirhams): "118.5", "121.2", "122.2", "124.5", "130.8", "133.6", "138.1", "141.8", "144.2", "146.7", "149.2". - Interest (billions of dirhams): "27.3", "27.1", "27.1", "27.3", "28.7", "28.7", "29.3", "28.5", "28.8", "30.4", "31.4". - Net acquisition of nonfinancial assets (billions of dirhams): "54.8", "57.8", "57.9", "60.8", "63.3", "57.1", "66.4", "73.2", "84.5", "91.1", "99.9". - Net lending / borrowing (overall balance, billions of dirhams): "-41.2", "-45.4", "-37.1", "-41.4", "-42.5", "-43.2", "-40.4", "-38.7", "-40.7", "-43.9", "-46.4". - Revenue (percent of GDP): "25.6", "26.0", "26.6", "26.0", "26.0", "26.2", "26.2", "26.3", "26.5", "26.7", "26.9". - Expense (percent of GDP): "25.2", "24.8", "24.6", "24.3", "24.2", "25.0", "24.1", "23.6", "23.3", "23.4", "23.4". - Total government debt (percent of GDP, memorandum): "64.9", "65.1", "64.9", "65.2", "65.1", "64.5", "63.1", "62.0", "60.9", "60.0". ### Balance of Payments — Key Items (Table 4) - Current account (in billions of US dollars): "-2.2", "-4.2", "-3.7", "-6.5", "-4.9", "-4.8", "-4.5", "-4.1", "-4.2", "-4.3", "-4.6". - Trade balance (in billions of US dollars): "-14.7", "-17.6", "-18.0", "-20.2", "-20.0", "-19.1", "-19.5", "-20.0", "-21.2", "-22.4", "-23.5". - Exports, f.o.b. (billions of US dollars): "18.6", "19.1", "21.5", "24.6", "26.5", "26.2", "28.3", "30.5", "32.6", "35.0", "37.4". - Imports, f.o.b. (billions of US dollars): "-33.3", "-36.7", "-39.5", "-44.8", "-46.4", "-45.3", "-47.8", "-50.5", "-53.8", "-57.4", "-60.9". - Services (net, billions of US dollars): "6.8", "6.9", "7.5", "8.0", "8.3", "8.1", "8.6", "9.3", "10.1", "10.8", "11.4". - Tourism receipts (billions of US dollars): "6.3", "6.5", "7.4", "7.8", "8.0", "7.8", "8.2", "8.7", "9.1", "9.6", "10.0". - Financial account (in billions of US dollars): "5.8", "6.4", "2.0", "4.0", "6.7", "6.3", "5.8", "6.1", "7.1", "7.6", "8.5". - Gross official reserves (in billions of US dollars): "22.8", "25.1", "26.2", "24.4", "26.8", "26.0", "27.4", "29.6", "32.5", "35.9", "39.9". - Oil price (US$/barrel; Brent): "52.4", "44.0", "54.4", "71.1", "72.3", "61.8", "61.5", "60.8", "60.4", "60.6", "61.0". ### Monetary and Banking Sector — Selected Indicators (Tables 5 and 6) - Net International Reserves (billions, monetary table): "222.1", "249.2", "240.9", "230.7", "241.2". - Broad money (billions of dirhams): "1,148.0", "1,202.4", "1,269.1", "1,320.6", "1,373.4". - Claims to the economy (billions of dirhams): "1,052.1", "1,100.0", "1,157.3", "1,225.9", "1,289.6". - Velocity (GDP/M3): "0.86", "0.84", "0.84", "0.84", "0.84". - Regulatory capital to risk-weighted assets (percent): historical values include "13.7", "13.7", "14.2", "13.7", "13.8", "14.0". - Nonperforming Loans (NPLs) to total loans (percent): "6.8", "7.2", "7.1", "7.0", "7.0", "7.1", "6.8". - Specific provisions to NPLs (percent): "68.0", "67.0", "69.0", "70.0", "71.0", "70.0", "69.1". - Return on assets (ROA, percent): "0.8", "1.1", "1.1", "1.1", "0.9", "1.1", "0.9". - Deposits to loans (percent): "104.3", "105.4", "98.1", "97.2", "100.1", "93.6", "96.9". ### Capacity to Repay and External Debt Indicators (Table 7) - Total external debt (percent of GDP): "31.1", "35.2", "34.3", "33.1", "31.8", "29.8", "28.2", "27.3". - Public external debt (percent of GDP): "27.8", "31.8", "31.0", "29.8", "28.6", "26.7", "25.2", "24.5". - Gross international reserves (billions of US dollars, memorandum): "24.4", "26.0", "27.4", "29.6", "32.5", "35.9", "39.9", "43.9". - Nominal GDP (in billions of U.S. dollars, memorandum): "118.6", "120.7", "127.3", "135.4", "144.3", "153.8", "164.0", "175.0". ### Inclusive Growth Indicators (Table 8) — Selected Metrics - Population (million of people, 2018): "35.2". - Per capita GDP: "$3,559; 2018". - GDP per capita growth (percent; 2011 PPP, 2015-18 average): "2.1". - Unemployment rate (% of total labor force, 2018): "9.0". - Gross fixed capital formation (percent of GDP; 2015-18 average): "29.8". - Female (percent of female labor force, 2018): "10.4". - Youth (percent of total labor force ages 15-24, 2018): "21.9". - Labor force participation (% of total population ages 15+, 2018): "45.4". - Poverty headcount ratio at $3.20/day (percent of population; 2011 PPP): "7.7". - GINI Index (2014): "39.5". - Prevalence of stunting (% of children under 5, 2011): "14.9". - Child mortality (per 1,000, 2016): "27.1". *Source: IMF staff estimates and projections as presented in the supplied content unit.