## EXECUTIVE SUMMARY (1marea2019005)

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---

### Context and near-term challenges
- Despite a challenging external environment, improved fiscal management and economic diversification have strengthened the resilience of Morocco’s economy in recent years.
- Growth and labor market:
  - Economic growth was 3 percent in 2018.
  - Early estimates: growth slowed to 2.3 percent in Q1 2019 (against 3.3 percent over the same period last year).
  - Unemployment was 10 percent in Q1 2019 (from 10.5 percent in Q1 2018), with youth and graduate unemployment about 24.1 percent and 17.1 percent, respectively.
- Key priority reforms to achieve higher, more inclusive, and more private sector-led growth:
  - Improving the quality of education.
  - Improving the functioning of the labor market and the business environment.
  - Continuing the fight against corruption.
  - Increasing female labor force participation.
- Elevated external risks include fragile recovery in the euro area and geopolitical risks in the region.

### PLL arrangement and qualification
- A two-year precautionary and liquidity line (PLL) arrangement was approved in December 2018 in the amount of SDR 2.15 billion (or 240 percent of quota), equivalent to about US$3 billion.
- Staff assessment and recommendation:
  - Morocco continues to meet the PLL qualification criteria and staff recommends completion of the first review of the PLL arrangement.
  - Morocco performs strongly in three out of the five PLL qualification areas: monetary, financial, and data.
  - Morocco does not substantially underperform in fiscal policy, and external position and market access.
  - The authorities do not face any of the circumstances under which the Fund might no longer approve a PLL arrangement.
- Program use and targets:
  - The authorities have not drawn on the arrangement and continue to treat it as precautionary.
  - The end-March 2019 quantitative indicative targets (IT) for the fiscal deficit and net international reserves (NIR) were met.

### Recent macroeconomic developments and program performance
- Macroeconomic resilience and reforms:
  - Authorities implemented difficult reforms: pensions, energy subsidies, fiscal framework, business environment, and financial sector.
  - Transition to greater exchange rate flexibility was initiated in January 2018.
- Activity composition and trends:
  - In 2018 weaker growth reflected lower agricultural growth despite a second consecutive year of good cereal harvest; non-agricultural growth modest due to slow tertiary sector growth.
  - Private consumption remains the main driver of growth.
  - Private investment recovered gradually after a decline from 30.7 percent of GDP in 2008 to 22.8 percent of GDP in 2015.
- Fiscal developments:
  - Fiscal consolidation slowed in 2018 but developments through April 2019 were positive.
  - End-March 2019 Indicative Target met: deficit of 0.1 percent of GDP against an indicative target of 0.8 percent.
  - End-April 2019 preliminary fiscal deficit: 1.2 percent of GDP (against 1.4 percent of GDP in the same period last year).
  - Cyclically-adjusted primary deficit (excluding grants) remains neutral.
  - Public debt decreased slightly to 64.9 percent of GDP at end-2018.
- Monetary and financial conditions:
  - Headline inflation declined 0.1 percent y-o-y in March 2019; core inflation was 0.9 percent.
  - Bank-Al-Maghrib (BAM) policy rate unchanged at 2.25 percent since March 2016.
  - Bank credit growth increased to 5.1 percent y-o-y in March 2019.
  - Real estate prices are stable.
- External sector and reserves:
  - Current account deficit widened to 5.4 percent of GDP in 2018 (against 3.4 percent in 2017).
  - Net FDI increased to 2.5 percent of GDP in 2018 (due in part to one very large transaction).
  - International reserves dropped by US$1.7 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.
  - Q1 2019 preliminary data: some improvement in trade deficit but remittances and tourism receipts declined by 5.7 percent and 3.5 percent y-o-y, respectively; net FDI declined 47.2 percent y-o-y.
  - Exchange rate fluctuations limited since January 2018 after widening of the dirham fluctuation band to +/-2.5 percent (from 0.3 percent) on either side of a reference parity; BAM has not intervened in the foreign exchange market since March 2018.
- Banking sector soundness and risks:
  - Banks' regulatory capital ratio increased to 14.7 percent as of December-2018.
  - NPL ratios remain at 7.7 percent with provisioning about 70 percent.
  - IFRS9 implemented in January 2018, with a five-year transition for capital adjustments.
  - Risks: credit concentration, NPL levels, and 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).

### Policy priorities and recommended reforms
- Fiscal policy framework:
  - Medium-term objective: reduce public debt to 60 percent of GDP by 2024 (64.9 percent in 2018) and increase fiscal buffers.
  - Required measures:
    - Accelerate tax reforms from the May 2019 national tax conference, including broadening the tax base (e.g., reduced tax exemptions and fight against fiscal fraud).
    - Improve efficiency and quality of public investment and services via comprehensive civil service reform, strengthened financial oversight of state-owned enterprises (SOEs), implementation of PIMA recommendations, and sound public financial management at the local level as part of fiscal decentralization.
- Financial sector policy framework:
  - Continue upgrading in line with 2015 FSAP recommendations: increase supervisory capacity, improve BAM’s stress-testing and macroprudential framework with Fund technical assistance.
  - Address weaknesses in AML/CFT framework identified by MENAFATF.
  - Draft central bank law submitted to parliament to strengthen central bank independence and clarify role for financial stability; further amendments needed per January 2019 safeguards assessment regarding BAM’s autonomy and governance.
- Exchange rate regime:
  - Greater exchange rate flexibility seen as beneficial to preserve reserve buffers and competitiveness; preparations completed and conditions supportive of a gradual, orderly transition.
  - Authorities await an opportune moment and plan a well-structured communication strategy to ensure SMEs and others manage foreign exchange risks.
  - Relaxation of remaining restrictions on capital outflows by residents to be gradual and at a later stage.
- Structural reforms to boost growth and inclusion:
  - Business environment: reactivation of the Competition Council, efforts to limit public sector payment delays, and support private sector development.
  - Financial inclusion: comprehensive strategy launched; strengthen collateral framework to improve SME access to finance.
  - Labor market and social policy: improve quality of education, labor market functioning, reduce inequalities and middle-class vulnerabilities through better targeted social programs, and finalize measures under the 2015 national strategy for employment.
  - Governance: continue implementation of the national strategy against corruption.

### Outlook and risks (projections and scenarios)
- Baseline projections under sustained reform implementation:
  - Growth: expected to remain at 3 percent in 2019 and reach 4.5 percent over the medium term.
  - Inflation: projected to slow to 0.6 percent in 2019 and stabilize around 2 percent over the medium term.
  - Fiscal deficit: projected at 3.7 percent of GDP in 2019, with privatization receipts reducing public financing needs to 3.3 percent of GDP; deficit expected to decline and stabilize around 3 percent of GDP after 2020.
  - Public debt: projected to be reduced to 60 percent of GDP over the medium term (from 64.9 percent in 2018) with expected privatization revenues.
  - Current account deficit: expected to decline to 4 percent of GDP in 2019 and 2.8 percent of GDP over the medium term.
  - Foreign direct investment: expected to remain stable at about 2 percent of GDP.
  - Other private flows: expected to hover around 2 percent of GDP.
  - International reserves: expected to reach 100 percent of the ARA metric in the medium term (about 128 percent of the ARA metric adjusted for capital controls).
- Balance of risks (tilted to the downside):
  - Domestic risks: delays in fiscal and structural reforms could reduce fiscal space, increase social tensions, and adversely affect tourism receipts, FDI inflows, and potential growth.
  - External risks: higher oil prices, weaker euro area growth, geopolitical risks, and more volatile global financial conditions could slow activity via lower exports, tourism, FDI, remittances, higher borrowing costs, and weaker investor confidence.
  - Upside factors: lower international oil (and butane gas) prices and increased regional integration in the Maghreb could enhance resilience and medium-term growth.

*Source: 1marea2019005 - EXECUTIVE SUMMARY*

---

### Box 1. External Economic Stress Index

### Purpose and construction
- Indicator of the evolution of the external environment faced by Morocco; mandated for FCL and PLL countries since June 2014.
- Based on: (i) key external risks facing Morocco; (ii) selection of proxy variables capturing these risks; (iii) choice of weights applied to each variable.
- Model first developed at the time of the 2012 PLL arrangement request.

### Risks (from February 2019 G-RAM)
- (i) Weaker than expected global growth, particularly in Europe and Morocco’s main trading partners.
- (ii) Intensification of security risks in parts of the Middle East, Africa, and Europe.
- (iii) Tighter global financial conditions.
- (iv) Large swings in oil prices.

### Proxy variables and weights
- Euro area growth captures lower exports, remittances, FDI, and tourism (weight: 0.580).
- VXEEM (emerging markets volatility index) captures global financial volatility effects (weight: 0.095).
- Change in oil price captures higher oil import costs (weight: 0.324).
- The three weights were set at the PLL request stage, in December 2018.

### Scenarios and assessment
- Baseline: uses April 2019 WEO projections for euro area growth and oil prices and VXEEM futures at end-March 2019; result—external economic stress virtually unchanged relative to December 2018.
- Downside scenario (broadly staff’s adverse scenario): euro area growth 0.5pp lower than baseline; US$10 increase in oil prices; increase in VXEEM by two standard deviations; result—external economic stress broadly comparable to December 2018.
- Overall assessment: external pressures abated between 2012–16 but increased more recently; model omits a geopolitical risk proxy, which suggests a relatively heightened stress index at present.

