## cr1924-morocco ## Source details **Canonical URL:** [cr1924-morocco](https://www.imf.org/-/media/files/publications/cr/2019/cr1924-morocco.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/cr1924-morocco.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/cr1924-morocco.pdf.json) --- ### EXECUTIVE SUMMARY - Context and Rationale - Following the expiration of the third Precautionary and Liquidity Line (PLL) arrangement in July 2018, the authorities requested a new PLL arrangement to support policies aimed at strengthening resilience and promoting higher and more inclusive growth. - Morocco did not draw on the last three PLL arrangements and has made further progress in reducing domestic vulnerabilities despite a sharp pick up in oil prices. - Domestic reforms have been slow since late 2016 elections; important reform priorities include raising human capital, strengthening the labor market to reduce structural unemployment (in particular among the youth), strengthening social safety nets, and promoting higher and more inclusive growth. - PLL Arrangement and Qualification - Staff considers that Morocco continues to meet the PLL qualification criteria and recommends approval of the authorities’ request. - Performance: strong in three out of five PLL qualification areas—monetary, financial, and data—and does not substantially underperform in fiscal policy, and external position and market access. - Fund Liquidity, Duration, and Access - Authorities intend to treat the new arrangement of a proposed duration of two years as precautionary. - Staff estimates that under a stress scenario, potential financing needs by 2020 could lead to a total access level of 240 percent of quota, amounting to SDR 2.15 billion, or US$3 billion. - Recent developments (through Q3–Q4 2018) - Growth and labor market: - Output grew by 4.1 percent in 2017; non-agricultural GDP growth was 2.7 percent in 2017. - Preliminary estimates show growth should reach 3.1 percent in 2018. - Unemployment was 10 percent in the third quarter of 2018; youth unemployment was 27.5 percent; graduates’ unemployment was 17.1 percent. - Fiscal: - Fiscal deficit declined to 3.6 percent of GDP in 2017 (against 4.5 percent in 2016). - For 2018, headline deficit is expected to reach 3.6 percent of GDP (against the authorities’ objective of 3.0 percent). - Public debt projected to stabilize around 65.3 percent of GDP in 2018 (against 65.1 percent in 2017). - Monetary and credit: - Headline inflation reached 1.1 percent in October 2018 (compared to 0.64 percent in October 2017) and is projected to average 2 percent in 2018. - Bank-Al-Maghrib policy rate unchanged at 2.25 percent since March 2016. - Credit growth to non-financial private enterprises was 1.1 percent in September (y-o-y). - External sector: - Current account deficit expected to widen to 4.5 percent in 2018 from 3.6 percent in 2017. - EBA analysis (July 2018) found a current account gap of 1 percent of GDP, consistent with an exchange rate broadly in line with fundamentals. - Authorities started transition to greater exchange rate flexibility in January 2018 by widening the dirham fluctuation band to 2.5 percent (from 0.3 percent) on either side of a reference parity; central bank has not intervened since March 2018. - Banking sector: - Banks’ regulatory capital ratio declined slightly to 13.3 percent at end-June 2018. - Nonperforming loan (NPL) ratio was 7.7 percent in September 2018; provisioning levels were 70 percent. - IFRS 9 introduced in January 2018 with phased-in capital impact over the next five years. ### MEDIUM-TERM OUTLOOK AND PROJECTIONS - Growth and inflation - Growth projected to reach 3.3 percent in 2019 and 4.5 percent over the medium term (conditional on implementing reform commitments). - Inflation projected to slow to 1.4 percent in 2019 and stabilize around 2 percent over the medium term. - Fiscal and public debt - Fiscal deficit projected to increase to 3.7 percent of GDP in 2019; with privatization receipts reducing the public financing need to 3.3 percent of GDP. - Deficit expected to decline and stabilize around 3 percent of GDP by 2020. - Expected privatization revenues would contribute to reduce public debt close to 60 percent of GDP over the medium term. - External sector and reserves - Current account deficit expected to decline to 4 percent of GDP in 2019 and to 2.8 percent of GDP in the medium term. - Foreign direct investment expected to increase to 2.2 percent of GDP. - Other private flows expected to hover around 1.7 percent of GDP. - International reserves expected to reach 93 percent of the ARA metric in the medium term. - Notable 2018 shock - Energy prices are projected to be up 32 percent vis-à-vis 2017. ### KEY MACRO PROJECTIONS (selected series as presented) - Real GDP (selected years): 2015: 4.5; 2016: 1.1; 2017: 4.4; 2018: 4.1; 2019: 3.1; 2020: 3.1; 2021: 3.3; 2022: 3.9; 2023: 4.2; 2024: 4.4; 2025: 4.5. - Consumer prices (end of period): 2015: 0.6; 2016: 1.8; 2017: 0.9; 2018: 1.9; 2019: 1.6; 2020: 2.0; 2021: 1.4; 2022: 2.0; 2023: 2.0; 2024: 2.0; 2025: 2.0. - Total government debt (percent of GDP): 2015: 63.7; 2016: 64.9; 2017: 64.4; 2018: 65.1; 2019: 64.1; 2020: 65.3; 2021: 65.2; 2022: 64.5; 2023: 63.3; 2024: 62.2; 2025: 61.3. ### FISCAL CONSOLIDATION AND MEDIUM-TERM FISCAL SPACE - Fiscal stance, debt outlook, and fiscal space - Morocco currently has some fiscal space, reflecting moderate gross financing needs, a favorable debt structure, and manageable medium and long-term adjustment needs. - Public debt remains sustainable, resilient to various shocks, and below the benchmark of 70 percent of GDP for emerging markets (Annex I). - Authorities committed to gradually reduce public debt to 60 percent of GDP. - Reduced subsidy spending on butane gas, if prices decline, could generate fiscal savings up to 0.3 percent of GDP. - Anchoring public debt reduction to 60 percent of GDP is compatible with a pace of fiscal consolidation that does not significantly weaken growth prospects. - Reforms needed to secure medium-term fiscal sustainability and reduce fiscal risks - Tax reform: boost tax collection by 0.8 percent of GDP by 2020 and 1.3 percent of GDP over the medium term through measures including aligning reduced VAT rates with the standard rate, reducing tax exemptions, better enforcement for self-employed, lowering and simplifying corporate tax rates, and raising property tax. - Public wage containment: keep public payroll below 10.5 percent of GDP over the medium term; civil service reform including contractual employment, personnel mobility, merit-based progression, and simplification of civil service statute. - Fiscal decentralization: implement deconcentration charter in 2019; draft law submitted October 2018 to strengthen Regional Investment Centers. - SOE governance: draft law to strengthen governance and oversight of SOEs to be submitted during April 2019 session; forthcoming privatization program to refocus SOE activities. ### PUBLIC DEBT SUSTAINABILITY (Annex I — selected findings) - Summary findings - Public debt about 65.1 percent of GDP at end-2017. - Gross financing needs exceeded 15 percent of GDP in 2014 but declined under that benchmark in 2015 and expected to continue declining. - Short-term debt represented about 12.3 percent of total public debt at end-2017. - DSA shows debt resilient to various shocks; debt remains below the 70 percent benchmark under most shocks but approaches the benchmark under shocks to real GDP growth or the primary balance. - Baseline public debt path (nominal gross public debt, in percent of GDP): - 2016: 54.6; 2017: 64.9; 2018: 65.1; 2019: 65.3; 2020: 65.2; 2021: 64.5; 2022: 63.3; 2023: 62.2. - Policy recommendations from DSA - Continue fiscal consolidation to reduce deficits and public debt toward 60 percent of GDP. - Lengthen average maturities and improve debt management to lower gross financing needs and rollover risks. ### PLL QUALIFICATION, ACCESS, AND ADVERSE SCENARIO - Qualification summary - Staff assesses Morocco continues to qualify for a PLL arrangement; performs strongly in financial sector and supervision, monetary policy, and data adequacy; does not substantially underperform in external position and market access, and fiscal policy. - International reserves averaged 88 percent of the ARA metric over 2013–17. - Public debt increased from 56.5 percent to 65.1 percent of GDP between 2012 and 2017 but assessed to be sustainable with high probability. - Vulnerabilities and rationale for precautionary access - Balance of payments vulnerable to external shocks: higher oil prices; weaker euro-area demand affecting exports, tourism, FDI, remittances; volatile global financial conditions raising borrowing costs. - Baseline: Morocco does not face a financing gap; gross external financing requirements expected to stabilize around US$6.5 billion at end-2020. - Adverse scenario (staff assessment): financing gap consistent with total access level of 240 percent of quota (about US$3 billion) by 2020. - Adverse scenario assumptions (summary) - Net increase in the oil price by about US$10 (US$15 attributable to geopolitical supply shock; US$5 decrease attributable to spillover from weak euro area growth). - Decline in euro area trading partners’ growth by about 0.5 percentage point. - Net decline in tourism receipts by about 15 percent relative to the baseline. - Decline in FDI inflows by 15 percent and equity portfolio outflows of about 60 percent relative to the baseline. - Increase in interest rates by 100 basis points above the baseline. - Access sizing and phasing - Preliminary assessment: potential financing need of about US$3 billion by end-2020 (total access 240 percent of quota). - Proposed disbursement: two tranches of US$1.7 and US$1.3 billion over 2019 and 2020, respectively. - Full drawing under proposed PLL would bring Morocco’s outstanding use of GRA resources to SDR 2.15 billion. - Capacity to repay and Fund exposure - Morocco has no outstanding debt to the Fund prior to the proposed PLL. - Were the full amount purchased in first