* ### 39.6 Ease of Doing Business ### 1marea2019003 - 39.6 Ease of Doing Business ### Ease of Doing Business and Related Indicators - Ease of Doing Business (DTF, 2019) — Morocco: 39.6 (presentation heading) - Selected DTF indicators (Morocco vs EMDE Average as presented): - Starting a Business (DTF, 2019): 93.0 — 81.5 - Registering Property (DTF, 2019): 67.9 — 57.4 - Enforcing Contracts (DTF, 2019): 60.9 — 52.4 - Paying Taxes (DTF, 2019): 85.7 — 63.8 - Resolving Insolvency (DTF, 2019): 52.8 — 36.3 - Trading Across Borders (DTF, 2019): 83.6 — 62.8 - Other governance, development, access and competitiveness indicators (values as shown): - Growth in mean consumption (growth, %, bottom 40th percentile): n.a. - Human Development Index (2017): 0.6 - Life expectancy at birth (years, 2016): 75.8 - Access to electricity (% of population, 2016): 100.0 - Net school enrollment, secondary, total (% population, 2012): 56.7 - Individuals using internet (% population, 2016): 58.3 — 40.8 - Literacy rate (% population, 2012): 69.4 — 79.1 - Access to basic water sources (% of population): 83.0 - Open Budget Survey Index (2017): 45.3 — 37.5 - Global Competitiveness Index, Overall (2018): 56.6 — 54.5 - Government Effectiveness (WGI, 2017): -0.1 — -0.5 - Government Regulatory Quality (WGI, 2017): -0.2 — -0.4 - Rule of Law (WGI, 2017): -0.2 — -0.4 - Control of Corruption (WGI, 2017): -0.1 — -0.3 - Corruption Perceptions Index (2017): 40.0 — 36.2 - Criminal Justice (WJP, 2017-18): 0.37 — 0.44 - Bribery Index (2017-18): 50.1 — 42.3 (and -0.48 — -0.25 shown in table) - Government expenditure on education, total (% GDP, 2009): 5.3 — 4.6 - Health expenditure, domestic general government (% of GDP, 2015): 2.4 — 2.9 - Gender indicators: - Account at a financial institution (male vs. female, % points, 2017): 24.5 — 8.07 - Female employment to population ratio (%, 2017): 22.5 — 46.8 - Literacy rate (female vs male, %, 2014): 73.6 — 86.1 - Account at a financial institution (% age 15+, 2017): 28.4 — 43.0 - Net school enrollment, secondary (female vs male, %, 2011): 85.4 — 97.3 - Female seats in Parliament (share of total seats): 20.5 — 19.5 - Wage Equality for Similar Work (survey, WEF, 2018): 0.61 — 0.65 - Financial Inclusion Index (IMF, 2017): 0.7 — 0.3 - Global Gender Gap Score (WEF, 2018): 0.6 — 0.7 - Note: "Better than EMDE Average" and "Worse than EMDE Average" legend presented. ### FSAP Key Recommendations — Status as of March 2019 (Banking, Macroprudential, Resolution, FMIs, Markets, Inclusion) - Banking Regulation and Oversight — Selected recommendations and implementation status: - Address banking supervisor’s capacity constraints; strengthen on-site supervision capacity. Priority: I. Implementation status: In progress. Internal reorganization implemented and increase of effectives to respond to on site supervision. - Review loan classification and provisioning rules on a solo basis; conduct an impact study for implementing the relevant IFRS9 in coordination with tax authorities. Priority: NT. Implementation status: On a solo basis, the loans classification and provisioning rules have been finalized. The transitional arrangement is currently being developed in consultation with the banks and external auditors. The accounting treatment of the first-time application impact is planned to be consulted with the national council of accountancy. On a consolidated basis, IFRS 9 was adopted by Moroccan banks on January 1, 2018. Bank Al-Maghrib (BAM) conducted the impact studies of this standard before implementation and adopted, on this basis, a transitional arrangement for the prudential impact on regulatory capital in line with Basel Committee provisions. - Advance recovery & resolution plans; more frequent comprehensive assessments for SIFIs. Priority: I/NT. Implementation status: The R&R circular was examined by the CEC in July 2017 and communicated to banks for their implementation. New units dedicated to overseeing individual SIFIs since January 2016. Following the adoption of BAM circular in Q3 2017. The three systemic banks submitted to BAM during Q4 2018 their first recovery plans. - Macroprudential Oversight — Selected recommendations and implementation status: - Clarify the powers, instruments and voting arrangements of the CCSRS. Priority: I. Implementation status: Finalized. The draft decree ... was adopted by the Government Council in September 2017. - Amend laws governing regulators for capital markets, and insurance and pensions to include financial stability objective. Priority: I/NT. Implementation status: In progress. Legal framework addressing overlap among various regulatory bodies being designed. Work in progress and expected to be finalized by 2022. - Implementation of Countercyclical Capital Buffers (CCB). Priority: NT. Implementation status: Introduced by the circular 1/W/16 (June 2016) on Credit Institutions Equity, published in the official bulletin on April 2018. Procedure for setting the level of CCB published in the Financial Stability Report 2016. Given the evolution of the financial cycle and the methodology adopted, the level of the CCB is set so far at 0%. It is calibrated regularly, and the results are presented to the financial stability committees. - Expand data coverage for the risk map. Priority: NT. Implementation status: Risk mapping reviewed in first semester 2017 and consist on six risk pillars. A new pillar dedicated to payment systems and market infrastructures was introduced. Work is underway to introduce emerging risks related to FinTech, cyber risk, and green finance. Data coverage extended: (i) sample to monitor non-financial firms indebtedness improved from 1684 to 72100 public and private non-financial