*Source: Box 1. External Economic Stress Index (1marea2019005).*

---

### Safeguards assessment, governance, and staff appraisal

### Safeguards assessment and governance
- The 2019 safeguards assessment found that BAM continues to maintain strong operational controls in key areas, but a few improvements are needed to fully meet international best practice.
- Internal and external audit mechanisms, internal controls, and the related Audit Committee oversight remain robust.
- Authorities are considering staff’s recommendations, including:
  - further amendments to strengthen the central bank law in the areas of autonomy and governance, and
  - that BAM transition to IFRS.

### Exit strategy and macroeconomic outlook
- By end of the arrangement (baseline projections):
  - primary fiscal deficit would fall below the debt-stabilizing balance, and public debt would be on a downward path.
  - current account deficit would be close to what would be expected for an emerging market country like Morocco.
  - reserves would be just above 87 percent of the ARA metric, or 114 percent of the adjusted metric.
- Authorities should communicate their exit strategy considering changes in external risks, strengthening of economic resilience and policy space, reform achievements and commitments, including the exchange rate transition.
- Authorities agreed but stressed the importance of the PLL arrangement in supporting public confidence.

### Staff appraisal: assessment of developments and reforms
- The PLL arrangement is serving Morocco well and remains on track.
- Macroeconomic vulnerabilities have been reduced and the end-March 2019 indicative targets were met.
- Fiscal and public sector reforms will enhance resilience and efficiency of public investment and services:
  - Fiscal sustainability to benefit from comprehensive tax reform following May 2019 national tax conference.
  - Improving efficiency requires overhauling public sector governance, modernizing civil service, careful fiscal decentralization, and strengthening SOE project implementation and risk management.
- Exchange rate transition conditions remain supportive; reform will allow modernization of monetary policy toward eventual inflation targeting.
- Sustained structural reform implementation is essential to achieve higher growth and reduce unemployment:
  - Recent acceleration in business environment and financial inclusion reforms supports shift to private sector-led growth.
  - Needed reforms: education quality, labor market functioning, female labor force participation, targeting of social programs.
  - Continuing to implement 2015 FSAP recommendations will strengthen financial sector policy framework.

### PLL qualification and institutional assessment
- Morocco continues to meet PLL qualification criteria.
- Morocco performs strongly in: financial sector and supervision; monetary policy; data adequacy.
- Morocco does not substantially underperform in: external position and market access; fiscal policy.

*Source: IMF staff report (1marea2019005).*

---

### Real, fiscal, financial, external, and structural developments (detailed data & projections)

### Real sector and labor market (2009–19)
- Non-agricultural growth pick-up in 2018 expected to continue in 2019.
- Unemployment has declined slightly since 2017 but remains high for youth and women.
- Demand composition: private consumption and investment remain main growth drivers.
- High-frequency indicators: strong tourism activity; subdued construction activity.
- Inflation remained low despite volatile food prices.

### Fiscal developments (2009–18)
- Fiscal consolidation slowed in 2018; cyclically and structural balances slowly improving.
- Revenues lower than expected in 2018 due to subdued corporate tax revenues and grants.
- Public debt sustainable and projected to decline gradually.

### Financial developments (2009–19)
- Banks remain profitable; capitalization stable.
- NPLs remain relatively high for private businesses and household loans; provisioning relatively high (~70 percent).
- Private credit growth increased to 5.1 percent y-o-y in March 2019; household lending driving credit growth.
- Lending rates decreased slightly since 2018.

### External developments (2009–18)
- Export growth driven by emerging manufacturing sectors; imports of energy, capital goods, raw materials increased.
- Trade deficit increasing since 2016, weakening current account.
- FDI and private borrowing key to financing current account deficit in 2018.
- Reserves coverage expected to improve in medium term; REER appreciated in 2018.

### Structural reforms
- Morocco fares relatively well on business climate and competitiveness.
- Recent reforms: new bankruptcy law, streamlined administrative procedures.
- Limited progress on education system and labor market functioning; priority actions:
  - increase years of schooling, teacher training, vocational training.
  - strengthen labor market policies and reduce regulatory rigidities.
  - facilitate SME access to finance.

### Selected economic indicators (Table 1 excerpts, 2015–24)
- Real GDP (Annual percentage change): 2015: 4.5; 2016: 1.1; 2017: 4.1; 2018: 3.0; 2019 (Proj.): 3.3; 2020: 3.0; 2021: 3.8; 2022: 4.1; 2023: 4.3; 2024: 4.4.
- Consumer prices (end of period): 2015: 0.6; 2016: 1.8; 2017: 1.9; 2018: 0.1; 2019 (Proj.): 1.4; 2020: 0.6; 2021: 1.1; 2022–2024: 2.0.
- Gross capital formation (Percent of GDP): 2018: 33.2; 2019 (Proj.): 36.9; 2024: 35.6; 2025: 35.9.
- Public finances: Budget balance 2018: -3.7 percent of GDP; 2019 (Proj.): -3.7 percent of GDP; Total government debt 2018: 64.9; 2019 (Proj.): 65.2; projected decline to 60.0 by 2024.
- Gross reserves (US$ billions): 2018: 24.4; 2019 (Proj.): 26.8; projection to 39.9 by 2024.
- Oil price (Brent, US$/barrel): 2018: 71.1; 2019 (Proj.): 72.3; 2020: 61.8; 2021 onward: ~60–61.

### Monetary and reserve indicators (Table 4 excerpts, 2015–19)
- Net International Reserves (Billions of dirhams): 2015: 222.1; 2016: 249.2; 2017: 240.9; 2018: 230.7; 2019: 241.2.
- Gross reserves (Billions of dirhams): 2015: 225.4; 2016: 253.5; 2017: 244.3; 2018: 233.7; 2019: 247.2.
- Broad money (Billions of dirhams): 2015: 1,148.0; 2016: 1,202.4; 2017: 1,269.1; 2018: 1,320.6; 2019: 1,373.4.

### Financial soundness indicators (Table 5 excerpts, 2015–18)
- Regulatory capital to risk-weighted assets: 2018 Jun: 14.7.
- Non-performing Loans (NPLs) to total loans: 2018 Dec: 6.8.
- Specific provisions to NPLs: 2018 Dec: 69.1.
- Return on assets (ROA) and return on equity (ROE): ROA ~0.8–1.1; ROE ~9.1–11.7.

### Capacity to repay (Table 6 excerpts, 2018–25)
- GRA credit to Morocco (SDR million): 2019: 2,150.8; 2020: 2,150.8; 2021: 2,150.8; 2022: 1,838.1; 2023: 762.7; 2024–2025: 0.0.
- In percent of quota: 2019: 240.5; 2020: 240.5; 2021: 240.5; 2022: 205.5; 2023: 85.3; 2024–2025: 0.0.
- Total external debt (Percent of GDP): 2018: 31.1; 2019: 35.2; projected decline to 27.3 by 2025.
- Gross international reserves (US$ billions) memorandum: 2018: 24.4; 2019: 26.0; 2024: 40.1; 2025: 44.1.
- Note: Authorities intend to treat the PLL as precautionary; full drawing scenario presented in the table.

*Source: IMF staff report and tables (1marea2019005).*

---

### Appendix I — Written Communication (highlights)

### Program objectives and stance
- Morocco’s economic fundamentals described as "strong and steadily improving."
- Authorities committed to written communication of November 30, 2018.
- PLL arrangement approved on December 17, 2018 is treated as precautionary insurance; Morocco does not require balance of payments financing but values arrangement to bolster investor confidence.
- Program objectives: accelerate structural reforms to promote stronger and more inclusive growth, create more jobs, strengthen economic resilience, fiscal and external buffers, and financial system stability.
- Target growth ambition: reach "4.5 to 5 percent per year."

### Fiscal policy, public debt, and revenue measures
- Fiscal deficit excluding privatization proceeds will be held at "3.7 percent of GDP in 2019" ("3.3 percent if privatizations are included") and reduced to "3 percent of GDP by 2021."
- Convergence target for public debt/GDP ratio: "60 percent" in the medium term.
- Main tax measures in the 2019 Budget Law expected to bring in "0.5 percent of GDP."
- Personnel expenditure objective: keep personnel expenditure, including social contributions, "below 10.5 percent of GDP in the medium term."
- Privatization program expected contribution: "the equivalent of 2 percent of GDP to the budget over the period 2019-2024."

### Tax reform consultations (May 3–4, 2019)
- Recommendations include restructuring the IR in favor of low-income and middle classes, recognizing VAT neutrality, normalizing regimes for exports/free zones/Casablanca Finance City, simplifying taxation for low-income merchants/artisans, and strengthening tax administration via automation, professionalization, ethical values, and transparency.
- A tax framework law will be prepared to establish reform parameters.

### Structural reforms, public enterprise governance, and PPPs
- Doing Business ranking: gain of "9 positions" (2019).
- Measures: modernize incentives/legal environment, improve infrastructure and public service quality, automate administrative procedures, revise Regional Investment Centers (CRIs), revise Investment Charter, legal framework for secured transactions, Competition Council formation, clear VAT credits and reduce payment delays.
- Draft law to enhance governance and government financial control over EEPs expected in April 2019 session; IMF assistance to develop integrated EEP risk monitoring.
- Plans for PPP legal reforms: draft law amending Law No. 86.12 on PPPs adopted in April 2019 to ease procedures and expand PPP scope to local governments.