and second year, Fund credit would reach about 5 percent of total external debt at its peak; projected debt service to the Fund would peak in 2023 at about 1 percent of GDP. - One-year forward commitment capacity (FCC) would decrease by about 1.2 percent to about SDR 181.7 billion upon approval. - Proposed access represents 1.5 percent of total GRA commitments; if fully drawn, GRA credit to Morocco would be about 4 percent of current GRA credit outstanding (as of November 23, 2018). ### POLICY PRIORITIES UNDER THE PLL ARRANGEMENT - Objectives - Enhance macroeconomic resilience in an adverse international environment. - Support transition to a growth model that is more private sector-led, broad-based and inclusive, including through strengthened public governance and reduced corruption and inequalities. - Key policy areas and actions (from Written Communication/W-COM) - Fiscal policy: continue fiscal prudence while managing temporary impact of higher oil and butane prices; 2019 budget envisages a public deficit of 3.7 percent of GDP (3.2 percent including privatization revenues). - Monetary policy: maintain accommodative stance given contained inflation and subdued non-agricultural and credit growth. - Structural reforms: improve business environment, boost productivity, enhance tax revenues, reform taxation, governance, oversight of SOEs, fiscal decentralization; strengthen social safety nets and reduce inequalities. - Financial sector: strengthen bank capitalization to accommodate IFRS 9 phased impact; monitor NPLs, credit concentration, and risks from international expansion. - Implementation and monitoring - Morocco will provide IMF with information needed to monitor economic and policy developments, including weekly NIR/GIR reporting and monthly fiscal deficit and budget aggregates. - Indicative targets (examples): Net international reserves (BAM) targets listed as 24,369; 25,228 (end-period stocks); fiscal deficit cumulative targets in millions of dirham listed as 9,369; 27,908. - Program exchange rate for monitoring NIR during the first year: MAD 9.527 per U.S. dollar (rate prevailing on November 9, 2018). - Board approval and review timetable: Board approval of PLL expected December 17, 2018; first review by no later than June 16, 2019; second review by no later than December 16, 2019; third review by no later than June 16, 2020. ### RISKS, UNCERTAINTIES, AND STAFF ASSESSMENT - Balance of risks tilted to the downside. - Domestic risks: delays in implementing fiscal and structural reforms could reduce fiscal space, increase social tensions, and weigh on potential growth. - External risks: oil prices, euro area growth, geopolitical risks, and global policy uncertainty could affect exports, tourism, FDI, and remittances; volatile global financial conditions could raise borrowing costs and weaken investor confidence. - Upside possibility: lower international oil (and butane gas) prices could significantly improve macroeconomic imbalances. - Staff appraisal and recommendation - Staff assesses Morocco continues to meet PLL qualification criteria and recommends approval of a new two-year PLL arrangement of SDR 2.15 billion (240 percent of quota), with 140 percent available in the first year. - Arrangement considered appropriate to insure against external shocks and support reform implementation; staff views arrangement as carrying low risks to the Fund. *International Monetary Fund. EXECUTIVE SUMMARY; IMF staff report and annexes (cr1924-morocco).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and Rationale - Following the expiration of the third Precautionary and Liquidity Line (PLL) arrangement in July 2018, the authorities requested a new PLL arrangement to support policies aimed at strengthening resilience and promoting higher and more inclusive growth. - Morocco did not draw on the last three PLL arrangements and has made further progress in reducing domestic vulnerabilities despite a sharp pick up in oil prices. - Domestic reforms have been slow since late 2016 elections; important reform priorities include raising human capital, strengthening the labor market to reduce structural unemployment (in particular among the youth), strengthening social safety nets, and promoting higher and more inclusive growth. ### PLL Arrangement and Qualification - Staff considers that Morocco continues to meet the PLL qualification criteria and recommends approval of the authorities’ request. - Key judgments: - Morocco’s economic fundamentals and policy frameworks are sound; the country is implementing (and has a track record of implementing) generally sound policies and remains committed to maintaining such policies. - Morocco performs strongly in three out of five PLL qualification areas: monetary, financial, and data. - Morocco does not substantially underperform in the areas of fiscal policy, and external position and market access. - Morocco does not face any of the circumstances under which the Fund might no longer approve a PLL arrangement. ### Fund Liquidity, Duration, and Access - The authorities intend to treat the new arrangement of a proposed duration of two years as precautionary. - Staff estimates that under a stress scenario, potential financing needs by 2020 could lead to a total access level of 240 percent of quota, amounting to SDR 2.15 billion, or US$3 billion. ### Recent Developments (approved and observed through Q3–Q4 2018) - Growth and labor market: - Output grew by 4.1 percent in 2017; non-agricultural GDP growth was 2.7 percent in 2017. - Preliminary estimates show growth should reach 3.1 percent in 2018, supported by another good cereal harvest and strong activity in tourism and commerce. - Unemployment was 10 percent in the third quarter of 2018; youth unemployment was 27.5 percent; graduates’ unemployment was 17.1 percent. - Fiscal: - Fiscal deficit declined to 3.6 percent of GDP in 2017 (against 4.5 percent in 2016). - For 2018, headline deficit is expected to reach 3.6 percent of GDP (against the authorities’ objective of 3.0 percent). - Cyclically-adjusted and primary deficits would decrease by about 0.3 percent of GDP in 2018. - Public debt projected to stabilize around 65.3 percent of GDP in 2018 (against 65.1 percent in 2017). - Monetary and credit: - Headline inflation reached 1.1 percent in October 2018 (compared to 0.64 percent in October 2017) and is projected to average 2 percent in 2018. - Bank-Al-Maghrib policy rate unchanged at 2.25 percent since March 2016. - Credit growth to non-financial private enterprises was 1.1 percent in September (y-o-y). - External sector: - Current account deficit expected to widen to 4.5 percent in 2018 from 3.6 percent in 2017, driven mainly by higher energy and capital goods imports despite sustained exports of phosphate and industrial products. - The EBA analysis updated in July 2018 found a current account gap of 1 percent of GDP, consistent with an exchange rate broadly in line with fundamentals. - Authorities started a transition to greater exchange rate flexibility in January 2018 by widening the dirham fluctuation band to 2.5 percent (from 0.3 percent) on either side of a reference parity; exchange rate fluctuations have remained very limited and the central bank has not intervened in the foreign exchange market since March 2018. - Banking sector: - Banks’ regulatory capital ratio declined slightly to 13.3 percent at end-June 2018. - Nonperforming loan (NPL) ratio was 7.7 percent in September 2018; provisioning levels were 70 percent. - IFRS 9 was introduced in January 2018; its impact will be phased in over the next five years by increasing capital accordingly. - Risks include NPLs, credit concentration, and international expansion of banks (notably in Africa, most recently in Egypt). ### Medium-Term Outlook and Projections - Growth and inflation: - Growth projected to reach 3.3 percent in 2019 as nonagricultural activity recovers, and 4.5 percent over the medium term (conditional on implementing reform commitments). - Inflation projected to slow to 1.4 percent in 2019 and stabilize around 2 percent over the medium term. - Fiscal and public debt: - Fiscal deficit projected to increase to 3.7 percent of GDP in 2019; with privatization receipts reducing the public financing need to 3.3 percent of GDP. - Deficit expected to decline and stabilize around 3 percent of GDP by 2020. - Expected privatization revenues would contribute to reduce public debt close to 60 percent of GDP over the medium term. - External sector and reserves: - Current account deficit expected to decline to 4 percent of GDP in 2019 and to 2.8 percent of GDP in the medium term. - Foreign direct investment expected to increase to 2.2 percent of GDP. - Other private flows (including trade credit and portfolio investment flows) expected to hover around 1.7 percent of GDP. - International reserves expected to reach 93 percent of the ARA metric in the medium term. - Notable 2018 shock: - Energy prices are projected to be up 32 percent vis-à-vis 2017. ### Risks and Uncertainties - Balance of risks is tilted to the downside. - Domestic risks: - Delays in implementing key fiscal and structural reforms could reduce future fiscal space, contribute to social tensions, and adversely affect the external sector and potential growth. - External risks: - Oil prices, euro area growth, geopolitical risks, and global policy uncertainty could affect exports, tourism, FDI flows, and remittances, worsening fiscal and external imbalances. - Increasingly volatile global financial conditions may increase borrowing costs and weaken investor confidence. - Upside possibility: - Lower international oil (and butane gas) prices could significantly improve macroeconomic imbalances. ### Policy Priorities Under the PLL Arrangement - Objectives: - Enhance macroeconomic resilience in an adverse international environment. - Support the authorities’ transition to a growth model that is more private sector-led, broad-based and inclusive, including through strengthened public governance and reduced corruption and inequalities. - Key policy areas and actions (as outlined in the Written Communication/W-COM): - Fiscal policy: Continue fiscal prudence while managing the temporary impact of higher oil and butane prices; the 2019 budget envisages a public deficit of 3.7 percent of GDP (3.2 percent including privatization revenues). - Monetary policy: Maintain accommodative monetary policy in a context of contained inflation and subdued non-agricultural and credit growth. - Structural reforms: Implement reforms to improve the business environment, boost productivity, enhance tax revenues, reform taxation, governance, oversight of state-owned enterprises, fiscal decentralization, and the business environment; strengthen social safety nets and reduce inequalities. - Financial sector: Strengthen bank capitalization to accommodate IFRS 9 phased impact; monitor NPLs, credit concentration, and risks from international expansion. ### Assessment and Implementation Support - PLL would provide insurance against external shocks and support the authorities’ efforts to improve fundamentals and policy frameworks. - The arrangement would build on progress under past PLL arrangements and help anchor reform implementation to support resilience and inclusive growth. *International Monetary Fund. EXECUTIVE SUMMARY (cr1924-morocco).