enterprises; (ii) data for real estate risks: data to calculate LTV collected from Property registry Agency; (iii) sample to monitor Household sector improved from 182471 to 265084 borrowers. Ongoing work aims to set a dedicated survey. - Implementation of new specific macroprudential instruments: Capital overload for systemically important banks: methodology for D-SIB identification and capital surcharge put in place and approved in December 2017. LTV Cap: data required collected; IMF technical assistance in late April 2019. - Emergency Liquidity Assistance (ELA): - Separate BAM’s ELA function clearly from government solvency support. Priority: I. Implementation status: In progress. Amendment included in the Bank Al-Maghrib’s draft law expected to be approved in the April 2019 parliamentary session. - Strengthen BAM’s recapitalization process; review its profit distribution mechanism. Priority: NT. Implementation status: Agreed that BAM’s balance sheet needs to be strengthened. Alternative chosen: include a state guaranty scheme in case of solvency problem, included in draft BAM law. - Early Intervention/Bank Resolution Framework: - Define the objectives of banking resolution; incorporate “the least-cost principle”. Priority: III. Implementation status: In progress. Comprehensive overhaul of legal framework initiated; technical work estimated up to three years, approximately by end 2020. - Formalize the hierarchy of creditors’ claims; introduce bail-in powers. Priority: I/NT. (Status indicated I/NT) - Designate an explicit bank resolution authority; limit its legal liabilities in this mandate. Priority: I/NT. - Deposit Insurance: - Remove any type of open bank assistance via the deposit guarantee fund (DGF). Priority: NT. Implementation status: The deposit guarantee fund is introduced in the Banking law. The draft law on immovable assets adopted by the government council on March 14, 2019; this version does not include a priority to the DGF. Art 139 of the banking law mentions that in case of liquidation, the DGF has a priority of recovering the amounts given to banks through the Treasury. - Grant DGF a priority over uninsured depositors and general creditors. Priority: NT. - Financial Market Infrastructures: - Implement guarantee scheme and default handling procedures for securities transactions. Priority: I. Implementation status: In progress. A new legal framework (Loi sur le Marche a Terme) transmitted to Government’s General Secretariat in 2018; part of market supervision reform to create the compensation chamber and extend its scope. - Strengthen BAM’s oversight of the payment systems. Priority: NT. Implementation status: In progress. Mobile solution launched in November 2018. Payment system supervision covered in draft BAM law submitted to parliament. - Publish all policies applicable to FMIs and the disclosure framework of the SRBM. Priority: NT. - Securities Market Regulation and Oversight: - Apply consistent regulations and supervision to all participants in securities markets. Priority: NT. Implementation status: In progress as part of ongoing revision of the legal framework for capital markets. The Security Exchange Law (2017) includes provisions needing regulation. - Strengthen enforcement in sanctions and fines imposed on individuals. Priority: NT. Implementation status: The regulation on enforcement on sanctions and fines finalized in 2018. - Improve valuation of government securities and review valuation rules of mutual funds. Priority: NT. Implementation status: The yield curve is being revised; valuation rules to be introduced in a more comprehensive reform of mutual funds being finalized. - Financial Inclusion: - Establish a well-resourced governance and a robust monitoring and evaluation framework. Priority: I. Implementation status: The National Strategy for Financial Inclusion finalized by BAM and MoF was launched in April 2019 with the creation of the National Council for Financial Inclusion, headed by the Minister of Finance. - Improve credit bureau data quality; expand data providers to non-financial institutions. Priority: I/NT. Implementation status: In progress. Second credit bureau started operating in November 2017. New services introduced, including enterprise scoring and portfolio surveillance, and use of alternative data such as utility bill payment information. - Review blanket ceiling on lending rates. Priority: NT. Implementation status: Partially done. Micro-credit institutions have higher interest rate ceilings than the banking system (average interest rates are 18% while for banks are 15%), but they have still to better reflect level of risks and costs. At end 2018, micro-credit law modified to increase ceiling for credits to micro-enterprises from DH 50,000 a DH 150,000. ### Annex I — Implementation of Past Fund Advice (Selected findings) - Fiscal policy: - The deficit in 2018: 3.7 percent of the GDP. Deficit in 2017: 3.5 percent of the GDP. Budget objective: 3 percent of the GDP. - Exogenous factors cited: higher international butane price and grant shortfall. - Authorities