### Social protection, education, labor, agriculture, and financial inclusion
- Social protection roadmap: expand basic health and pension coverage; replace nontargeted subsidies with direct assistance using a single social registry to be implemented by "end-2020."
- Education and employment: 2015–2030 strategic vision; teacher staffing program final phase to be completed in 2019; public preschool system expanded; draft education framework law submitted September 2018; vocational training roadmap (April) to create professions and skills centers in 12 regions.
- Agriculture: "A million hectares of collective lands will be made available to small-scale farmers, particularly young people"; new Soulaliyate legal framework adopted February 2019.
- Financial inclusion: national strategy approved January 2019 and adopted April 1, 2019; Small Business Act planned for 2019; microcredit maximum authorized amount "increased threefold."

### Exchange rate flexibility and monetary/financial sector
- Transition to greater exchange rate flexibility initiated January 2018 by widening dirham fluctuation band to "+ 2.5 percent (from + 0.3 percent)."
- Dirham remained within band without central bank intervention "since March 2018."
- Draft central bank law: adopted by second house of Parliament on "May 14, 2019"; to be brought before first house for final adoption on "June 11, 2019."
- Banking sector described as sound and resilient; NPLs "still relatively high" but "declining and are well provisioned."
- IFRS 9 adopted January 2018 with capitalization phase-in over "five years."
- Authorities committed to strengthening AML/CFT framework (MENAFATF assessment April 2019) and to finalizing regulation on financial conglomerates by end-2019; preparing legal framework for bank resolution and designating BAM as resolution authority.

### Data, statistics, and technical assistance
- Consolidated government finance and debt statistics for 2017 at general government level to be completed "by the end of the first half of 2019."
- Updating of statistics for 2018 to begin "immediately thereafter."
- Government receiving IMF technical assistance for these tasks.

*Written communication to IMF Managing Director, Rabat, May 28, 2019.*

---

### Indicative targets, PLL schedule, and staff-authorities statements

### Indicative targets and performance (end-March 2019 extract)
- Net international reserves (NIR) of BAM (end-of-period stocks, in millions of U.S. dollars, evaluated at program exchange rate 9.527 MAD/$):
  - 3/31/19 Target: 24,369; Adjusted: 23,539; Actual: 23,869.
  - 9/30/19 Target: 25,228; Adjusted: 24,216.
  - 3/31/20 Target: 25,648.
- Fiscal deficit (cumulative since beginning of fiscal year, eop in millions of dirham):
  - 3/31/19 Target: 9,369; Adjusted: 9,771; Actual: 1,236.
  - 9/30/19 Target: 27,908; Adjusted: 28,608.
  - 3/31/20 Target: 10,293.
- Memorandum adjustors:
  - Adjustor on NIR (in millions of U.S. dollars):
    - 3/31/19: 1,733; Adjusted: 830; Actual: 903.
    - 9/30/19 Target: 2,152; Adjusted: 2,373.
    - 3/31/20 Target: 3,278.
  - Adjustor on fiscal deficit (in millions of dirham):
    - 3/31/19: 500; Adjusted: 402; Actual: 98.
    - 9/30/19 Target: 1,500; Adjusted: 1,500.
    - 3/31/20 Target: 500.
- Performance summary:
  - The indicative target on the fiscal deficit has been met.
  - Net international reserves are above the target.

### PLL schedule and access (Table 2 extract)
- Board approval: December 17, 2018 — initial credit available shown (SDR/US$ equivalence presented in table).
- First review: June 12, 2019 — based on March 31, 2019 indicative targets.
- Second review: December 16, 2019 — based on September 30, 2019 indicative targets; full access will be available on December 17, 2019.
- Total credit available under arrangement: SDR 2,150.80 (noted in table) — authorities intend to treat PLL as precautionary.

### Staff and authorities’ assessments (statement by Mr. Mohammed Daïri, June 12, 2019)
- Fiscal and structural reforms have reduced fiscal vulnerabilities; public debt remains sustainable and should start to decline.
- Medium-term public debt-to-GDP target: 60 percent.
- PLL considered key under current global uncertainty; authorities hopeful to complete first review.
- Performance under PLL favorable; March 2019 indicative targets met with a wide margin on the fiscal target.
- Authorities’ reservation: concerns about staff assessment of the external sector under the EBA CA approach; request inclusion of other methods.
- Authorities will treat PLL as precautionary and may monitor possibility of reducing access or exiting as conditions permit.
- Emphasis on social consensus and broad support for reforms.

*Source: IMF staff estimates and written communications contained in the provided content unit.*

*Source: 1marea2019005 (IMF staff report and supporting tables).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and near-term challenges
- Despite a challenging external environment, improved fiscal management and economic diversification have strengthened the resilience of Morocco’s economy in recent years.
- Growth and labor market:
  - Economic growth was 3 percent in 2018.
  - Early estimates: growth slowed to 2.3 percent in Q1 2019 (against 3.3 percent over the same period last year).
  - Unemployment was 10 percent in Q1 2019 (from 10.5 percent in Q1 2018), with youth and graduate unemployment about 24.1 percent and 17.1 percent, respectively.
- Key priority reforms to achieve higher, more inclusive, and more private sector-led growth:
  - Improving the quality of education.
  - Improving the functioning of the labor market and the business environment.
  - Continuing the fight against corruption.
  - Increasing female labor force participation.
- Elevated external risks include fragile recovery in the euro area and geopolitical risks in the region.

### PLL arrangement and qualification
- A two-year precautionary and liquidity line (PLL) arrangement was approved in December 2018 in the amount of SDR 2.15 billion (or 240 percent of quota), equivalent to about US$3 billion.
- Staff assessment and recommendation:
  - Morocco continues to meet the PLL qualification criteria and staff recommends completion of the first review of the PLL arrangement.
  - Morocco performs strongly in three out of the five PLL qualification areas: monetary, financial, and data.
  - Morocco does not substantially underperform in fiscal policy, and external position and market access.
  - The authorities do not face any of the circumstances under which the Fund might no longer approve a PLL arrangement.
- Program use and targets:
  - The authorities have not drawn on the arrangement and continue to treat it as precautionary.
  - The end-March 2019 quantitative indicative targets (IT) for the fiscal deficit and net international reserves (NIR) were met.

### Recent macroeconomic developments and program performance
- Macroeconomic resilience and reforms:
  - Authorities implemented difficult reforms: pensions, energy subsidies, fiscal framework, business environment, and financial sector.
  - Transition to greater exchange rate flexibility was initiated in January 2018.
- Activity composition and trends:
  - In 2018 weaker growth reflected lower agricultural growth despite a second consecutive year of good cereal harvest; non-agricultural growth modest due to slow tertiary sector growth.
  - Private consumption remains the main driver of growth.
  - Private investment recovered gradually after a decline from 30.7 percent of GDP in 2008 to 22.8 percent of GDP in 2015.
- Fiscal developments:
  - Fiscal consolidation slowed in 2018 but developments through April 2019 were positive.
  - End-March 2019 Indicative Target met: deficit of 0.1 percent of GDP against an indicative target of 0.8 percent.
  - End-April 2019 preliminary fiscal deficit: 1.2 percent of GDP (against 1.4 percent of GDP in the same period last year).
  - Cyclically-adjusted primary deficit (excluding grants) remains neutral.
  - Public debt decreased slightly to 64.9 percent of GDP at end-2018.
- Monetary and financial conditions:
  - Headline inflation declined 0.1 percent y-o-y in March 2019; core inflation was 0.9 percent.
  - Bank-Al-Maghrib (BAM) policy rate unchanged at 2.25 percent since March 2016.
  - Bank credit growth increased to 5.1 percent y-o-y in March 2019.
  - Real estate prices are stable.
- External sector and reserves:
  - Current account deficit widened to 5.4 percent of GDP in 2018 (against 3.4 percent in 2017).
  - Net FDI increased to 2.5 percent of GDP in 2018 (due in part to one very large transaction).
  - International reserves dropped by US$1.7 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.
  - Q1 2019 preliminary data: some improvement in trade deficit but remittances and tourism receipts declined by 5.7 percent and 3.5 percent y-o-y, respectively; net FDI declined 47.2 percent y-o-y.
  - Exchange rate fluctuations limited since January 2018 after widening of the dirham fluctuation band to +/-2.5 percent (from 0.3 percent) on either side of a reference parity; BAM has not intervened in the foreign exchange market since March 2018.
- Banking sector soundness and risks:
  - Banks' regulatory capital ratio increased to 14.7 percent as of December-2018.
  - NPL ratios remain at 7.7 percent with provisioning about 70 percent.
  - IFRS9 implemented in January 2018, with a five-year transition for capital adjustments.
  - Risks: credit concentration, NPL levels, and 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).