* ### 15. Over the medium term, fiscal consolidation will remain essential to reduce public debt ### 15. Over the medium term, fiscal consolidation will remain essential to reduce public debt ### Fiscal stance, debt outlook, and fiscal space - Morocco currently has some fiscal space, reflecting moderate gross financing needs, a favorable debt structure, and manageable medium and long-term adjustment needs. - Public debt remains sustainable, resilient to various shocks, and below the benchmark of 70 percent of GDP for emerging markets (Annex I). - The authorities are committed to gradually reduce public debt to 60 percent of GDP. - Reduced subsidy spending on butane gas, if butane gas prices decline (together with international oil prices), could generate fiscal savings up to 0.3 percent of GDP that should help reach faster the authorities’ objective of 60 percent of GDP. - Based on analyses of the fiscal multiplier, anchoring public debt reduction to 60 percent of GDP over the medium term would be compatible with a pace of fiscal consolidation that does not significantly weaken growth prospects. ### Reforms needed to secure medium-term fiscal sustainability and reduce fiscal risks - Tax reform - Objective: increase fairness, reduce distortions, and boost tax collection by 0.8 percent of GDP by 2020 (and 1.3 percent of GDP over the medium term). - Elements to reflect in strategy: - Align reduced VAT rates on manufacturing goods and services with the standard VAT rate. - Reduce tax exemptions. - Better enforce tax payments from the self-employed and liberal professions. - Lower and simplify corporate tax rates. - Raise property tax. - A national conference on taxation in early 2019 will be an opportunity to design a tax reform strategy; the Fund will be ready to provide technical support. - Public wage containment - Authorities intend to keep the public payroll below 10.5 percent of GDP over the medium term so as not to compromise priority spending. - A civil service reform is needed to generate durable savings while strengthening the efficiency and quality of public services. - Measures introduced that need further implementation include contractual employment and personnel mobility. - Additional measures needed: merit-based career progression and a simplification of the civil service statute. - Fiscal decentralization - The organic budget law for the regions (adopted in 2015) defined the contour of decentralization and reinforced local governance. - A draft law to strengthen the role of Regional Investment Centers (CRIs) and better reflect local needs in investment decisions was submitted to parliament in October 2018. - With increasing transfers of public resources to local entities, mechanisms to ensure sound financial management are essential: - A deconcentration charter, to be implemented in 2019, will help clarify local competences, introduce transparent criteria for intergovernmental transfers, mitigate contingent liability risks, and, in the longer term, enhance local taxation. - Public enterprises (SOEs) - A draft law to strengthen the governance and oversight of SOEs and to improve their performance should be submitted to parliament during the April 2019 session. - SOEs are aligning their accounting practices with the International Financial Reporting Standard and the authorities are preparing consolidated SOE balance sheet data. - The forthcoming privatization program will help improve SOE performance, including by refocusing their activities on core missions. - Ongoing technical assistance from FAD supports efforts to strengthen operational and strategic frameworks to assess and mitigate SOE-related fiscal risks. ### Exchange rate policy and external resilience - Continuing the transition to greater exchange rate flexibility will strengthen external resilience. - Staff recommended moving forward without unnecessary delay for preventive purposes: to protect reserve buffers, put the economy in a better position to absorb potential external shocks, and preserve competitiveness. - The reform will encourage export diversification and SME development, supporting job opportunities and income for the poor and middle class (90 percent of enterprises are SMEs). - The authorities remain committed to continue the exchange rate transition, consisting of a further broadening of the dirham fluctuation band, when conditions permit and in the context of a well-structured communication strategy. ### Financial sector soundness - Risks related to bank asset quality will continue to be monitored closely. - The gradual introduction of strengthened provisioning requirements under IFRS9 should be absorbed without major impact on bank capitalization; many banks have prepared to adjust their capital structure. - The supervisory authority is encouraging greater use of syndicated lending to better distribute risks and reduce concentrated credit exposures. - Efforts to deepen supervisory collaboration with host countries in Africa are continuing, especially regarding money laundering and terrorist financing risks and pressures on correspondent banking relationships. ### Public sector governance and public spending efficiency - Clearing the large stock of VAT credits due to public and private enterprises (about 4 percent of GDP) is a significant and welcome step toward transparency and accountability. - Authorities are introducing measures to reduce payment delays in the public and private sectors (including an electronic platform). - The Organic Budget law implementation is expected to continue, including measures to strengthen the oversight role of the Parliament and the Cour des Comptes. - Reporting publicly on the implementation of the national strategy to address governance and corruption vulnerabilities will be important to safeguard public trust. - Progress includes an online platform for public feedback on public service delivery. - A draft law to establish illicit enrichment as a criminal offense has been prepared and should be submitted to parliament in 2019. - Staff welcomed the authorities’ intention to publish the first progress report of the national strategy. - Strengthening efficiency and impact of public spending - For public investment: implement recommendations of the 2017 Public Investment Management Assessment (PIMA), including tools to facilitate centralized management of public investment projects and related risks. - Increasing reliance on public-private partnerships, with Fund technical support (FAD). - For social spending: major shortcomings in targeting and impact are being addressed. - The planned introduction of a social registry in 2019–20, with World Bank support and building on international best practices, will be important to improve targeting. - Broader efforts to raise the quality of public services (e.g., better teacher performance evaluation in education) are critical. ### Growth, inclusion, and structural impediments - Morocco’s total factor productivity (TFP) growth has been decelerating over the last decade, mostly due to structural impediments in the education system, the labor market, and the business environment. - Authorities intend to increase the pace and coordination of structural reforms to boost potential growth and job creation and reduce social and spatial disparities. - Business environment and SMEs - Doing Business ranking rose from 69 in 2018 to 60 in 2019. - Recent reforms: new bankruptcy law (approved April 2018) and dematerialization of administrative procedures (e.g., starting a business, transferring property). - A new Investment Charter is being developed to make the investment regime more attractive and simplify administrative procedures. - Longstanding weaknesses in competition practices limit SME development; the Competition Council (created in 2014) should become operational imminently (following the nomination of its President in November 2018). - Financial inclusion and SME finance - At about 33 percent of total credit, credit to SMEs is relatively high by regional standards but has been stagnant in recent years. - Collateral requirements for small enterprises are high (above 200 percent, a level larger than the global and MENA averages). - Firms continue to consider access to finance as the second largest obstacle to doing business in Morocco. - A national strategy for financial inclusion is expected to be finalized before the end of 2018, introducing objectives and measures: increase financial education, expand mobile payments and credit bureau coverage, relax credit ceilings for microcredit institutions. - Authorities will soon present to parliament a draft law to extend the array of assets that can be pledged to facilitate access to credit, including moveable assets. - Labor market and unemployment - Reducing unemployment, particularly among the youth, will require ambitious labor market reforms. - Measures identified for 2018–19: creation of a labor market observatory for skills matching, support for education and vocational training, strengthening active labor market policies targeting the youth. - Staff stressed the importance of further steps to unlock youth job opportunities, including greater flexibility for contractual employment and in hiring and firing regulations (together with proper unemployment safety nets), which may require revisions to the labor code. - Social spending targeting and public service quality - Social programs are numerous but not properly coordinated and evaluated; despite relatively high aggregate social spending, impact on the poorest is unsatisfactory. - Introduction of a social registry in 2019–20 will be an important step to improve targeting. - Raising the quality of public services (notably education) is critical; measures include better teacher performance evaluation. *Source: IMF staff report excerpt (Morocco).