remain committed to reducing public debt to 60 percent of GDP over the medium term. - Organic budget law provisions on limiting the carryover of investment appropriations entered into force in January 2018. Remaining provisions (triennial budget and programming, auditing of fiscal accounts) planned to be gradually implemented by 2020. - A comprehensive strategy to implement recommendations from the 2017 IMF/World Bank Public Investment Management Assessment (PIMA) has been put in place. The deconcentration charter adopted, and transparent criteria for transfer of public resources to regions. - Monetary and exchange rate policy: - BAM main policy interest rate: unchanged at 2.25 percent since March 2016. - Transition to greater exchange rate flexibility started January 2018: dirham fluctuation band widened to +/-2.5 percent (from 0.3 percent) on either side of a reference parity (euro/US dollar basket). - The central bank has not intervened in the foreign exchange market since March 2018. Banks' foreign exchange positions remain long. Exchange rate fluctuations have remained very limited so far. - Financial sector policies: - Progress upgrading financial policy framework, including implementing Basel III and FSAP recommendations. - Most regulations to implement the new banking law introduced, except crisis management and bank resolution frameworks. - Banks' loan classification and provisioning practices upgraded with adoption of IFRS 9 in January 2018. Its impact will be phased in over the next five years. - Bank supervision continues to be strengthened; cooperation with host-country and regional supervisory bodies noted. - New central bank law expected to be approved during April 2019 parliamentary session. - Structural reforms: - Continued progress to improve business climate and access to finance, but much remains to be done to raise productivity and potential GDP. - Reaching medium-term government objectives requires sustained reforms to facilitate job creation, improve education outcomes and vocational training, and reduce inequalities. ### Annex II — External Sector Assessment (Selected findings and projections) - Summary assessment: - Morocco’s external position in 2018 is assessed to be moderately weaker than implied by fundamentals and desirable policies. - Policy actions recommended to bolster buffers and resilience: resolve remaining fiscal imbalances, increased exchange rate flexibility, structural reforms to improve business climate and boost competitiveness. - Current account and exchange rate developments: - The current account deficit widened in 2018 after improving moderately in 2017. - Drivers: 2016 worsening due to higher imports of capital goods and lower export growth; 2017 improvement from import stabilization and strong tourism and remittances; 2018 widening due to trade balance deterioration from higher oil prices and imports, despite strong automobile and phosphate export performance. Tourism receipts and remittances underperformed in 2018. - Looking forward, the current account is expected to gradually improve, driven by strong export growth in phosphates and aeronautics and automotive sectors, moderate import growth, and sustained tourism receipts and remittances. These trends would offset the reduction in official grants expected in 2019–24. - Overall, the current account deficit is expected to decrease to 2.8 percent in the medium term. - Characteristics: large trade deficits, tourism-driven surplus in services, strong remittances. Trade deficit highly sensitive to Eurozone demand (2/3 of export market) and oil price. Share of oil imports as percent of GDP: 12.6 in 2012; 5.4 in 2016; 7.4 in 2018. Tourism receipts around 6½ percent of GDP. - REER and EBA assessment: - Since 2012, the REER has been appreciating moderately through 2018. - Based on IMF’s External Balance Assessment (EBA): - Current account (CA) methodology suggests a current account gap of -1.8 percent of GDP, corresponding to an over-valuation of the REER of 6 percent. - The CA gap consists of a policy gap of 1.5 percent of GDP, comprising: - fiscal gap of 0.6 percent of GDP - health spending gap of -0.3 percent of GDP - credit gap of 0.8 percent of GDP - reserve gap of -0.4 percent of GDP - capital control gap of 0.8 percent of GDP - The unexplained residual is -3.4 percent of GDP. - The complementary structural tool suggests worker-employer relations (correlated with lower employment protection and higher spending on active labor market policies) help to explain the residual; labor market rigidities, if addressed, would improve competitiveness and the current account. - The REER method suggests an undervaluation of 5.2 percent. Caveats: underlying series on the home bias variable is limited for Morocco, affecting robustness; when models conflict, the EBA current account model may be preferable. *Source: 1marea2019003 - 39.6 Ease of Doing Business (PDF chapter/section).