### Policy priorities and recommended reforms
- Fiscal policy framework:
  - Medium-term objective: reduce public debt to 60 percent of GDP by 2024 (64.9 percent in 2018) and increase fiscal buffers.
  - Required measures:
    - Accelerate tax reforms from the May 2019 national tax conference, including broadening the tax base (e.g., reduced tax exemptions and fight against fiscal fraud).
    - Improve efficiency and quality of public investment and services via comprehensive civil service reform, strengthened financial oversight of state-owned enterprises (SOEs), implementation of PIMA recommendations, and sound public financial management at the local level as part of fiscal decentralization.
- Financial sector policy framework:
  - Continue upgrading in line with 2015 FSAP recommendations: increase supervisory capacity, improve BAM’s stress-testing and macroprudential framework with Fund technical assistance.
  - Address weaknesses in AML/CFT framework identified by MENAFATF.
  - Draft central bank law submitted to parliament to strengthen central bank independence and clarify role for financial stability; further amendments needed per January 2019 safeguards assessment regarding BAM’s autonomy and governance.
- Exchange rate regime:
  - Greater exchange rate flexibility seen as beneficial to preserve reserve buffers and competitiveness; preparations completed and conditions supportive of a gradual, orderly transition.
  - Authorities await an opportune moment and plan a well-structured communication strategy to ensure SMEs and others manage foreign exchange risks.
  - Relaxation of remaining restrictions on capital outflows by residents to be gradual and at a later stage.
- Structural reforms to boost growth and inclusion:
  - Business environment: reactivation of the Competition Council, efforts to limit public sector payment delays, and support private sector development.
  - Financial inclusion: comprehensive strategy launched; strengthen collateral framework to improve SME access to finance.
  - Labor market and social policy: improve quality of education, labor market functioning, reduce inequalities and middle-class vulnerabilities through better targeted social programs, and finalize measures under the 2015 national strategy for employment.
  - Governance: continue implementation of the national strategy against corruption.

### Outlook and risks (projections and scenarios)
- Baseline projections under sustained reform implementation:
  - Growth: expected to remain at 3 percent in 2019 and reach 4.5 percent over the medium term.
  - Inflation: projected to slow to 0.6 percent in 2019 and stabilize around 2 percent over the medium term.
  - Fiscal deficit: projected at 3.7 percent of GDP in 2019, with privatization receipts reducing public financing needs to 3.3 percent of GDP; deficit expected to decline and stabilize around 3 percent of GDP after 2020.
  - Public debt: projected to be reduced to 60 percent of GDP over the medium term (from 64.9 percent in 2018) with expected privatization revenues.
  - Current account deficit: expected to decline to 4 percent of GDP in 2019 and 2.8 percent of GDP over the medium term.
  - Foreign direct investment: expected to remain stable at about 2 percent of GDP.
  - Other private flows: expected to hover around 2 percent of GDP.
  - International reserves: expected to reach 100 percent of the ARA metric in the medium term (about 128 percent of the ARA metric adjusted for capital controls).
- Balance of risks (tilted to the downside):
  - Domestic risks: delays in fiscal and structural reforms could reduce fiscal space, increase social tensions, and adversely affect tourism receipts, FDI inflows, and potential growth.
  - External risks: higher oil prices, weaker euro area growth, geopolitical risks, and more volatile global financial conditions could slow activity via lower exports, tourism, FDI, remittances, higher borrowing costs, and weaker investor confidence.
  - Upside factors: lower international oil (and butane gas) prices and increased regional integration in the Maghreb could enhance resilience and medium-term growth.

*Source: 1marea2019005 - EXECUTIVE SUMMARY*

### Box 1. External Economic Stress Index

### Box 1. External Economic Stress Index

### Background
- The external economic stress index is an indicator of the evolution of the external environment faced by a country.
- Its use was mandated by the IMF Executive Board for Flexible Credit Line (FCL) and PLL arrangement countries at the time of the review of these instruments in June 2014.
- The index is based on: (i) a consideration of the key external risks facing Morocco; (ii) the selection of proxy variables capturing these risks; and (iii) the choice of the weights to apply to each of these variables.
- The model was first developed at the time of the 2012 PLL arrangement request.

### Risks (as identified in the February 2019 G-RAM)
- (i) Weaker than expected global growth, particularly in Europe and Morocco’s main trading partners, resulting in lower exports, FDI, tourism, and remittances.
- (ii) Intensification of security risks in parts of the Middle East, Africa, and Europe, resulting in negative sentiment and lower capital inflows and tourism receipts.
- (iii) Tighter global financial conditions, resulting in higher borrowing costs and disruption to portfolio flows.
- (iv) Large swings in oil prices.

### Proxy variables
- Lower exports, remittances, FDI, and tourism receipts are captured by growth in the euro area (which represents more than 50 percent of Morocco’s trade, FDI, and remittances).
- Higher oil imports are captured by oil prices.
- The impact of global financial volatility on portfolio flows and borrowing costs is captured by the emerging markets volatility index (VXEEM).

### Weights (data-based approach using balance of payments and IIP data as a share of GDP)
- Weight on euro area growth: 0.580 — corresponds to the sum of exports, FDI, remittances, and tourism receipts from Europe.
- Weight on the VXEEM: 0.095 — corresponds to the stocks of external debt and equity.
- Weight on the change in oil price: 0.324 — corresponds to oil imports.
- The three weights are as set at the PLL request stage, in December 2018.
- Interpretation: the highest weights fall on euro area growth and oil price (based on their relative contribution to items on the balance of payments/financing needs); the VXEEM has a smaller weight, reflecting the small size of portfolio flows in the financial account.

### Baseline scenario
- Baseline inputs:
  - April 2019 World Economic Outlook (WEO) projections for euro area growth and oil prices.
  - VXEEM volatility index (VIX) futures at end-March 2019.
- Result: At the current juncture, the level of external economic stress is virtually unchanged relative to the December 2018 request (solid lines).
- Explanation: lower oil price assumptions are offset by lower growth in advanced economies, particularly Europe, and improved VXEEM index projections.

### Downside scenario
- Assumptions broadly consistent with staff’s adverse scenario:
  - Euro area growth that is 0.5pp lower than the baseline.
  - A US$10 increase in oil prices relative to the baseline, based on historical standard deviations.
  - An increase in the VXEEM by two standard deviations, similar to the assumption at the time of the PLL request.
- Footnote clarifies scenario composition: The scenario combines a US$15 increase in oil prices and a US$5 drop consistent with lower growth in the euro area.
- Result: In the downside scenario, external economic stress is broadly comparable to that at the time of the December 2018 request.

### Overall assessment
- The external economic stress index for Morocco suggests that external pressures abated between 2012-16, but increased more recently.
- The model does not include a proxy for geopolitical risk (given the difficulty in choosing such a variable); at present, this omission would suggest a relatively heightened stress index.

*Source: Box 1. External Economic Stress Index (1marea2019005).*

### 16.      The 2019 safeguards assessment found that while BAM continues to maintain strong

### 1marea2019005 - 16.      The 2019 safeguards assessment found that while BAM continues to maintain strong

### Safeguards assessment and governance
- The 2019 safeguards assessment found that BAM continues to maintain strong operational controls in key areas, but a few improvements are needed to fully meet international best practice.
- Internal and external audit mechanisms, internal controls, and the related Audit Committee oversight remain robust.
- Authorities are considering staff’s recommendations, including:
  - further amendments to strengthen the central bank law in the areas of autonomy and governance, and
  - that BAM transition to IFRS.

### Exit strategy and macroeconomic outlook
- Given projected improvements in Morocco's economic resilience and growth, the authorities will need to communicate about their exit strategy from the PLL arrangement.
- Baseline scenario projections by the end of the arrangement:
  - the primary fiscal deficit would fall below the debt-stabilizing balance, and public debt would be on a downward path.
  - the current account deficit would be close to what would be expected for an emerging market country like Morocco.
  - reserves would be at a comfortable level: just above 87 percent of the ARA metric, or 114 percent of the adjusted metric.
- Authorities’ communication about their exit strategy should consider:
  - changes in external risks,
  - strengthening of economic resilience and policy space,
  - reform achievements and commitments, including the exchange rate transition (as articulated in W-COM.-¶22).
- Authorities agreed but stressed the importance of the PLL arrangement at this juncture, including in supporting public confidence in the implementation of key reforms.

### Staff appraisal: assessment of developments and reforms
- The PLL arrangement is serving Morocco well and remains on track.
- Despite a challenging external environment, macroeconomic vulnerabilities have been reduced in recent years, and the end-March 2019 indicative targets were met.
- Fiscal and public sector reforms will help further enhance macroeconomic resilience and the efficiency and quality of public investment and services.
  - Fiscal sustainability is expected to benefit from a comprehensive tax reform to boost revenues while increasing fairness, based on the outcome of the May 2019 national tax conference.
  - Improving efficiency and quality of public investment and services will 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.
- Current conditions remain supportive to continue with the transition to a flexible exchange rate regime.
  - This reform will allow modernization of Morocco’s monetary policy regime through the eventual introduction of inflation targeting.
  - Greater exchange rate flexibility will help further strengthen the economy’s resilience and growth potential.
- Sustained structural reform implementation is essential to achieve higher growth and reduce unemployment.
  - Recent acceleration in key reforms includes the business environment and financial inclusion, which will help shift to a more private sector-led growth model.
  - Mutually-reinforcing reforms are needed to improve:
    - the quality of the education system,
    - the functioning of the labor market,
    - female labor force participation,
    - targeting of social programs to the most vulnerable groups.
  - Continuing to implement the 2015 FSAP recommendations will help further strengthen the financial sector policy framework.