* ### 27. Staff assesses that Morocco continues to qualify for a PLL arrangement, in line with the ### Staff assesses that Morocco continues to qualify for a PLL arrangement ### Qualification summary - Staff assesses that Morocco continues to qualify for a PLL arrangement, in line with the generally positive assessment of Morocco’s policies by the Executive Board during the 2017 Article IV consultation. - Morocco meets the qualification criteria for a PLL arrangement and performs strongly in three out of the five PLL qualification areas (financial sector and supervision, monetary policy, and data adequacy), and does not substantially underperform in the other two areas (external position and market access, and fiscal policy). - International reserves averaged 88 percent of the ARA metric over 2013–17. - Public debt increased from 56.5 percent to 65.1 percent of GDP between 2012 and 2017, but is assessed to be sustainable with a high probability and resilient to various shocks. ### Macroeconomic fundamentals and policy stance - Growth averaged 3½ percent during 2012–17. - Inflation remained low (less than 2 percent). - Fiscal developments were favorable, with contained current expenditures offsetting weaker revenues; the public deficit increased in 2018 due mostly to exogenous factors. - The current account deficit narrowed in 2017 but widened in 2018; the underlying current account deficit remains relatively high but broadly in line with fundamentals. - Over the medium term, economic growth is projected to increase steadily in a context of moderate inflation. Both public and external debts are sustainable. - Authorities’ commitments and reform priorities: - Secure strong revenue performance, contain spending, and reduce public debt to close to 60 percent of GDP over the medium term. - Pursue structural reforms to raise potential growth and promote higher and more inclusive growth, including improving competitiveness and the business environment, strengthening the fight against corruption, and raising human capital. - Flexible policy and institutional frameworks: - OBL implementation enhances the fiscal policy framework by helping to maintain current spending within budgeted levels. - Morocco performs well on indicators of the ability to undertake countercyclical fiscal policy; scores lower on monetary policy cyclicality (less relevant given pegged exchange rate regime). - Bank al-Maghrib (BAM) has a clear mandate and is upgrading the monetary policy regime as part of the transition to greater exchange rate flexibility and inflation targeting. - Morocco performs well relative to peers in the 2017 Worldwide Governance Indicators on control of corruption and government effectiveness (scores: control of corruption -0.1; government effectiveness -0.2; average emerging market and developing economy -0.3 and -0.5, respectively). ### Box 1 — Achievements Under the Third PLL Arrangement - Objective of the 2016 PLL arrangement: provide insurance and support to authorities’ reform program in an environment with significant downward risks. - Program macro targets and outcomes (selected): - Growth projections: 1.8 percent in 2016 and 4.8 percent in 2017 (projected at program onset). - Fiscal targets: 3.5 percent of GDP in 2016 and 3 percent of GDP in 2017. - Current account projections: 1.2 percent in 2016 and 1.4 percent in 2017. - Reserves projection: increase to 7.6 months of imports in 2017. - External assumptions: Euro zone GDP growth projected to improve by 0.1 percent of GDP from 2016 to 2017; oil prices expected to increase from US$43.1 in 2016 to US$50 in 2017. - Reforms implemented during the third PLL arrangement: - Parametric reform of the main public sector pension plan implemented in 2017. - Pension scheme for self-employed and independent workers adopted in November 2017. - Focus on improving targeting of social programs and preparation of a social registry following full liberalization of liquid fuel prices in 2015. - Transition to greater exchange rate flexibility initiated in January 2018 with a widening of the dirham fluctuation band to +/-2.5 percent around the reference parity. - Program outcomes and deviations: - Real GDP growth in 2016 and 2017 was below projections, partly hampered by a severe drought (2016). - Fiscal deficits above targets: 4.1 percent of GDP in 2016 (target 3.5 percent) and 3.6 percent of GDP in 2017 (target 3.0 percent). - Current account deficits higher than expected: 4.2 percent of GDP in 2016 and 3.6 percent of GDP in 2017 (expected 1.2 percent and 1.4 percent, respectively), driven by larger food imports in 2016 and higher international oil prices since 2017. - Reserves remained above five months of imports during 2016–18 despite weaker-than-expected net capital inflows. - Selected macro table highlights (2016–18, various indicators): - Real GDP: 1.8 / 1.1 / 4.8 / 4.1 / 4.2 / 3.1 (table layout preserved in source). - Consumer prices (period average): 1.3 / 1.6 / 1.3 / 0.8 / 1.4 / 2.0. - Revenue: 26.9 / 26.0 / 27.5 / 26.1 / 27.6 / 26.2. - Expenditure: 30.4 / 30.5 / 30.5 / 29.7 / 30.4 / 29.8. - Budget balance: -3.5 / -4.5 / -3.0 / -3.6 / -2.8 / -3.6. - Total government debt: 64.4 / 64.9 / 63.8 / 65.1 / 63.3 / 65.3. - Current account including official transfers: -1.2 / -4.2 / -1.4 / -3.6 / -1.5 / -4.5. - Gross reserves (in billions of U.S. dollars): 26.7 / 25.1 / 30.2 / 26.2 / 34.2 / 24.8. - In months of next year imports of goods and services: 7.1 / 6.1 / 7.6 / 5.7 / 8.1 / 5.2. - Oil Brent Price ($/barrel): 43.1 / 44.0 / 50.0 / 54.4 / 52.2 / 71.9. ### Assessment of Specific PLL Criteria - Overall: Morocco performs strongly in three areas (financial sector and supervision, monetary policy, and data adequacy) and does not substantially underperform in external position and market access, and fiscal policy. - External position and market access (does not substantially underperform) - Criterion 1 — Sustainable external position: - July 2018 EBA: Morocco’s external position is broadly in line with fundamentals. - Current account: narrowed in 2017 after widening in 2016; widened in 2018 and should reach 4.5 percent of GDP at the end of 2018. - External debt: 33.7 percent of GDP and expected to decline to 31 percent of GDP in the medium term. - Criterion 2 — Capital account position dominated by private flows: - Private capital flows about 81 percent on average between 2015 and 2017; FDI is the largest component. - Private external debt about 10.7 percent of total debt or 3.6 percent of GDP. - Loans from bilateral and development partners constitute the bulk of public capital flows. - Criterion 3 — Track record of steady sovereign access to international capital markets at favorable terms: - Morocco has not issued international bonds since 2014; authorities plan to issue in early 2019. - Average maturity of public external debt extended to eight years and six months (against seven years and four months in 2009). - Criterion 4 — Reserve position: - Reserves below 100 percent of the ARA metric on average over the last three years, at 95 percent. - Other metrics: 5.6 months of imports, ample coverage of short-term debt and broad money, and 110 percent of the ARA adjusted for capital controls at end-2017. - By 2023, reserves expected to reach about six months of imports, 93 percent of the standard ARA metric, and 121 percent of the metric adjusted for capital controls. - Fiscal policy (does not substantially underperform) - Criterion 5 — Sound public finance, including a sustainable public debt position: - A deficit of 3.6 percent of GDP expected in 2018 due mostly to exogenous factors. - Authorities aim to reduce public debt close to 60 percent of GDP over the medium term (against 65.1 percent of GDP in 2017), requiring bringing the fiscal deficit to about 3 percent of GDP by 2020. - Public debt sustainable with high probability and resilient to various shocks despite high gross financing needs; average maturities lengthened from 6 years and 6 months in 2014 to about 7 years and 3 months in 2017. - Structural fiscal measures advised: further tax reforms (reduced exemptions, stronger VAT revenues, improved corporate taxation), civil service reform to generate long-term savings on the wage bill, institutional mechanisms to control risks from fiscal decentralization. - Authorities intend to submit to parliament a draft law to reinforce governance and oversight of SOEs in April 2019, and to undertake a multi-year privatization plan. - Monetary policy (performs strongly) - Criterion 6 — Low and stable inflation: - Inflation in single digits over the last five years; 1.1 percent y-o-y in September 2018. - Inflation expected to stabilize around 2 percent in the medium term. - Monetary policy framework based on an exchange rate anchor vis-à-vis a composite basket (euro and U.S. dollar); transition to greater exchange rate flexibility initiated in January 2018 expected to lead to inflation targeting. - Staff assesses the transition is likely to proceed smoothly given reasonable fiscal and external buffers, a resilient financial sector, and restrictions on capital outflows by residents. - Financial sector soundness and supervision (performs strongly) - Criterion 7 — Sound financial system and absence of solvency problems: - Banks have adequate capital buffers though further strengthening may be needed following alignment with IFRS 9 in early 2018. - NPLs at 7.7 percent; provisioning levels at 70 percent. - Risks from large credit exposures persist; bank expansion into Africa provides diversification but involves higher host-country risks. - 2015 FSAP stress tests showed banking system could withstand severe shocks. - Criterion 8 — Effective financial sector supervision: - Bank supervision capacity improving per 2015 FSAP recommendations. - Macroprudential enhancements and intensified oversight of banks expanding into Africa in collaboration with host-country supervisors. - Since 2016, corporate groups required to prepare consolidated financial statements and risk weights raised for large connected exposures. - Supervision moving to a more risk-based and forward-looking approach, including AML/CFT-related risks. - Data adequacy (performs strongly) - Criterion 9 — Data transparency and integrity: - Overall data quality adequate to conduct effective surveillance and program monitoring. - Morocco subscribes to the Special Data Dissemination Standard. - Authorities committed to improving data quality and access. *Source: IMF staff assessment as presented in the specified chapter.