* ### 5. An uptick in net FDI and private capital inflows strengthened the financial account in ### 5. An uptick in net FDI and private capital inflows strengthened the financial account in ### Financial account and FDI - Net FDI was 1.5 percent of GDP in 2016 and 2017, down from an average of 2.6 percent during 2011–15. - Net FDI is estimated to have strengthened to 2.5 percent of GDP in 2018. - Net FDI is expected to hover around 2 percent of GDP in the medium term, driven by ongoing and expected investments in the aeronautics, chemicals, and automobile sectors. - Government and corporates have been able to issue bonds in international markets at favorable rates, supported by an accommodative global financing environment. - The government expects three large sovereign bond issuances between 2019 and 2022. - Private portfolio investment and other inflows should continue to contribute to financing the current account deficit. - External debt is contained at about 30 percent of GDP in the medium term and its structure poses limited risks (see External Debt Sustainability Assessment). ### Reserves and reserve adequacy - Reserves are assessed as adequate based on a range of metrics. - Reserves are estimated to have decreased slightly in 2018 but account for 5.2 months of imports. - Reserves equal 87.2 percent of the standard reserve adequacy metric (compared to 92.3 percent in 2017). - Reserve coverage is expected to remain at about 87 percent of the standard reserve adequacy metric in 2019 and reach 100 percent (128 percent of the adjusted metric) by 2024. ### Net international investment position (NIIP) - Morocco’s NIIP weakened after an improvement in 2015; NIIP moved from about -61 percent of GDP in 2015 to -66.1 percent of GDP in 2017, and -65.4 percent of GDP in 2018, due mainly to FDI and other investment. - EBA external sustainability approach results (as of April 3, 2019): - Projected current account is stronger than the level required to stabilize the IIP, suggesting an REER undervaluation of 4.5 percent. - A current account deficit of 4.2 percent of GDP would stabilize the NIIP at -65.4 percent of GDP. - To maintain the NIIP at its 10-year average of about -50 percent of GDP, a current account deficit of 3.2 percent of GDP is required, suggesting an REER undervaluation of 1.3 percent. - The ES approach provides useful insights but does not provide information on specific policy gaps to bring the actual current account or REER closer to normative values. ### External competitiveness - Morocco’s external competitiveness could improve further; labor rigidities and low cooperation between employers and employees raise labor costs for a given level of wages, lowering competitiveness. - Morocco ranks 71st out of 137 countries in the 2017–18 World Economic Forum’s Global Competitiveness Index, with low scores in labor market efficiency, higher education and training, and innovation. - On the 2019 World Bank’s Ease of Doing Business Indicators, Morocco ranks 60th (improved from 69 in 2018) but performs poorly on getting credit, resolving insolvency, enforcing contracts, and registering property. ### Public Debt Sustainability Analysis (DSA) — key findings and projections - Public debt remains sustainable; gross public debt was about 64.9 percent of GDP at end-2018. - DSA shows debt is resilient to various shocks; vulnerabilities linked to level and profile of debt are mostly moderate. - Gross financing needs exceeded benchmark of 15 percent of GDP in 2014 but declined under that benchmark in 2015 and are expected to continue declining over the medium term. - A small revision to real GDP growth projections for 2018–24 has not affected the debt-to-GDP ratio significantly. - Higher fiscal deficits in 2018–19 (due to elevated international butane prices and lower grant revenues) and increased social spending have slightly moved the public debt path upward. - Authorities plan to reduce and stabilize the fiscal deficit around 3 percent of GDP after 2020; reduction of public debt to 60 percent of GDP over the medium term would be achieved mostly through improved growth dynamics, with a portion of privatization proceeds used to lower government financing needs. - Short-term debt is about 12.3 percent of total at end-2017 and is on a downward path. - The investment base is mostly local investors, many of whom are long-term investors, which mitigates rollover risks. ### DSA baseline projections and underlying assumptions (selected figures) - Nominal gross public debt: 56.1 (2017), 65.1 (2018), 64.9 (2019), 65.1 (2020), 64.5 (2021), 63.1 (2022), 62.0 (2023), 60.9 (2024), 60.0 (projection endpoint). - Public gross financing needs: 14.4 (2017), 7.2 (2018), 12.1 (2019), 9.4 (2020), 10.7 (2021), 10.2 (2022), 9.0 (2023), 8.2 (2024), 7.6 (projection endpoint). - Real GDP growth (in percent): 3.9 (2017), 4.1 (2018), 3.0 (2019), 3.0 (2020), 3.8 (2021), 4.1 (2022), 4.3 (2023), 4.4 (2024), 4.5 (projection endpoint). - Inflation (GDP deflator, in percent): 1.2 (2017), 0.7 (2018), 1.8 (2019), 0.7 (2020), 1.0 (2021), 1.8 (2022), 1.8 (2023), 1.7 (2024), 1.7 (projection endpoint). - Nominal GDP growth (in percent): 5.1 (2017), 4.9 (2018), 4.7 (2019), 3.8 (2020), 4.9 (2021), 