### PLL qualification and institutional assessment
- Morocco continues to meet the PLL qualification criteria.
- The IMF Executive Board's assessment in the context of the 2019 Article IV consultation was positive.
- Morocco's economic fundamentals and institutional frameworks are sound; the country has a track record of—and is implementing—sound policies, and remains committed to such policies in the future.
- Morocco performs strongly in three out of the five PLL qualification areas:
  - financial sector and supervision,
  - monetary policy,
  - data adequacy.
- Morocco does not substantially underperform in the other two qualification areas:
  - external position and market access,
  - fiscal policy.

*Source: https://www.imf.org/-/media/files/publications/cr/2019/1marea2019005.pdf*

### 23.      Against this background, staff recommends the completion of the first review under

### 23.      Against this background, staff recommends the completion of the first review under the PLL arrangement.

### Real Sector Developments (2009–19)
- The pick-up in non-agricultural growth in 2018 is expected to continue in 2019.
- Unemployment has declined slightly since 2017 but remains high for the youth and women.
- On the demand side, private consumption and investment remain the main growth drivers.
- Surveys confirm strong household confidence, while business confidence remains relatively low.
- High-frequency indicators point to still strong tourism activity and subdued construction activity.
- Inflation has remained low despite volatile food prices.
- Sources and notes: National authorities; and IMF staff estimates. Note: 2019 projected.

### Fiscal Developments (2009–18)
- Fiscal consolidation slowed in 2018.
- Cyclical and structural fiscal balances have slowly been improving.
- Revenues were lower than expected in 2018 due to subdued corporate tax revenues and grants.
- Expenditures remain contained.
- Public debt is sustainable and projected to decline gradually in the medium term.
- Sovereign spreads have remained low and stable despite the increase in the EMBI.
- Budget balance and public debt (Percent of GDP): charts provided for 2009–18.
- Cyclically adjusted balance and structural balance (Percent of GDP): charts provided for 2009–18.
- Government revenue composition (Percent of GDP) 2009–18: G&S Tax, Income Tax, Other, Grants.
- Government expenditure composition (Percent of GDP) 2009–18: Wages, G&S & Other, Subsidies, Investment.
- Predictive densities of public debt (Percent of GDP; Gross, Nominal, Symmetric distribution) 2017–2024 show baseline and percentile bands.
- CDS spreads: Morocco CDS spread and JP Morgan EMBI Global Spread (Basis points) 2013–2019.

### Financial Developments (2009–19)
- Banks continue to be profitable, and capitalization levels are stable.
- NPLs remain relatively high for private businesses and household loans.
- Provisioning is relatively high while liquidity conditions remain favorable.
- Private credit growth has slightly increased in 2019 after the lackluster performance of 2018.
- Household lending is driving credit growth.
- Lending rates have decreased slightly since 2018.
- Bank profitability and capitalization indicators: Return on assets, Interest rate average spread, Cost of risk as a percent of credit, Regulatory capital to risk-weighted assets (Percent) 2009–2018 (sources: National Authorities; as of Dec. 2018).
- Distribution of NPLs: NPL as a percent of total loans for Private Businesses and Households (National currency, Billions).
- Bank liquidity indicators: Liquid assets to total assets; Specific provisions to total loans; Specific provisions to NPLs (RHS) (Percent) 2009–2018.
- Loans and deposits (Annual percent change) 2013–2019: Private credit growth, Loan to deposit ratio (RHS), Deposit growth.
- Contribution to credit growth (Annual percent change) 2013–2018: Non-Financial Corporates, Households, Public Sector, Private Financial Institutions.
- Bank lending rates and interest margin (Percent) 2009–2018: Lending rates, CB policy rate, Lending-deposit rate spread (sources: National authorities and IMF staff estimates; as of Q3 2018).

### External Developments (2009–18)
- Export growth has been driven by emerging manufacturing sectors.
- Imports of energy, capital goods, and raw materials also increased.
- The trade deficit has been increasing since 2016, weakening the current account.
- FDI and private borrowing played a key role in financing the current account deficit in 2018.
- Morocco’s reserves coverage is expected to improve in the medium term.
- The real effective exchange rate appreciated in 2018.
- Exports by type of goods (US$, Billions) 2009–2018: Mining products, Food products, Finished goods, Semi-finished goods, Other.
- Imports by type of goods (US$, Billions) 2009–2018: Energy, Food products, Capital goods, Raw materials, Semi-finished goods, Consumption goods.
- Current account components (US$ Billions) 2009–2018 includes Merchandise balance, Services: Tourism, Income, Transfers: Remittances, Transfers: Other; CA/GDP (RHS).
- Current account financing (US$ Billions) 2009–2018: FDI, Portfolio, Private borrowing, Public borrowing, Current account, Reserves (RHS).
- Reserve adequacy metrics (US$ billions): Reserves, 3M of Imports, Standard metric 20% of broad money, Adjusted metric Reserves/(ST debt + CA deficit).
- Real and Nominal Effective Exchange Rates (Index, Jan. 2010 = 100): NEER and REER 2010–2019.
- Sources: National authorities; and IMF staff estimates.

### Structural Reforms
- Morocco fares relatively well in terms of overall business climate and competitiveness.
- Recent reforms include a new bankruptcy law that improved the insolvency regime and further streamlining of administrative procedures.
- Limited progress has been made in improving the education system and labor market functioning.
- On education, efforts should focus on increasing years of schooling, teachers’ training, and vocational training.
- Efforts are needed to strengthen labor market policies and reduce regulatory rigidities.
- Facilitating access to finance for SMEs is a priority.
- Sources: World Bank's 2019 Doing Business Report, World Economic Forum's 2018 Global Competitiveness Report and IMF staff calculations.
- Notes: The Global Competitiveness Index and Doing Business indicators are scored 0-100 where 100 represents the frontier; some scores rely on perceptions-based data.

### Selected Economic Indicators (Table 1), 2015–24 (key excerpts and projections)
- Real GDP (Annual percentage change): 2015: 4.5; 2016: 1.1; 2017: 4.1; 2018: 3.0; 2019 (Proj.): 3.3; 2020: 3.0; 2021: 3.8; 2022: 4.1; 2023: 4.3; 2024: 4.4; (Note: table formatting preserves numbers as in source).
- Real agriculture GDP: 2015: 11.9; 2016: -13.7; 2017: 15.4; 2018: 3.9; 2019 (Proj.): 0.7; 2020: 0.1; 2021: 3.3; 2022: 3.7; 2023: 4.0; 2024: 4.3; 2025: 4.5.
- Real non-agriculture GDP: 2015: 3.7; 2016: 3.1; 2017: 2.7; 2018: 2.8; 2019 (Proj.): 3.6; 2020: 3.4; 2021: 3.9; 2022: 4.2; 2023: 4.3; 2024: 4.4; 2025: 4.5.
- Consumer prices (end of period): 2015: 0.6; 2016: 1.8; 2017: 1.9; 2018: 0.1; 2019 (Proj.): 1.4; 2020: 0.6; 2021: 1.1; 2022: 2.0; 2023: 2.0; 2024: 2.0.
- Gross capital formation (Percent of GDP): 2015: 30.8; 2016: 32.6; 2017: 32.6; 2018: 33.2; 2019 (Proj.): 36.9; 2020: 34.0; 2021: 34.4; 2022: 34.8; 2023: 35.2; 2024: 35.6; 2025: 35.9.
- Gross national savings (Percent of GDP): 2015: 28.8; 2016: 28.4; 2017: 28.9; 2018: 27.8; 2019 (Proj.): 32.9; 2020: 30.0; 2021: 30.9; 2022: 31.8; 2023: 32.2; 2024: 32.8; 2025: 33.1.
- Public finances (Percent of GDP): Revenue 2015: 26.5; 2016: 26.0; 2017: 26.6; 2018: 26.0; 2019 (Proj.): 26.0; Budget balance 2015: -4.2; 2016: -4.5; 2017: -3.5; 2018: -3.7; 2019 (Proj.): -3.7; Total government debt 2015: 63.7; 2016: 64.9; 2017: 65.1; 2018: 64.9; 2019 (Proj.): 65.2; projected decline to 60.0 by 2024.
- External sector: Exports and imports (US$ percentage change) and current account balances are provided with projections through 2024. Example: Current account excluding official transfers (Percent of GDP) 2015: -2.6; 2016: -5.0; 2017: -4.5; 2018: -5.8; 2019 (Proj.): -4.3; projections improving to -2.9 by 2024.
- Gross reserves (US$ billions): 2015: 22.8; 2016: 25.1; 2017: 26.2; 2018: 24.4; 2019 (Proj.): 26.8; projections to 39.9 by 2024.
- Memorandum items: Nominal GDP (US$ billions) 2015: 101.2; 2016: 103.3; 2017: 109.7; 2018: 118.6; 2019 (Proj.): 122.9; projections to 164.0 by 2024.
- Output gap (percentage points of non-agricultural GDP): 2015: -0.2; 2016: -0.8; 2017: -1.1; 2018: -1.0; 2019 (Proj.): -0.2; 2020: -0.8; 2021 onward: -0.2 to 0.0.
- Unemployment rate (in percent): 2015: 9.7; 2016: 9.9; 2017: 10.2; 2018: 9.8 (further values shown as ellipses in source table).