* ### 31. Morocco has a track record of sound policies. Morocco has met the PLL qualification ### Morocco has a track record of sound policies. Morocco has met the PLL qualification standard since 2012. ### Qualification and baseline assessment - Morocco has met the PLL qualification standard since 2012; staff’s assessment of the relevant core indicators over the five most recent years confirms this assessment. - Morocco does not face any of the circumstances under which the Fund may not approve a PLL arrangement: - (i) Morocco has access to international capital markets. - (ii) there is no need to undertake large macroeconomic or structural policy adjustment (neither the planned fiscal adjustment nor the expected external sector adjustment is large in international perspective). - (iii) the public debt position is sustainable in the medium term, with a high probability. - (iv) there are no widespread bank insolvencies. ### Duration, baseline financing, and reserves - Baseline scenario: Morocco does not face a financing gap because of sound policies and fundamentals. - Gross external financing requirements are expected to stabilize around US$6.5 billion at end-2020 (Table 6). - Expected financing composition in baseline: net FDI inflows (about US$2.8 billion) and medium- and long-term borrowing. - Gross international reserves are projected to strengthen to about 93 percent of the ARA metric in the absence of external shocks. ### Vulnerabilities and rationale for precautionary access - Balance of payments remains vulnerable to external shocks, justifying continued access under a PLL arrangement. - Key vulnerability channels: - Higher oil prices could weaken the current account. - Exports, FDI, remittances, and tourism receipts are vulnerable to lower demand in key European trading partners. - These risks could weaken the current account and put pressure on reserves. - In case of an adverse shock or if expected financing falls durably short, staff encourages the authorities to seek financial assistance from both multilateral and bilateral donors. ### Duration of arrangement, staff view - Authorities expressed interest in a two-year successor arrangement. - Staff view: a two-year precautionary arrangement is appropriate because: - (i) geopolitical and security risks, and more broadly volatile global financial conditions, are unlikely to improve markedly in the near term; and - (ii) a two-year period is necessary to address remaining vulnerabilities and further strengthen macroeconomic buffers to allow for a successful exit should external circumstances warrant. ### Key risks - Risks similar to the 2016 PLL arrangement and highlighted in the October 2018 WEO and G-RAM (External Stress Index). The most significant risks: - Geopolitical and security risks related to the Middle East and North Africa, which could trigger rises in oil prices, declines in tourism activity, and disruptions in capital flows, weakening Morocco’s external position. - A protracted period of slower growth in Morocco’s main euro area trading partners, worsening the current account through lower exports and tourism receipts, as well as reduced inward FDI and remittance flows. - More volatile global financial conditions, particularly for emerging and frontier economies, potentially causing higher borrowing costs, lower portfolio and FDI flows, and capital flow reversals. ### External Economic Stress Index (summary) - The index is based on: (i) key external risks facing Morocco; (ii) proxy variables capturing these risks; and (iii) weights for each variable. - Main external risks (October 2018 G-RAM): (i) protracted slow growth in advanced economies (especially euro area); (ii) heightened geopolitical risks increasing oil prices and disrupting capital flows and tourism; (iii) tighter global financial conditions increasing borrowing costs and disrupting portfolio flows. - Proxy variables used: - euro area growth (captures lower exports, remittances, FDI, tourism receipts from Europe), - oil prices (captures higher oil imports), - VXEEM (emerging markets volatility index) (captures impact of global financial volatility on portfolio flows and borrowing costs). - Weights (data-based): euro area growth 0.580; change in oil price 0.324; VXEEM 0.095. - Baseline corresponds to October 2018 WEO for euro area growth and oil prices; VXEEM consistent with VIX futures as of end-September 2018. - Downside scenario: euro area growth 0.5 percentage point lower than baseline; US$10 increase in oil prices relative to baseline; increase in VXEEM by two standard deviations. - Overall assessment: external pressures under the baseline have abated in recent years but increased more recently; model does not include a proxy for geopolitical risk, which would suggest a relatively more heightened stress index. ### Adverse scenario and access level - Staff’s assessment of balance of payments needs uses a downside scenario of disruption in capital flows, adverse oil shock, and declining tourism revenues stemming from geopolitical tensions and drop in investor confidence. - Under the adverse scenario, Morocco’s reserves level would not be comfortable enough to cover the financing need generated. - Preliminary assessment: financing gap (shortfall of reserves relative to 80 percent of the Fund’s ARA metric) would be consistent with a total access level of 240 percent of new quota (about US$3 billion) by 2020 (Box 3). - Proposed disbursement: two tranches of US$1.7 and US$1.3 billion over 2019 and 2020, respectively. - This proposed access level is lower than in the 2016 PLL arrangement, reflecting improved balance of external risks. - Some downside risks under the previous PLL did materialize, though the authorities did not draw on PLL resources. ### Adverse scenario assumptions (summary from Box 3) - Net increase in the oil price by about US$10 (US$15 attributable to geopolitical supply shock; US$5 decrease attributable to spillover from weak euro area growth). - Decline in euro area trading partners’ growth by about 0.5 percentage point. - Net decline in tourism receipts by about 15 percent relative to the baseline (about half due to euro area growth decline; half due to heightened geopolitical risks). - Decline in FDI inflows by 15 percent and equity portfolio outflows of about 60 percent relative to the baseline. - Increase in interest rates by 100 basis points above the baseline. ### Access sizing and historical comparisons - The adverse scenario results are consistent with a potential financing need of about US$3 billion by the end of 2020 (equivalent to a total access level of 240 percent of the quota). - Comparison of past PLL requests and shocks presented in table form (2012, 2014, 2016, 2018 requests) in source document informs context for proposed access. ### Capacity to repay and Fund exposure - Morocco has no outstanding debt to the Fund. - Full drawing under the proposed PLL arrangement—which the authorities intend to treat as precautionary—would bring Morocco’s outstanding use of GRA resources to an amount equivalent to SDR 2.15 billion. - Were the full amount available under the proposed PLL arrangement to be purchased in the first and second year: - Morocco’s total external debt would remain moderate, with Fund credit reaching about 5 percent of total external debt at its peak. - External debt service would increase over the medium term; Morocco’s projected debt service to the Fund would peak in 2023 at about 1 percent of GDP. - Impact on Fund liquidity and buffers: - One-year forward commitment capacity (FCC) would decrease by about 1.2 percent to about SDR 181.7 billion (Fund finances as of November 23, 2018) upon approval of the proposed PLL arrangement. - Proposed access represents a small share of current total GRA commitments (1.5 percent). - If fully drawn, GRA credit to Morocco would be equivalent to about 4 percent of current GRA credit outstanding (as of November 23, 2018). - This amount represents about 12.4 percent of the Fund’s end-FY2018 precautionary balances. - Peak charges would be equivalent to about one-third of the current burden-sharing capacity. ### Staff appraisal and recommendation - Staff assesses that Morocco continues to meet the qualification criteria for access to a new PLL arrangement. - Progress noted: significant strides in reducing domestic vulnerabilities despite the pick-up in oil prices and lower grants. - Authorities exhibit a track record of sound policy management and commitment to implement sound policies and accelerate reforms resumed after a slowdown in the last two