6.0 (2022), 6.1 (2023), 6.2 (2024), 6.3 (projection endpoint). - Effective interest rate (in percent): 4.9 (2017), 4.1 (2018), 3.9 (2019), 4.0 (2020), 3.9 (2021), 3.7 (2022), 3.6 (2023), 3.6 (2024), 3.6 (projection endpoint). - Change in gross public sector debt (cumulative projection): 1.5 (2017), 0.3 (2018), -0.2 (2019), 0.2 (2020), -0.6 (2021), -1.4 (2022), -1.1 (2023), -1.1 (2024), -0.9 (projection endpoint), cumulative -4.9. - Identified debt-creating flows (cumulative): 1.9 (2017), -0.5 (2018), 1.1 (2019), 0.9 (2020), -0.1 (2021), -1.0 (2022), -0.9 (2023), -0.8 (2024), -0.6 (projection endpoint), cumulative -2.4. - Primary deficit (in percent of GDP): 1.7 (2017), 0.9 (2018), 1.3 (2019), 1.3 (2020), 0.9 (2021), 0.8 (2022), 0.9 (2023), 0.9 (2024), 1.0 (projection endpoint), cumulative 5.7. - Primary (noninterest) revenues: 27.8 (2017), 26.6 (2018), 26.0 (2019), 26.2 (2020), 26.2 (2021), 26.3 (2022), 26.5 (2023), 26.7 (2024), 26.9 (projection endpoint), cumulative 158.7. - Primary (noninterest) expenditures: 29.5 (2017), 27.5 (2018), 27.3 (2019), 27.4 (2020), 27.2 (2021), 27.0 (2022), 27.4 (2023), 27.6 (2024), 27.9 (projection endpoint), cumulative 164.4. - Automatic debt dynamics contribution (cumulative): 0.3 (2017), -1.5 (2018), -0.2 (2019), 0.1 (2020), -0.6 (2021), -1.4 (2022), -1.5 (2023), -1.5 (2024), -1.5 (projection endpoint), cumulative -6.5. - Real interest rate contribution (of which): 1.9 (2017), 2.1 (2018), 1.3 (2019), 2.0 (2020), 1.8 (2021), 1.1 (2022), 1.0 (2023), 1.1 (2024), 1.0 (projection endpoint), cumulative 8.0. - Real GDP growth contribution (of which): -2.0 (2017), -2.5 (2018), -1.8 (2019), -1.9 (2020), -2.4 (2021), -2.5 (2022), -2.5 (2023), -2.6 (2024), -2.6 (projection endpoint), cumulative -14.5. - Residual, including asset changes (cumulative): -0.4 (2017), 0.8 (2018), -1.3 (2019), -0.8 (2020), -0.6 (2021), -0.4 (2022), -0.3 (2023), -0.3 (2024), -0.3 (projection endpoint), cumulative -2.6. ### DSA scenarios and stress tests (selected outcomes) - Alternative scenarios include Baseline, Historical, Constant Primary Balance, and stress tests for Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, and Adverse Scenario. - Example scenario assumptions: - Baseline real GDP growth path (2019–2024): 3.0, 3.8, 4.1, 4.3, 4.4, 4.5. - Historical scenario real GDP growth path (2019–2024): 3.0, 3.6, 3.6, 3.6, 3.6, 3.6. - Constant Primary Balance scenario: Primary Balance held at -1.3 (2019–2024). - Stress test examples: - Real GDP Growth Shock path (2019–2024): 3.0, 2.6, 2.9, 4.3, 4.4, 4.5. - Adverse Scenario real GDP growth path (2019–2024): 3.0, 2.2, 2.5, 2.6, 2.8, 2.9. - Under most shocks the debt level remains below the debt burden benchmark of 70 percent of GDP for emerging markets, except in cases of shocks to real GDP growth or to the primary balance where it slightly approaches the benchmark. *Source: IMF staff (as presented in the content unit).* ### Annex IV. External Debt Sustainability Analysis (DSA) ### Annex IV. External Debt Sustainability Analysis (DSA) ### Medium-term outlook and baseline - External debt-to-GDP: - 2017: 34.5 percent of GDP. - Projected to gradually decline to about 28 percent of GDP in 2024. - Drivers of baseline decline: - Expected improvements in the current account. - Robust GDP growth. ### Shock scenarios and bound tests - Exchange rate shock: - A 30 percent exchange rate depreciation (one-time real depreciation of 30 percent occurs in 2018) would raise the external debt-to-GDP ratio to about 45 percent. - Current account (CA) shock: - A shock to the current account would raise the external debt-to-GDP ratio to about 35 percent. - Other scenario notes: - Individual shocks are permanent one-half standard deviation shocks. - Combined shocks and historical scenario projections are used to illustrate debt dynamics. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance in combined tests. ### Key statistics from the External Debt Sustainability Framework, 2014–24 (percent of GDP unless otherwise indicated) - External debt (line 1): - 2014: 31.0 - 2015: 33.4 - 2016: 33.7 - 2017: 34.5 - 2018: 31.1 - 2019: 32.7 - 2020: 31.9 - 2021: 30.8 - 2022: 30.0 - 2023: 29.1 - 2024: 28.2 - Change in external debt (line 2): - 2014: 0.7 - 2015: 2.4 - 2016: 0.3 - 2017: 0.8 - 2018: -3.4 - 2019: 1.6 - 2020: -0.7 - 2021: -1.1 - 2022: -0.9 - 2023: -0.9 - 2024: -0.9 - Identified external debt-creating flows (line 3): - 2014: -0.6 - 2015: 1.0 - 2016: 2.1 - 2017: 0.2 - 2018: 2.7 - 2019: 0.3 - 2020: 0.2 - 2021: -0.3 - 2022: -0.6 - 2023: -0.7 - 2024: -0.8 - Current account deficit, excluding interest payments (line 4): - 2014: 5.0 - 2015: 1.2 - 2016: 3.1 - 2017: 2.5 - 2018: 4.6 - 2019: 3.2 - 2020: 2.6 - 2021: 2.2 - 2022: 2.1 - 2023: 2.0 - 2024: 2.0 - Deficit in balance of goods and services (line 5): - 2014: 12.3 - 2015: 7.8 - 2016: 10.4 - 2017: 9.6 - 2018: 10.3 - 2019: 9.1 - 2020: 8.5 - 2021: 7.9 - 2022: 7.7 - 2023: 7.5 - 2024: 7.4 - Exports (line 6): - 2014: 32.5 - 2015: 32.9 - 2016: 33.3 - 2017: 35.3 - 2018: 36.4 - 2019: 37.7 - 2020: 38.2 - 2021: 38.5 - 2022: 38.5 - 2023: 38.6 - 2024: 38.3 - Imports (line 7): - 2014: 44.8 - 2015: 40.7 - 2016: 43.7 - 2017: 45.0 - 2018: 46.7 - 2019: 46.8 - 2020: 46.7 - 2021: 46.3 - 2022: 46.2 - 2023: 46.1 - 2024: 45.7 - Net non-debt creating capital inflows (negative, line 8): - 2014: -5.6 - 2015: -3.9 - 2016: -1.2 - 2017: -1.4 - 2018: -1.8 - 2019: -2.7 - 2020: -2.1 - 2021: -2.1 - 2022: -2.2 - 2023: -2.2 - 2024: -2.3 - Automatic debt dynamics (line 9): - 2014: 0.0 - 2015: 3.7 - 2016: 0.3 - 2017: -0.9 - 2018: -0.1 - 2019: -0.1 - 2020: -0.3 - 2021: -0.4 - 2022: -0.4 - 2023: -0.4 - 2024: -0.5 - Contribution from nominal interest rate (line 10): - 2014: 0.9 - 2015: 1.0 - 2016: 1.0 - 2017: 0.9 - 2018: 0.8 - 2019: 0.8 - 2020: 0.9 - 2021: 0.8 - 2022: 0.8 - 2023: 0.8 - 2024: 0.7 - Contribution from real GDP growth (line 11): - 2014: -0.8 - 2015: -1.5 - 2016: -0.4 - 2017: -1.3 - 2018: -0.9 - 2019: -0.9 - 2020: -1.2 - 2021: -1.2 - 2022: -1.2 - 2023: -1.2 - 2024: -1.2 - Residual, including change in gross foreign assets (line 13): - 2014: 1.3 - 2015: 1.4 - 2016: -1.8 - 2017: 0.6 - 2018: -6.0 - 2019: 1.3 - 2020: -1.0 - 2021: -0.8 - 2022: -0.3 - 2023: -0.2 - 2024: -0.1 - External debt-to-exports ratio (in percent): - 2014: 95.3 - 2015: 101.5 - 2016: 101.2 - 2017: 97.6 - 2018: 85.6 - 2019: 86.7 - 2020: 83.5 - 2021: 80.2 - 2022: 77.8 - 2023: 75.4 - 2024: 73.6 - Gross external financing need (in billions of US dollars, line 5/): - 2014: 8.5 - 2015: 3.9 - 2016: 6.4 - 2017: 5.8 - 2018: 8.7 - 2019: 7.1 - 2020: 6.8 - 2021: 6.5 - 2022: 6.4 - 2023: 6.5 - 2024: 6.8 - Gross external financing need (percent of GDP): - 2014: 7.7 - 2015: 3.9 - 2016: 6.2 - 2017: 5.3 - 2018: 7.3 - 2019: 5.9 - 2020: 5.3 - 2021: 4.8 - 2022: 4.4 - 2023: 4.2 - 2024: 4.1 - Scenario with key variables at their historical averages (selected projected levels of external debt-to-GDP): - 33.9, 35.4, 37.1, 39.4, 41.8, 44.3 (presented as a sequence in the table) ### Key macroeconomic assumptions underlying the baseline - Real GDP growth (percent): - 2014: 2.7 - 2015: 4.5 - 2016: 1.1 - 2017: 4.1 - 2018: 3.0 - 2019: 3.0 - 2020: 3.8 - 2021: 4.1 - 2022: 4.3 - 2023: 4.4 - 2024: 4.5 - GDP deflator in US dollars (change in percent): - 2014: 0.4 - 2015: -12.1 - 2016: 1.0 - 2017: 1.6 - 2018: 5.4 - 2019: -1.2 - 2020: 1.6 - 2021: 2.1 - 2022: 2.2 - 2023: 2.1 - 2024: 2.1 - Nominal external interest rate (percent): - 2014: 3.0 - 2015: 2.9 - 2016: 2.9 - 2017: 2.9 - 2018: 2.6 - 2019: 2.7 - 2020: 2.8 - 2021: 2.7 - 2022: 2.8 - 2023: 2.8 - 2024: 2.7 - Growth of exports (US dollar terms, percent): - 2014: 7.4 - 2015: -7.0 - 2016: 3.3 - 2017: 12.7 - 2018: 11.2 - 2019: 5.4 - 2020: 7.1 - 2021: 7.0 - 2022: 6.7 - 2023: 6.7 - 2024: 6.0 - Growth of imports (US dollar terms, percent): - 2014: 1.0 - 2015: -16.5 - 2016: 9.5 - 2017: 9.3 - 2018: 12.2 - 2019: 2.0 - 2020: 5.4 - 2021: 5.4 - 2022: 6.3 - 2023: 6.2 - 2024: 5.8 - Current account balance, excluding interest payments (percent of GDP) (repeated): - 2014: -5.0 - 2015: -1.2 - 2016: -3.1 - 2017: -2.5 - 2018: -4.6 - 2019: -3.2 - 2020: -2.6 - 2021: -2.2 - 2022: -2.1 - 2023: -2.0 - 2024: -2.0 - Net non-debt creating capital inflows (percent of GDP): - 2014: 5.6 - 2015: 3.9 - 2016: 1.2 - 2017: 1.4 - 2018: 1.8 - 2019: 2.7 - 2020: 2.1 - 2021: 2.1 - 2022: 2.2 - 2023: 2.2 - 2024: 2.3 *Sources: IMF country desk data; and IMF staff estimates.* --- ### Annex V. Financial Development and Inclusion in Morocco ### Overall assessment - Morocco has a high level of financial development and a comparatively deep financial system. - Measured by the Financial Development index, Morocco’s level is close to the emerging market average. - Banking system: - Relatively well capitalized and sophisticated. - Several large banks expanding across SSA. - Credit to GDP: 61 percent of GDP (noted as ahead of MENAP and EMDE averages, but below upper middle-income economies at 116 percent). ### Financial inclusion gaps and indicators - SME and firm finance: - Share of bank lending to SMEs: about 17 percent. - Increasing share of Moroccan firms have a line of credit (52 percent in 2013 against 33 percent in 2007). - Only 6 percent of micro-enterprises have access to bank financing. - Micro-credit represents only 0.6 percent of GDP. - Estimated finance gap for MSME is larger than in peer economies. - Indicates credit concentration toward large and medium enterprises, including SOEs. - Household financial inclusion: - Share of adults (aged 15+) with accounts in financial institutions: 29 percent (against 51 percent in peer countries). - Gender gap: 17 percent of women have a bank account versus 41 percent of men. - Rural access: 20 percent of the rural population has a bank account compared to 29 percent for the whole country. - Digital financial services uptake: - Mobile money account ownership (adults age 15+): 1 percent in Morocco (compared to 5 percent in MENAP and 14 percent in EMDEs). - Payments in cash: 90 percent in Morocco (compared to 40 percent worldwide). - Utility bills are mostly paid in cash in Morocco; about one third of remittances is received or paid in cash. ### Supply and demand factors constraining