### Budgetary Central Government Finance (Tables 2a & 2b), 2015–24 (selected figures)
- Revenue (Billions of dirhams): 2015: 262.1; 2016: 264.0; 2017: 282.4; 2018: 289.8; 2019 (Proj.): 301.6; 2020: 302.1; 2021: 317.7; 2022: 337.0; 2023: 361.2; 2024: 385.4; 2025: 413.1.
- Taxes (Billions of dirhams): 2015: 208.9; 2016: 216.9; 2017: 232.1; 2018: 242.5; 2019 (Proj.): 259.0; 2020: 254.3; 2021: 273.5; 2022: 292.2; 2023: 313.6; 2024: 335.1; 2025: 359.7.
- Expense (Billions of dirhams): 2015: 248.5; 2016: 251.6; 2017: 261.6; 2018: 270.3; 2019 (Proj.): 280.8; 2020: 288.2; 2021: 291.7; 2022: 302.5; 2023: 317.4; 2024: 338.2; 2025: 359.6.
- Compensation of employees (Billions of dirhams): 2015: 118.5; 2016: 121.2; 2017: 122.2; 2018: 124.5; 2019 (Proj.): 130.8; 2020: 133.6; 2021: 138.1; 2022: 141.8; 2023: 144.2; 2024: 146.7; 2025: 149.2.
- Net acquisition of nonfinancial assets (Billions of dirhams): 2015: 54.8; 2016: 57.8; 2017: 57.9; 2018: 60.8; 2019 (Proj.): 63.3; 2020: 57.1; 2021: 66.4; 2022: 73.2; 2023: 84.5; 2024: 91.1; 2025: 99.9.
- Net lending / borrowing (overall balance, Billions of dirhams): 2015: -41.2; 2016: -45.4; 2017: -37.1; 2018: -41.4; 2019 (Proj.): -42.5; 2020: -43.2; 2021: -40.4; 2022: -38.7; 2023: -40.7; 2024: -43.9; 2025: -46.4.
- Net incurrence of liabilities (Billions of dirhams): 2015: 41.2; 2016: 43.9; 2017: 37.1; 2018: 41.4; 2019 (Proj.): 37.5; 2020: 38.2; 2021: 35.4; 2022: 33.7; 2023: 37.7; 2024: 40.9; 2025: 46.4.
- Memorandum: GDP (Billions of dirhams) 2015: 988.0; 2016: 1,013.6; 2017: 1,063.3; 2018: 1,112.8; 2019 (Proj.): 1,159.0; 2020: 1,155.0; 2021: 1,211.1; 2022: 1,283.6; 2023: 1,362.1; 2024: 1,446.1; 2025: 1,536.8.
- Percent of GDP breakdowns provided in Table 2b for the same items (Revenue 25.6 percent of GDP in 2015; Expense 25.2 percent of GDP in 2015; etc.).

### Balance of Payments (Table 3), 2015–24 (selected figures)
- Current account (US$ billions): 2015: -2.2; 2016: -4.2; 2017: -3.7; 2018: -6.5; 2019 (Proj.): -4.9; 2020: -4.8; 2021: -4.5; 2022: -4.1; 2023: -4.2; 2024: -4.3; 2025: -4.6.
- Trade balance (US$ billions): 2015: -14.7; 2016: -17.6; 2017: -18.0; 2018: -20.2; 2019 (Proj.): -20.0; projections to -23.5 by 2025.
- Exports, f.o.b. (US$ billions): 2015: 18.6; 2016: 19.1; 2017: 21.5; 2018: 24.6; 2019 (Proj.): 26.5; 2020: 26.2; 2021: 28.3; 2022: 30.5; 2023: 32.6; 2024: 35.0; 2025: 37.4.
- Imports, f.o.b. (US$ billions): 2015: -33.3; 2016: -36.7; 2017: -39.5; 2018: -44.8; 2019 (Proj.): -46.4; projections to -60.9 by 2025.
- Services: Tourism receipts (US$ billions) 2015: 6.3; 2016: 6.5; 2017: 7.4; 2018: 7.8; 2019 (Proj.): 8.0; projections to 10.0 by 2024.
- Transfers (US$ billions): 2015: 7.7; 2016: 8.2; 2017: 8.8; 2018: 8.0; 2019 (Proj.): 8.9; projections to 10.3 by 2024.
- Financial account (US$ billions): 2015: 5.8; 2016: 6.4; 2017: 2.0; 2018: 4.0; 2019 (Proj.): 6.7; projections to 8.5 by 2025.
- Gross official reserves (US$ billions): 2015: 22.8; 2016: 25.1; 2017: 26.2; 2018: 24.4; 2019 (Proj.): 26.8; projections to 39.9 by 2024.
- Assessing Reserve Adequacy (ARA) metric coverage (Percent): 2015: 93.6; 2016: 98.5; 2017: 92.3; 2018: 87.1; 2019 (Proj.): 85.4; projections to 99.2 by 2024.
- Memorandum: GDP (US$) 2015: 101.2; 2016: 103.3; 2017: 109.7; 2018: 118.6; 2019 (Proj.): 122.9; projections to 164.0 by 2024.
- Oil price (US$/barrel; Brent): 2015: 52.4; 2016: 44.0; 2017: 54.4; 2018: 71.1; 2019 (Proj.): 72.3; 2020: 61.8; 2021 onward: ~60–61.

### Monetary Survey (Table 4), 2015–19 (selected figures)
- Net International Reserves (Billions of dirhams): 2015: 222.1; 2016: 249.2; 2017: 240.9; 2018: 230.7; 2019: 241.2.
- Gross reserves (Billions of dirhams): 2015: 225.4; 2016: 253.5; 2017: 244.3; 2018: 233.7; 2019: 247.2.
- Net domestic assets (Billions of dirhams): 2015: 924.3; 2016: 961.0; 2017: 1,006.8; 2018: 1,070.4; 2019: 1,134.1.
- Domestic claims (Billions of dirhams): 2015: 1,052.1; 2016: 1,100.0; 2017: 1,157.3; 2018: 1,225.9; 2019: 1,289.6.
- Claims to the economy (Billions of dirhams): 2015: 904.2; 2016: 957.6; 2017: 989.5; 2018: 1,005.7; 2019: 1,076.1.
- Broad money (Billions of dirhams): 2015: 1,148.0; 2016: 1,202.4; 2017: 1,269.1; 2018: 1,320.6; 2019: 1,373.4.
- Money components (Billions of dirhams): Money 2015: 707.1; Currency outside banks 2015: 192.6; Demand deposits 2015: 514.4; Quasi money 2015: 401.7.
- Velocity (GDP/M3) 2015–2019: 0.86, 0.84, 0.84, 0.84, 0.84 respectively.
- Claims to economy/GDP (Percent) 2015: 91.5; 2016: 94.5; 2017: 93.1; 2018: 91.9; 2019: 93.2.

### Financial Soundness Indicators (Table 5), 2015–18 (selected figures)
- Regulatory capital to risk-weighted assets: 2015 Jun: 13.7; 2015 Dec: 13.7; 2016 Jun: 14.2; 2016 Dec: 13.7; 2017 Jun: 13.8; 2017 Dec: 14.0; 2018 Jun: 14.7.
- Tier 1 capital to risk-weighted assets: values around 11.4–10.9 across periods.
- Capital to assets: ~9.1 across periods.
- Sectoral distribution of loans to total loans (selected sectors): Industry ~16.5–18.5; Households ~31.9–32.8; Construction ~10.5–11.4; Finance ~11.6–13.4; Public administration rose to 8.4 in 2018 Dec.
- FX-loans to total loans: 2015 Jun: 7.1; 2016 Jun: 6.9; 2017 Jun: 7.1; 2018 Dec: 8.8; 2018 Dec values around 7.4.
- Credit to the private sector to total loans: 2015 Jun: 91.0; 2018 Dec: 85.9.
- Non-performing Loans (NPLs) to total loans: 2015 Jun: 6.8; 2016 Jun: 7.2; 2017 Jun: 7.1; 2018 Jun: 7.0; 2018 Dec: 6.8.
- Specific provisions to NPLs: 2015 Jun: 68.0; 2018 Dec: 69.1.
- Specific provisions to total loans: ~5.0–5.3.
- Return on assets (ROA): ~0.8–1.1 across periods.
- Return on equity (ROE): ~9.1–11.7 across periods.
- Interest rate average spread (b/w loans and deposits): ~3.8–3.9.
- Cost of risk as a percent of credit: ~0.8–1.2.
- Liquidity: Liquid assets to total assets ranged ~11.8–16.1; Liquid assets to short-term liabilities ~14.4–21.2.
- Deposits to loans: ~103.8–107.5.
- Source: Bank Al-Maghrib.