years. - Program priorities described by authorities include: - continued fiscal prudence, - progress toward exchange rate flexibility, - reforms of taxation, governance, oversight of state owned enterprises, - sustained improvement of the business environment, - emphasis on reducing social and regional inequalities, - increasing access and quality of public services through an ambitious structural reform agenda aimed at securing macroeconomic resilience, raising growth potential, and further reducing inequality and unemployment (particularly among the youth). - Staff view: authorities’ policy package appropriately addresses short- and medium-term challenges; the fiscal consolidation in 2018-19 would accommodate temporary impact of higher oil prices and address social and investment spending needs without jeopardizing medium-term sustainability. - Staff recommendation: - Approve a new two-year PLL arrangement of SDR 2.15 billion (240 percent of quota), of which 140 percent would be available in the first year. - The access level is consistent with the size of downside risks in staff’s adverse scenario. - The phasing is appropriate to insure against the possibility that several independent risks materialize simultaneously. - The two-year duration is consistent with the nature and potential persistence of external risk factors. - Exit strategy note: Under the baseline, the primary fiscal deficit would fall below the debt-stabilizing balance, public debt would be on a downward path, the current account deficit by the end of the arrangement would be close to the norm for an emerging market country like Morocco, and reserves would reach about 90 percent of the Fund’s ARA metric—positioning Morocco for PLL exit when global and regional risks subside. The authorities will need to communicate publicly about their exit strategy. *IMF staff report content as provided in the source document.* ### 46. Staff considers that the proposed PLL arrangement carries low risks to the Fund. While ### Staff considers that the proposed PLL arrangement carries low risks to the Fund. ### Risk assessment of the PLL arrangement - Staff assessment: the proposed PLL arrangement "carries low risks to the Fund." - Morocco intends to treat the PLL as precautionary; "GRA credit to Morocco would be low even with a drawing." - Additional mitigating factors: "Morocco’s relatively low external debt levels and debt service obligations." ### Macroeconomic projections and key indicators (selected) - Real GDP: 4.5 (2015), 1.1 (2016), 4.4 (2017), 4.1 (2018), 3.1 (2019), 3.1 (2020), 3.3 (2021), 3.9 (2022), 4.2 (2023), 4.4 (2024), 4.5 (2025). - Consumer prices (end of period): 0.6 (2015), 1.8 (2016), 0.9 (2017), 1.9 (2018), 1.6 (2019), 2.0 (2020), 1.4 (2021), 2.0 (2022), 2.0 (2023), 2.0 (2024), 2.0 (2025). - Gross capital formation (percent of GDP): 30.8 (2015), 32.6 (2016), 33.9 (2017), 32.6 (2018), 35.0 (2019), 36.0 (2020), 36.9 (2021), 37.4 (2022), 37.8 (2023), 38.2 (2024), 38.6 (2025). - Gross national savings (percent of GDP): 28.8 (2015), 28.4 (2016), 30.2 (2017), 28.9 (2018), 31.3 (2019), 31.5 (2020), 32.9 (2021), 34.3 (2022), 34.8 (2023), 35.2 (2024), 35.8 (2025). - Total government debt (percent of GDP): 63.7 (2015), 64.9 (2016), 64.4 (2017), 65.1 (2018), 64.1 (2019), 65.3 (2020), 65.2 (2021), 64.5 (2022), 63.3 (2023), 62.2 (2024), 61.3 (2025). ### Public finances (central government) - Revenue (billions of dirhams): 262.1 (2015), 264.0 (2016), 278.3 (2017), 278.0 (2018), 294.8 (2019), 290.1 (2020), 301.6 (2021), 320.1 (2022), 342.7 (2023), 367.2 (2024), 391.8 (2025). - Expenditure (billions of dirhams): 248.5 (2015), 251.6 (2016), 258.3 (2017), 258.5 (2018), 267.0 (2019), 267.8 (2020), 280.8 (2021), 289.1 (2022), 304.1 (2023), 323.5 (2024), 344.3 (2025). - Budget balance (percent of GDP): -4.3 (2015), -4.5 (2016), -3.5 (2017), -3.6 (2018), -3.0 (2019), -3.6 (2020), -3.7 (2021), -3.3 (2022), -3.0 (2023), -3.0 (2024), -3.0 (2025). - Primary balance (excluding grants, percent of GDP): -1.9 (2015), -2.7 (2016), -1.9 (2017), -2.1 (2018), -1.3 (2019), -1.7 (2020), -1.5 (2021), -1.0 (2022), -0.8 (2023), -0.9 (2024), -0.6 (2025). - Interest expense (billions of dirhams): 27.3 (2015), 27.1 (2016), 27.6 (2017), 27.1 (2018), 27.1 (2019), 27.0 (2020), 28.7 (2021), 29.0 (2022), 29.8 (2023), 31.2 (2024), 35.3 (2025). - Net lending/borrowing (overall balance, billions of dirhams): -41.2 (2015), -45.4 (2016), -37.7 (2017), -37.9 (2018), -33.3 (2019), -39.8 (2020), -42.5 (2021), -40.2 (2022), -39.5 (2023), -42.0 (2024), -43.5 (2025). ### External sector, reserves, and balance of payments - Current account (percent of GDP): -2.1 (2015), -4.2 (2016), -3.9 (2017), -3.8 (2018), -3.6 (2019), -3.7 (2020), -4.5 (2021), -4.0 (2022), -3.1 (2023), -3.0 (2024), -3.0 (2025), -2.8 (2026? — note table lists through 2025 only). - Trade balance (percent of GDP): -14.5 (2015), -17.1 (2016), -16.4 (2017), -16.3 (2018), -16.5 (2019), -16.1 (2020), -16.9 (2021), -16.3 (2022), -15.3 (2023), -15.3 (2024), -15.4 (2025). - Exports, f.o.b. (billions of U.S. dollars): 18.6 (2015), 18.9 (2016), 20.5 (2017), 20.7 (2018), 21.5 (2019), 22.1 (2020), 24.8 (2021), 26.5 (2022), 28.7 (2023), 30.5 (2024), 32.4 (2025), 34.6 (2026?). - Imports, f.o.b. (billions of U.S. dollars): -33.3 (2015), -36.6 (2016), -38.5 (2017), -38.6 (2018), -39.6 (2019), -41.1 (2020), -44.8 (2021), -46.4 (2022), -48.8 (2023), -51.9 (2024), -55.4 (2025), -59.1 (2026?). - Gross official reserves (billions of U.S. dollars): 22.8 (2015), 25.1 (2016), 24.8 (2017), 25.8 (2018), 26.2 (2019), 28.3 (2020), 24.8 (2021), 26.8 (2022), 29.2 (2023), 32.1 (2024), 34.4 (2025), 38.2 (2026?). - Reserves in months of prospective imports of GNFS: 6.0 (2015), 6.1 (2016), 5.9 (2017), 6.1 (2018), 5.7 (2019), 6.3 (2020), 5.2 (2021), 5.4 (2022), 5.5 (2023), 5.7 (2024), 5.8 (2025), 6.2 (2026?). - Net international reserves (Bank Al-Maghrib, billions of dirhams): 222.1 (2015), 249.2 (2016), 239.1 (2017), 240.9 (2018), 229.2 (2019). ### Capacity to repay and GRA exposure - GRA credit to Morocco (SDR million): 1,250.7 (2018), 2,150.8 (2019), 2,150.8 (2020), 2,150.8 (2021), 1,525.5 (2022), 450.1 (2023), 0.0 (2024), 0.0 (2025). - GRA credit to Morocco (in percent of quota): 139.8 (2018), 279.5 (2019), 240.5 (2020), 240.5 (2021), 170.6 (2022), 50.3 (2023), 0.0 (2024), 0.0 (2025). - Charges due on GRA credit (SDR million): 6.3 (2018), 27.2 (2019), 50.5 (2020), 54.0 (2021), 46.8 (2022), 25.8 (2023), 7.5 (2024), 0.5 (2025). - Debt and debt service ratios (total external debt, percent of GDP): 35.1 (2018), 36.9 (2019), 36.5 (2020), 35.6 (2021), 33.3 (2022), 31.6 (2023), 30.5 (2024), 29.9 (2025). - Total external debt (in percent of gross international reserves): 167.3 (2018), 168.9 (2019), 163.6 (2020), 154.6 (2021), 144.5 (2022), 131.6 (2023), 126.8 (2024), 123.8 (2025). - GRA credit to Morocco (in percent of total external debt): 3.3 (2018), 5.0 (2019), 4.4 (2020), 4.0 (2021), 2.7 (2022), 0.7 (2023), 0.0 (2024), 0.0 (2025). ### External financing requirements and adverse scenario analysis (Table 6) - Baseline gross financing requirements (millions of dollars): 5,824 (2017 baseline), 7,477 (2018 baseline), 7,149 (2019 baseline), 10,288 (2020 baseline), 6,452 (2019 adverse), 9,725 (2020 adverse). - Components (2018 baseline example): Current account deficit 5,295; Trade deficit 20,041; ST debt amortization 59; MLT debt amortization 2,124. - Financing sources (2018 baseline example): FDI (net) 2,849; Portfolio investment (includes bond issuance) 1,047; MLT debt disbursement 2,327; Change in gross reserves (accumulation) 1,113; Other 1,131. - Adverse scenario assumptions: 1. an oil price shock of +$15/bb; 2. a decrease in euro area growth by 1 percentage point; 3. a decline in FDI and tourism receipts by 30 percent relative to the baseline; 4. a decline in portfolio flows by 60 percent and an increase in borrowing costs by 100 basis points. - Reserve adequacy under scenarios (GIR as percent of standard ARA metric): 93 (2017 baseline), 85 (2018 baseline), 85 (2019 baseline), 73 (2020 baseline), 86 (2019 adverse), 77 (2020 adverse). ### Impact on GRA finances and prudential indicators (Table 7) - Forward Commitment Capacity (FCC) including the proposed PLL for Morocco: 181,688 (SDR million). - Percent reduction in FCC: -1.2. - Commitment in percent of total GRA commitments: 1.5. - Fund GRA commitment to Morocco including credit outstanding (in percent of total GRA credit outstanding): 3.9. - Fund GRA commitment to Morocco in percent of current precautionary balances: 12.4. - Peak charges to current burden sharing capacity ratio: 0.3. - Memorandum items: FCC before approval 183,838; Total GRA Commitments 142,713; Fund's precautionary balances (FY2018) 17,400. - As of 11/23/2018. ### Financial sector soundness (selected FSIs, percent) - Regulatory capital to risk-weighted assets: 13.7 (2015), 14.2 (2017/2018 provisional). - Tier 1 capital to risk-weighted assets: 11.4 (2015), 11.5 (2017/2018 provisional). - Nonperforming Loans (NPLs) to total loans: 7.4 (2015), 7.8 (2016), 7.7 (2017), 8.0 (2018). - Specific provisions to NPLs: 68.0 (2015), 67.0 (2016), 67.0 (2017), 68.0 (2018). - Return on assets (ROA): 0.8 (2015), 1.1 (2017/2018 provisional). - Deposits to loans ratio: 104.3 (2015), 106.6 (2016), 105.4 (2017), 105.0 (2018). - Liquid assets to total assets: 16.1 (2015), 14.3 (2016), 13.0 (2017), 13.1 (2018). *Source: IMF staff estimates and Moroccan authorities as presented in the IMF country report data tables.