inclusion - Demand-side constraints: - Insufficient funds cited as main reason for not having an account: 52 percent of survey respondents. - Large informal economy: 11 percent of GDP and around 2 million units. - Lack of proper accounting systems and credit information. - Supply-side constraints: - Bank density in rural areas remains low with 65 percent of rural population without close access points. - Credit bureau coverage is much lower than in similar economies despite introduction of two credit bureaus. ### Government initiatives and regulatory changes - Measures to increase credit to SMEs: - Public guarantees extended for bank loans to MSMEs (of up to USD100,000) through the Caisse Centrale de Garantie. - Central bank refinancing facility for banks’ lending to MSMEs (since 2013). - Increase of micro-loan ceiling from USD5,000 to USD15,000. - Recently-approved law extending the array of assets that can be pledged as collateral, including moveable assets. - Bankruptcy law approved in April 2018 expected to have a positive role. - National Strategy for Financial Inclusion (SNIF) launched in early 2019 — main objectives and measures: - Expand mobile payments. - Boost micro finance through increased credit ceilings and relaxed interest rate caps. - Encourage bank penetration, including through postal agencies and more flexible regulatory requirements for underserved segments (e.g., in rural areas). - Support development of new credit scoring systems (e.g., big data analytics based on utility bill payments). - Accelerate digital payment systems. - Promote financial literacy. *Prepared by Lorraine Ocampos; sources include national authorities, IMF staff, World Bank, IFC, and IMF staff papers as cited in the original annex.* ### 7. The SNIF is a welcome initiative that should help reduce Morocco’s financial inclusion ### 7. The SNIF is a welcome initiative that should help reduce Morocco’s financial inclusion gap vis-à-vis peer countries. ### SNIF overview and objectives - The Stratégie Nationale d’Inclusion Financière (SNIF) is described as appropriately comprehensive, building on international best practice, and associated with clear objectives and specific action plans. - The strategy aims to reduce Morocco’s financial inclusion gap vis-à-vis peer countries. - Bank Al-Maghrib, Ministère de l’Economie et des Finances. 2018. « Stratégie Nationale d’Inclusion Financière (SNIF)». Note de Synthèse. (as referenced in the source text) ### Fintech and payments infrastructure - The SNIF’s fintech component will benefit from an effective payments infrastructure to: - increase competition; and - diversify financing sources in the economy. ### Financial literacy and informality - Given the importance of informality in the economy, the SNIF’s financial literacy component is highlighted as particularly important. ### Targeted measures and recent related reforms - Specific measures adopted or noted in the broader report that support financial inclusion objectives: - recent increase in the cap on microcredit, noted as being in line with staff advice, to help develop the microfinance system further; - a reform of the law on cooperatives (adopted last November) aimed at easing procedures for cooperative creation, while enhancing governance and oversight; - a Small Business Act under preparation to address constraints facing SMEs; - the credit guarantee scheme to be revamped by: - reducing the number of windows from 12 to 2; - expanding coverage to all SMEs; and - incentivizing good governance. ### Contextual indicators and references to access to credit - Credit Bureau Coverage, 2018 (% of Adults) — as presented in the source (figure labels preserved): - Morocco, Kenya, India, Thailand, Greece, Colombia, Brazil, Peru, Uruguay - Year label shown: 2014 (as in the figure) ### Implementation and expected benefits - The SNIF is expected to: - address significant gaps in access to financial services; - include specific targeting for SMEs, the youth, women, and the rural population; - support diversification of financing and increased competition through fintech and payments improvements; - complement reforms to secured transactions law, cooperative law, and microcredit policy to improve credit availability, reduce NPLs, and increase bank willingness to lend, particularly to SMEs. *Source: STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (excerpts on SNIF and related financial inclusion measures).* ### Conclusion ### Conclusion ### Reform progress - The authorities have significantly accelerated the pace of structural reform over the last two years. ### Commitments and priorities - They remain firmly committed to maintaining macroeconomic and financial stability and strengthening resilience. ### Partnerships and support - They look forward to continued support from their partners, including in the 5 context of Fund valuable advice and technical assistance and the PLL arrangement, and are grateful for their support. *Source: 1marea2019003 - Conclusion* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1marea2019003.pdf_