### Capacity to Repay Indicators (Table 6), 2018–25
- GRA credit to Morocco (SDR million): 2018: 0.0; 2019: 2,150.8; 2020: 2,150.8; 2021: 2,150.8; 2022: 1,838.1; 2023: 762.7; 2024: 0.0; 2025: 0.0.
- In percent of quota: 2018: 0.0; 2019: 240.5; 2020: 240.5; 2021: 240.5; 2022: 205.5; 2023: 85.3; 2024: 0.0; 2025: 0.0.
- Charges due on GRA credit and principal due on GRA credit series provided with specific SDR figures and years (source table).
- Total external debt (Percent of GDP) 2018: 31.1; 2019: 35.2; 2020: 34.3; 2021: 33.1; projections down to 27.3 by 2025.
- Public external debt (Percent of GDP) 2018: 27.8; 2019: 31.8; 2020: 30.9; 2021: 29.8; projections to 24.5 by 2025.
- Total external debt service (Percent of GDP): 2018: 2.7; 2019: 2.7; 2020: 2.6; 2021: 2.5; 2022: 2.6; 2023: 3.1; 2024: 2.6; 2025: 1.8.
- In percent of gross international reserves: total external debt 2018: 151.0; 2019: 163.0; 2020: 158.8; projections declining to 108.6 by 2025.
- Memorandum items: Nominal GDP (US$ billions) 2018: 118.6; 2019: 120.7; 2020: 127.3; 2021: 135.4; 2022: 144.3; 2023: 153.8; 2024: 164.0; Gross international reserves (US$ billions) 2018: 24.4; 2019: 26.0; 2020: 27.5; 2021: 29.7; 2022: 32.6; 2023: 36.0; 2024: 40.1; 2025: 44.1.
- Note: Upon approval of the second review of the PLL arrangement Morocco can draw up to 240 percent of quota. The Moroccan authorities have expressed their intention to treat the arrangement as precautionary, and the table presents the full drawing scenario.

*Source: IMF staff report and associated tables and figures as provided in the content unit.*

### Appendix I. Written Communication

### Appendix I. Written Communication

### Overview and program objectives
- Morocco’s economic fundamentals are described as "strong and steadily improving."
- Authorities remain committed to implementing the economic and financial policy of the written communication of November 30, 2018.
- The PLL arrangement approved on December 17, 2018 is treated as precautionary insurance against external shocks; Morocco does not require balance of payments financing but values the arrangement for bolstering investor confidence.
- Program objectives: accelerate structural reforms to promote stronger and more inclusive growth, create more jobs, strengthen economic resilience, fiscal and external buffers, and financial system stability.
- Target growth ambition: reach a new level of growth of "4.5 to 5 percent per year."

### Recent economic performance (2018) and medium-term outlook
- Growth in 2018: "around 3 percent."
- Inflation in 2018: "1.9 percent."
- Current account deficit in 2018: "5.4 percent of GDP."
- Foreign exchange reserves: "above 5 months of imports."
- Fiscal deficit in 2018: "did not exceed 3.7 percent of GDP."
- Public debt ratio: "stabilized at around 65 percent of GDP."
- Policy stance: PLL treated as precautionary; draw only in event of unforeseen exogenous shocks.

### Fiscal policy, public debt, and revenue measures
- Fiscal deficit excluding privatization proceeds will be held at "3.7 percent of GDP in 2019" ("3.3 percent if privatizations are included") and reduced to "3 percent of GDP by 2021."
- Convergence target for public debt/GDP ratio: "60 percent" in the medium term.
- Main tax measures in the 2019 Budget Law aimed to expand the tax base, improve compliance and equity; in net terms these measures are expected to bring in the equivalent of "0.5 percent of GDP."
- Personnel expenditure objective: keep personnel expenditure, including social contributions, "below 10.5 percent of GDP in the medium term."
- Privatization program expected contribution to the budget: "the equivalent of 2 percent of GDP to the budget over the period 2019-2024."

### Tax reform consultations and planned tax framework
- National tax reform consultations held on May 3 and 4, 2019 produced recommendations to:
  - Restructure the IR in favor of low-income groups and the middle classes while gradually expanding its base.
  - Recognize the principle of VAT neutrality.
  - Gradually normalize regimes applicable to exports, free zones and Casablanca Finance City; increase the marginal rate applied to protected activities.
  - Simplify taxation of low-income merchants and artisans.
  - Simplify and harmonize local taxation with central government taxation.
  - Strengthen tax administration via automation, professionalization, ethical values, and transparency.
  - Rebalance rights and obligations of taxpayers and the tax administration.
- Outcome: a tax framework law will be prepared to establish reform parameters and provide greater visibility to economic agents.

### Structural reforms, business environment, and public enterprise governance
- Doing Business ranking progress: a gain of "9 positions" (2019).
- Measures to improve business environment:
  - Modernize incentive systems and legal environment for businesses.
  - Improve infrastructure and public services quality.
  - Simplify and automate administrative procedures.
  - Draft law revising Regional Investment Centers (CRIs) adopted in 2019.
  - Revision of the Investment Charter underway.
  - New legal framework for secured transactions introduced.
  - New Competition Council chairman appointed in November 2018, followed by other members.
  - Accelerated program to clear VAT credits and reduce payment delays in public and private sectors.
- Public enterprise (EEP) governance:
  - Draft law to enhance governance and government financial control over EEPs expected to be submitted in April 2019 session.
  - IMF assistance for developing an integrated system to monitor and assess EEP risks, particularly fiscal risks.
  - Policy direction: gradual government divestment from sectors that could be handled by private sector; refocus EEPs on core business; sale of non-core assets; outsourcing related activities.

### Social protection, education, and labor policies
- National consultations on social protection (November 2018) established a roadmap to:
  - Expand basic health and pension coverage to the entire population.
  - Replace nontargeted subsidies with direct assistance to vulnerable categories based on a single social registry to be implemented by "end-2020."
  - Adapt social protection to international standards, simplify severance payment procedures, enhance legal framework for work-related accidents, introduce and expand unemployment insurance, and consolidate RAMED medical coverage.
- Education and employment reforms:
  - Strategic vision for 2015-2030 reform of education system and national employment strategy to improve productivity and labor-market matching, pursue active labor market policies, and promote youth and women employment.
  - Ambitious teacher staffing program with last phase to be completed in 2019 to reduce class sizes and serve remote areas.
  - Public preschool system created in 2018 and being expanded.
  - Draft framework law on the education, training and scientific research system submitted to Parliament in September 2018 (still under discussion).
  - New vocational training roadmap adopted in April calling for creation of professions and skills centers in the 12 regions.

### Agriculture, rural development, and financial inclusion
- Agricultural reform measures:
  - Facilitate land ownership to promote an agricultural middle class.
  - "A million hectares of collective lands will be made available to small-scale farmers, particularly young people."
  - New legislative framework for Soulaliyate collective lands adopted in February 2019 to facilitate management, transfer, and use as collateral.
- Financial inclusion:
  - National financial inclusion strategy approved in January 2019 and adopted by the National Financial Inclusion Council on April 1, 2019.
  - Measures targeting VSMEs, young people, women, and rural populations are being implemented.
  - Plans to prepare a Small Business Act in 2019 to address financing, legal framework, market access, taxation, and support.
  - Some measures to be implemented starting in the second half of 2019, including establishment of a portal for entrepreneurs.
  - Legislative revision for microcredit underway; maximum authorized amount of microcredit has been "increased threefold."

### Public investment management and PPPs
- Public investment policy:
  - Maintain level of public investment; enhance efficiency by improving project selection based on employment impact, reduction of disparities, and improvement of living conditions (based on PIMA recommendations).
  - Plans to adopt an integrated system for centralized management of public investments.
  - Introduce public-private partnerships (PPPs) to enhance infrastructure supply and quality while limiting cost and risks.
  - Unified legal framework for public investment management being prepared.
  - Draft law amending and supplementing Law No. 86.12 on PPPs adopted in April 2019 by the Council of Government to ease procedures and expand PPP scope to local governments.

### Decentralization and local governance
- Advanced regionalization and conservative fiscal decentralization to protect fiscal sustainability.
- Subnational governments given responsibilities; their own and transferred resources expected to increase gradually.
- Draft law reforming local taxation being prepared and to benefit from May 2019 tax consultations.
- National charter on administrative deconcentration adopted in November 2018 to define powers among government levels and criteria for revenue sharing and use of new solidarity and equalization funds.

### Data, statistics, and technical assistance
- Preparation of consolidated government finance and debt statistics for 2017 at general government level to be completed "by the end of the first half of 2019."
- Updating of statistics for 2018 to begin "immediately thereafter."
- Government receiving technical assistance from the IMF for this work.

### Monetary policy, banking sector, and financial stability
- Bank Al-Maghrib (BAM) maintained an accommodative monetary policy in context of moderate inflation, slow recovery of non-agricultural and credit growth, and comfortable foreign exchange reserves.
- BAM will continue to promote appropriate financing of the economy, with emphasis on VSMEs.
- Draft law reforming the central bank law:
  - Adopted by the second house of Parliament on "May 14, 2019."
  - To be brought before the first house for final adoption on "June 11, 2019."
  - Objective: strengthen BAM’s independence to contribute to financial stability and promote financial inclusion.
- Banking sector:
  - Sector described as sound and resilient.
  - Nonperforming loans: "still relatively high" but "declining and are well provisioned."
  - Strengthening supervisory capacity; regulation governing financial conglomerates to be finalized "by the end of 2019."
  - IFRS 9 adopted in January 2018; resulting requirement to increase bank capitalization is being phased in over a period of "five years."
  - Authorities to strengthen AML/CFT supervisory framework per Morocco’s assessment report adopted by MENAFATF in April 2019.
  - Strengthening macroprudential and bank resolution frameworks; preparing legal framework for resolution in line with international standards and designating BAM as the resolution authority; technical work to be completed in 2019.
  - Provision of emergency liquidity assistance (ELA) introduced in the draft central bank law.