* ### Annex I. Public Debt Sustainability Analysis (DSA) ### Annex I. Public Debt Sustainability Analysis (DSA) ### Summary findings - Morocco’s public debt remains sustainable: about 65.1 percent of GDP at end-2017. - The gross debt-to-GDP ratio declined between 2000 and 2010, then rose since 2010 following external shocks and domestic factors; public debt rose from 48 percent of GDP in 2009 to about 65.1 percent in 2017. - Gross financing needs exceeded the 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. - Vulnerabilities linked to the level and profile of the debt are moderate for the most part; short-term debt represented about 12.3 percent of total public debt at end-2017. - The DSA shows public debt to be resilient to various shocks; debt remains below the debt-burden benchmark of 70 percent of GDP under most shocks, but approaches the benchmark under shocks to real GDP growth or to the primary balance. ### Baseline projections and key assumptions - Baseline public debt path (nominal gross public debt, in percent of GDP): - 2016: 54.6 - 2017: 64.9 - 2018: 65.1 - 2019: 65.3 - 2020: 65.2 - 2021: 64.5 - 2022: 63.3 - 2023: 62.2 - (projection horizon continued to 2023) - Public gross financing needs (in percent of GDP): - 2016: 14.2 - 2017: 10.8 - 2018: 7.2 - 2019: 9.5 - 2020: 12.1 - 2021: 12.0 - 2022: 10.9 - 2023: 11.2 - (figure lists 10.7 for a later entry) - Real GDP growth (in percent): - 2016: 4.2 - 2017: 1.1 - 2018: 4.1 - 2019: 3.1 - 2020: 3.3 - 2021: 3.9 - 2022: 4.2 - 2023: 4.4 - (2023 also shown as 4.5 in some series) - Inflation (GDP deflator, in percent): 2016: 1.4; 2017: 1.4; 2018: 0.4; 2019: 1.5; 2020: 1.3; 2021: 1.8; 2022: 1.8; 2023: 1.7. - Nominal GDP growth (in percent): 2016: 5.6; 2017: 2.6; 2018: 4.9; 2019: 4.2; 2020: 4.6; 2021: 5.8; 2022: 6.1; 2023: 6.2; (2023 also shown as 6.3 in a column). - Effective interest rate (in percent): 2016: 5.0; 2017: 4.3; 2018: 4.1; 2019: 3.9; 2020: 4.0; 2021: 3.8; 2022: 3.8; 2023: 3.8; (later year 4.1). - Primary deficit (percent of GDP, series shown as positive numbers in table): 2016: 1.2; 2017: 1.8; 2018: 1.0; 2019: 1.2; 2020: 1.2; 2021: 0.9; 2022: 0.7; 2023: 0.8; cumulative/medium-term entries include 0.6 and 5.3 in the figure table. ### Debt dynamics and principal drivers - Main drivers of the rise in debt since 2010: - High primary deficits. - Higher-than-expected real interest rate/growth differential. - Rising international commodity prices in early 2010s increased food and fuel subsidies. - A substantial increase in 2012 when Morocco was affected by the crisis in Europe and higher oil prices. - Recent factors moving debt path upward (2018–19): - Elevated international butane prices and lower grant revenue increased subsidies and contributed to higher-than-budgeted primary deficits. - As a result, public debt projected to increase moderately to 65.3 percent in 2018 while economic growth is expected to remain robust. - Automatic debt dynamics and decomposition (selected entries from DSA table): - Change in gross public sector debt (cumulative projection): shows small positive changes in short term and declines later (example series: 1.0, 1.2, 0.3, 0.2, -0.1, -0.8, -1.2, -1.1, -0.9, -3.8). - Interest rate/growth differential contributions and real interest rate / real GDP growth components are explicitly shown in the DSA calculations. ### Vulnerabilities, stress tests, and risk assessment - Gross financing needs: - Exceeded 15 percent of GDP in 2014; declined below benchmark in 2015 and expected to continue declining due to lengthening of average maturities through improved debt management. - Even if gross financing needs increase under shock scenarios, the investor base (mostly local long-term investors) mitigates rollover risks. - Debt profile vulnerabilities: - Short-term debt is on a downward path and was about 12.3 percent of total debt at end-2017. - Relevant indicators (except bond spread over U.S. bonds) exceed lower early-warning benchmarks but do not exceed upper risk-assessment benchmarks. - Stress-test outcomes (high-level): - Under most stress tests debt remains below the 70 percent of GDP benchmark for emerging markets. - Under shocks to real GDP growth or to the primary balance, the debt ratio slightly approaches the 70 percent benchmark. - The DSA includes scenarios for Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, and an Adverse Scenario; charts show higher debt under these shocks though baseline resilience remains. - Policy implications from vulnerabilities: - Importance of continuing fiscal consolidation (authorities plan to reduce and stabilize the fiscal deficit around 3 percent of GDP by 2020) to reduce debt-financed deficits. - Careful management of the maturity profile of public debt to mitigate rollover and financing risks. ### Policy-relevant projections and recommendations - Authorities’ planned measures and expected impact: - Plan to resume fiscal consolidation in 2020 and stabilize the overall deficit around 3 percent of GDP in 2020–23. - Use a portion of privatization proceeds to finance a small portion of fiscal deficits, which would contribute to reducing government financing needs and lower public debt to about close to 60 percent of GDP over the medium term. - Debt management recommendations: - Continue efforts to lengthen average maturities and improve debt management to lower gross financing needs and rollover risks. - Maintain fiscal consolidation to reduce the primary deficit and limit debt accumulation from debt-creating flows. *Source: IMF staff (Annex I. Public Debt Sustainability Analysis (DSA) — Morocco).* ### 1. In recent years, Morocco has benefited from sound fundamentals and economic policies, as ### cr1924-morocco - 1. In recent years, Morocco has benefited from sound fundamentals and economic policies, as ### Recent macroeconomic performance and vulnerabilities - 2017: economic activity strengthened; inflation remained moderate; current account deficit contracted; foreign exchange reserves kept at a comfortable level; fiscal deficit reduced; public debt stabilized at around 65 percent of GDP; unemployment remains high, particularly among young people. - 2018: growth slightly lower than in 2017 at 4.1 percent; growth expected to remain robust at between 3-3.5 percent owing to a modest recovery in nonagricultural growth and a strong performance by the agricultural sector. - Inflation in 2018: expected to remain moderate at 2 percent. - Current account deficit in 2018: expected to increase to 4.5 percent of GDP owing to a significant increase in oil prices. - Foreign exchange reserves: expected to remain at a satisfactory level of more than five months of imports. - Fiscal deficit: expected to remain at its 2017 level (3.6 percent of GDP). - Public debt ratio: expected to remain at around 65 percent of GDP. - External risks cited: higher oil prices, heightened geopolitical tensions, increasing protectionism, growth slowdown in the euro area and in emerging countries, and tighter financing conditions for emerging countries. ### IMF support request and program objectives - Requested facility: new 24-month PLL arrangement in the amount of SDR 2.15 billion (240 percent of quota), or approximately US$ 3 billion. - Access during first year: SDR 1.25 billion (140 percent of quota) shall be available during the first year. - Treatment of facility: intended to be precautionary and to be drawn upon only in the event of severe exogenous shocks. - Program objectives: - Speed up structural reforms to promote stronger, more inclusive, and pro-job growth. - Further strengthen the economy’s resilience and fiscal and external buffers. - Strengthen robustness of the financial system. - Trigger new growth momentum to raise growth to a higher level of 4.5-5 percent a year. - Speed up job creation, reduce social and spatial disparities, and bring about a sustainable improvement in living standards. ### Structural reform agenda and business climate - Recent achievements: leap of 9 places up the Doing Business 2019 ranking. - Planned measures: - Improve business climate by strengthening incentives and the legal environment for firms, improving quality of public services, streamlining and digitizing administrative procedures. - Draft law recasting the organization and remit of the Regional Investment Centers submitted to parliament in October 2018. - Review of the Investment Charter to harmonize and streamline investment incentives. - Full operationalization of the Competition Council following the nomination of its President in November 2018. - VAT credit settlement plan and measures to reduce payment delays in public and private sectors; an observatory body set up to monitor implementation. - National Strategy against Corruption being implemented; progress report due beginning of 2019. - Legal reforms to strengthen judiciary independence, digitize administration, and strengthen transparency. - Law amending Book V of the Commercial Code enacted in April 2018 to improve insolvency proceedings and corporate difficulty resolution. ### Employment, education, and human capital - 2015–2030 strategic vision for education reform and national employment strategy aims to improve quality of human resources, strengthen productivity, and better match training to employment. - Active labor market policies to promote youth and female employment. - Teaching staff program: ambitious program to boost number of teaching staff; last phase to be completed in 2019 to reduce overcrowding and better serve remote areas. - Public preschool cycle introduced in 2018 and to be rolled out gradually. - Draft framework law on education, training and scientific research submitted to parliament. - National plan to promote employment for 2018-2019 adopted in April 2018. ### Agriculture and rural development - Reform to strengthen agricultural sector’s role in employment and investment by facilitating access to land ownership to encourage an agricultural middle class. - Plan to make a million hectares of collective lands available for use by small-scale farmers, particularly young people. ### State-owned enterprises (SOEs) and privatization - SOE overhaul objectives: - Government withdrawal from sectors coverable by private sector. - Refocusing SOEs on core activities. - Disposal of assets not related to mission and outsourcing related activities. - Privatization program: expected to contribute the equivalent of approximately 4 percent of GDP to the government budget for the 2019-24 period. - Draft bill expanding list of companies eligible for privatization adopted by the Government Council in November 2018. - Draft law to strengthen governance and improve