### Exchange rate flexibility and external resilience
- Transition to greater exchange rate flexibility initiated in January 2018 by widening dirham fluctuation band to "+ 2.5 percent (from + 0.3 percent)" around reference parity.
- Reform progress:
  - Dirham has moved within its fluctuation band and remained far from upper and lower limits without any central bank intervention "since March 2018."
  - Banks’ holding of foreign currency (assets) has increased and the interbank foreign exchange market has deepened.
  - Authorities plan to move to the next phase of the reform "at the appropriate time."
  - Emphasis on ensuring economic agents, particularly SMEs, understand risks of greater dirham fluctuations and can use existing hedging instruments.
  - Expected benefits: better absorption of external shocks, maintained competitiveness, support for diversification and integration in global economy.

*Written communication to IMF Managing Director, Rabat, May 28, 2019.*

### 21.      As regards the indicative targets established in the PLL arrangement for end-March 2019,

### 1marea2019005 - 21.      As regards the indicative targets established in the PLL arrangement for end-March 2019

### Indicative targets and performance
- The indicative target on the fiscal deficit has been met.
- Net international reserves are above the target.
- The authorities will provide the IMF with any information needed to monitor economic and policy developments within the framework of the PLL arrangement, particularly information relating to the indicative targets listed in Table 1.
- In accordance with the requirements of the PLL, the authorities will observe:
  - the standard performance criteria on import restrictions, exchange restrictions, bilateral payment arrangements and multiple currency practices, and
  - the continuous performance criterion on non-accumulation of payment arrears on the external debt.

### Policy assessment and commitments
- The authorities believe the policies and reforms described in the communication are adequate to achieve the economic goals of the program supported by the PLL and are committed to taking any additional measures that may be necessary.
- Policy priorities and resilience-building:
  - Continue strengthening the economy’s resilience by increasing fiscal and external buffers and further diversifying the economy.
  - Aim to be well positioned for exiting the PLL once exogenous risks have significantly declined.
  - Engage with the Fund, in accordance with relevant Fund procedures, to ensure success of economic policies.
- Official signatories:
  - Mohamed BENCHAABOUN, Minister of Economy and Finance
  - Abdellatif JOUAHRI, Governor, Bank Al-Maghrib

### Key quantitative indicative targets (Table 1 extract)
- Indicative targets (end-of-period stocks, as presented):
  - Net international reserves (NIR) of Bank Al-Maghrib (BAM) 1/:
    - 3/31/19 Target: 24,369
    - Adjusted: 23,539
    - Actual: 23,869
    - 9/30/19 Target: 25,228
    - Adjusted: 24,216
    - 3/31/20 Target: 25,648
  - Fiscal deficit (cumulative since beginning of fiscal year, eop in millions of dirham):
    - 3/31/19 Target: 9,369
    - Adjusted: 9,771
    - Actual: 1,236
    - 9/30/19 Target: 27,908
    - Adjusted: 28,608
    - 3/31/20 Target: 10,293
- Memorandum items:
  - Adjustor on NIR (in millions of U.S. dollars) 2/:
    - 3/31/19: 1,733
    - Adjusted: 830
    - Actual: 903
    - 9/30/19 Target: 2,152
    - Adjusted: 2,373
    - 3/31/20 Target: 3,278
  - Adjustor on the fiscal deficit (in millions of dirham) 3/:
    - 3/31/19: 500
    - Adjusted: 402
    - Actual: 98
    - 9/30/19 Target: 1,500
    - Adjusted: 1,500
    - 3/31/20 Target: 500
- Notes:
  - 1/ End-of-period (eop) stock, in millions of U.S. dollars, evaluated at the program exchange rate fixed on November 9, 2018 - namely 9.527 MAD/$.
  - 2/ The floor on NIR of BAM will be adjusted downward (upward) in the event of a shortfall (surplus) of official grants and loans received by the central government from bilateral and multilateral agencies relative to program projections. The adjustors are cumulative from end-September 2018.
  - 3/ The fiscal deficit ceiling will be adjusted upward (downward) in the event of a shortfall (surplus) of budgetary grants received by the central government from bilateral and multilateral agencies relative to program projections. The adjustors for 2019 are cumulative from end-December 2018. The adjustors for 2020 will be cumulative from end-December 2019.

### PLL schedule and access (Table 2 extract)
- Review dates and conditions for access (Million Dollars 6/):
  - December 17, 2018 — Board approval of the PLL:
    - Credit Available: 1,250.66   1,747.47
    - (additional table figures: 140; 58)
  - June 12, 2019 — First review, based on March 31, 2019 indicative targets:
    - Figures shown: 9,771; 23,539
    - Credit Available: 1,250.66   1,747.47
    - (additional table figures: 140; 58)
  - December 16, 2019 — Second review, based on September 30, 2019 indicative targets:
    - Figures shown: 28,608; 24,411
    - Credit Available: 2,150.80   3,005.19
    - (additional table figures: 240; 100)
  - June 16, 2020 — Third review, based on March 31, 2020 indicative targets:
    - Credit Available: 2,150.80   3,005.19
    - (additional table figures: 240; 100)
  - Total:
    - Credit Available: 2,150.80   3,005.19
    - (additional table figures: 240; 100)
- Notes:
  - Source: IMF staff estimates. 1/ Evaluated at the program exchange rate (November 9, 2018 - namely 9.527 MAD/$.) for 2019 and 2020.
  - 6/ SDR/Dollar Exchange rate of $1 = 0.715694 SDR as of October 16, 2018.
  - 4/ Credit available assuming no purchase. 5/ Full access will be available on December 17, 2019.

### Staff and authorities' assessment (Statement by Mr. Mohammed Daïri, June 12, 2019)
- Fiscal and structural reforms:
  - Fiscal vulnerabilities have been significantly reduced; public debt remains sustainable and resilient to shocks and should start to decline.
  - Medium-term target: bring public debt-to GDP ratio down to 60 percent.
  - Reforms to strengthen revenue mobilization, enhance spending prioritization and efficiency, and monitor and mitigate fiscal risks, including in SOEs.
  - Recourse to PPPs within a prudent regulatory framework to maintain infrastructure investment.
  - Announced privatization program to focus SOEs on core activities and reduce gross financing needs.
  - Implementation of advanced regionalization program with governance to mitigate fiscal risks.
  - Social protection overhaul to achieve broader coverage and enhance effectiveness and targeting of social spending.
- PLL role and performance:
  - PLL considered key under current unfavorable and uncertain global environment.
  - Authorities hopeful their track record will support completing the first review of the December 2018 PLL arrangement.
  - Performance under the PLL was favorable; indicative targets for fiscal deficit and net international reserves for March 2019 were met, the fiscal target with a wide margin.
  - Morocco meets PLL qualification criteria; strong performance in monetary, financial, and data areas.
  - Bank Al-Maghrib successful in maintaining inflation under firm control; transition to exchange rate flexibility started smoothly.
  - Financial sector is sound and well supervised; regulatory and supervisory framework and macroprudential toolkit strengthened in line with FSAP recommendations.
  - Authorities committed to addressing AML/CFT framework shortcomings.
  - Data provision and quality under the SDDS are adequate for surveillance and program monitoring.
- External sector and market access:
  - External sector vulnerabilities reduced following increased export diversification toward higher value-added activities.
  - Reserves comfortable by traditional and IMF ARA metrics.
  - External debt relatively low, assessed as sustainable and resilient to adverse shocks.
  - Investor confidence remains strong, evidenced by favorable spreads and steady FDI inflows.
  - Sovereign has not accessed international capital markets since 2014, but authorities intend to tap markets in 2019 and 2020.
- Authorities' reservations:
  - Authorities have reservations about staff assessment of the external sector under EBA; concern about excessive reliance on the current account (CA) approach.
  - Residual under CA approach increased from -1.6 percent in the 2017 exercise to -3.4 percent in this report; authorities question the explanatory validity of worker-employer relations for this change.
  - Authorities request that the two other methods be taken into consideration for a more balanced external sector assessment and stand ready to provide required data.
- PLL access stance:
  - Authorities will treat the PLL as precautionary.
  - After several reductions in access since the first PLL arrangement, they will monitor progress in strengthening resilience and global risks and assess the possibility of further reducing access or exiting the PLL as conditions permit.
- Institutional and business climate reforms:
  - Progress in enhancing the business climate reflected in improved Doing Business indicators and the Corruption Perception index.
  - Recent entry into function of the Competition Council and the new anti-corruption agency expected to help establish a level playing field.
  - Continued reforms targeted at easing business regulations, greater financial inclusion and support to SMEs, increased transparency, and improved interagency coordination.
- Social considerations:
  - Authorities emphasize the importance of social stability and building broad support for reforms.
  - Acknowledge that reform implementation in socially sensitive areas can be challenging and time consuming and will continue engaging key partners to reach broad consensus.

*Source: IMF staff estimates and statement contained in the provided content unit.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1marea2019005.pdf_