government performance and financial control applied to SOEs to be submitted during April 2019 session. - Efforts, with IMF technical support, to introduce integrated system to monitor and assess SOE-related risks, including fiscal risks. ### Fiscal policy, public debt, and public investment - Fiscal deficit targets (including privatization revenues): - 2019: reduce to 3.3 percent of GDP. - 2020: reduce to 3 percent of GDP. - Medium-term objective: convergence to a public debt-to-GDP ratio of 60 percent. - Means: stronger tax revenue mobilization, continued efforts to control public spending, prioritizing pro-growth investment in infrastructure and human capital, strengthening social protection. - Tax reforms and revenue measures: - Expand tax base through reduced tax exemptions. - Reform VAT to mitigate distortionary effects. - Gradual integration of informal sector. - Plan to reimburse VAT credits over a five to ten years period. - 2019 draft budget law includes tax measures expected to generate the equivalent of 0.5 percent of GDP and provides for removal of tax exemptions granted to banks and offshore holding companies. - Modernize tax administration via digitization and streamlined procedures. - Tax conference scheduled for May 2019 to consult stakeholders; expected output: draft framework taxation law in 2019. - Spending-side measures: - Maintain public wage bill including social contributions below 10.5 percent of GDP in the medium term. - Public administration reforms: organizational reform, modernization of HR management, promotion of integrity, roll-out of digital public administration, streamlining procedures. - Emphasis on contractual employment, facilitating mobility, modernizing civil service statute, and performance-based compensation and promotion. - Public investment: - Sustain level of public investment and enhance effectiveness via improved project selection (focus on employment, reduction of disparities, improvement of living standards) based on PIMA recommendations. - Introduce integrated system for centralized management of public investments and develop PPPs to strengthen infrastructure supply and quality while limiting costs and budget risks. ### Social protection and pensions - Strengthen social protection programs: improve consistency, targeting, and effectiveness. - National social security conference (November 2018) produced a roadmap to expand healthcare and pension coverage and replace generalized subsidies with targeted direct aid through a unified social registry to be finalized in 2019. - Third phase of the National Human Development Initiative (INDH) for 2019-23: total of 18 billion dirhams (almost 2 percent of GDP), launched in September 2018, focusing on human capital and support for younger generations and the least well-off. - Plans for major corporations to make a solidarity contribution from their profits over a two-year period to mobilize resources for social projects. - Pension reform (begun September 2016) to continue: objective to create two main pillars—one for public sector and one for private sector. - Expansion of coverage: law creating a pension scheme for self-employed workers and non-salaried workers exercising a professional activity on an independent basis adopted by parliament in November 2017. ### Decentralization and local governance - Advanced regionalization project implementation and fiscal decentralization introduced with care to preserve fiscal sustainability. - Subnational governments: increased responsibilities and gradually increasing resources (local revenues and transfers). - Law to reform local taxation currently being drafted. - National charter of administrative deconcentration adopted by Government Council in October 2018 and to be introduced in 2019 to ensure consistency of ministry activities at regional level, define competences, and establish transparent revenue-sharing and use of new solidarity and equalization funds. ### Government finance statistics and transparency - Coverage of government finance statistics to be expanded to incorporate all government agencies. - Government plans to produce a consolidated report on government finances, including debt, as of the first quarter of 2019. - Technical assistance from the IMF to support this effort. ### Monetary policy, financial inclusion, and financial sector resilience - Bank Al-Maghrib (BAM) has maintained an accommodative monetary policy in context of moderate inflation, slow recovery of non-agricultural and credit activity, and comfortable foreign exchange reserves. - BAM priorities: promote appropriate financing of the economy, giving priority to micro-enterprises and SMEs. - Draft central bank law adopted by lower chamber of parliament in July 2018, submitted to upper chamber and should be adopted by end-2018; new law will reinforce BAM’s independence and expand missions to contribute to financial stability and promote financial inclusion. - National Financial Inclusion Strategy finalized to coordinate public and private initiatives. - Government to develop a Small Business Act in 2019 to address financing, legal framework, market access, taxation, and support mechanisms for micro-enterprises and SMEs. - Banking sector sound and resilient; NPLs increased slightly but remain at a moderate level and well provisioned. - Supervisory and regulatory measures: - Strengthen supervisory capacity; regulations for financial conglomerates to be adopted in first semester of 2019. - Loan classification and provisioning rules aligned with IFRS9 in January 2018; capitalization increases phased in over five years. - Intensify coordination with supervisory authorities in countries where Moroccan banks are established. - Enhance macro-prudential and bank resolution frameworks, including legal framework for resolution in line with international standards and designating BAM as resolution authority; technical aspects to be finalized in 2019. - Participatory finance and sukuk: - Efforts to create participatory financing market; in 2018 several participatory banks were created, legal framework governing sukuk certificates revised and the first sovereign debt issue took place. - Draft amendments to insurance code complementing takaful insurance submitted to parliament. ### Exchange rate policy - Transition to a more flexible exchange rate regime initiated in January 2018 by widening the dirham fluctuation band to +2.5 percent (from +0.3 percent) around its reference parity. - Implementation: dirham remained within fluctuation band without any central bank intervention since March 2018; banks’ foreign assets strengthened; interbank foreign exchange market deepened. - Authorities intend to move to next phase of reform for preventative purposes as soon as economic conditions allow; expected benefits: better absorption of external shocks, preserved competitiveness, and support for diversification. *Italic: Source — cr1924-morocco - 1. In recent years, Morocco has benefited from sound fundamentals and economic policies, as (PDF chapter/section).* ### 23. We will provide the IMF with all the information needed to monitor economic and policy ### cr1924-morocco - 23. We will provide the IMF with all the information needed to monitor economic and policy ### Information sharing and PLL compliance - Morocco will provide the IMF with all information needed to monitor economic and policy developments within the framework of the PLL arrangement, particularly information relating to the indicators listed in Table 1 and in the attachment. - Morocco will observe the standard criteria on trade and exchange restrictions, bilateral payment agreements, multiple currency practices, and the non-accumulation of payment arrears on the external debt. - Morocco will report to the IMF: - Level of NIR and GIR no later than one week after the end of each week both at the program exchange rates and at the market exchange rates. - Fiscal deficit and relevant budget aggregates in monthly and cumulative flows from January 1 of each year, reported monthly before the end of the following month. ### Quantitative indicative targets (Table 1) - Indicative targets (end-period stocks / cumulative flows): - Net international reserves (NIR) of Bank Al-Maghrib (BAM): 24,369; 25,228 - Fiscal deficit (cumulative since beginning of fiscal year, eop in millions of dirham): 9,369; 27,908 - Memorandum items (adjustors): - Adjustor on NIR (in millions of U.S. dollars): 1,733; 2,152 - Adjustor on the fiscal deficit (in millions of dirham): 500; 1,500 - Program exchange rate for monitoring NIR during the first year: MAD 9.527 per U.S. dollar (rate prevailing on November 9, 2018). - Foreign-currency accounts denominated in currencies other than the U.S. dollar and monetary gold will be valued in U.S. dollars at the exchange rates and gold prices prevailing on November 9, 2018. ### Schedule, access, and targets under the PLL (Table 2 and schedule) - Board approval of the PLL: December 17, 2018 — Credit available assuming no purchase / Full access will be available on December 17, 2019. - Review timetable and related indicative targets: - First review: June 16, 2019 (based on March 31, 2019 indicative targets) - Indicative targets listed: 9,369; 24,369 - Second review: December 16, 2019 (based on September 30, 2019 indicative targets) - Indicative targets listed: 27,908; 25,228 - Third review: June 16, 2020 (based on March 31, 2020 indicative targets) - Access and totals (Million Dollars / Million SDR): - Initial access and subsequent schedule entries shown in Table 2 (including values: 1,250.66; 1,747; 1,250.66; 1,747; 2,150.8; 3,005; 240; 100; Total 2,150.8; 3,005; 240; 100). - SDR/Dollar Exchange rate: $1 = 0.715694 SDR as of October 16, 2018. - Reviews completion deadlines (assuming Board approval on December 17, 2018): - First review by no later than June 16, 2019. - Second review by no later than December 16, 2019. - Third review by no later than June 16, 2020. ### Technical definitions and adjustors (Attachment / Technical Appendix) - Definitions: - Gross international reserves (GIR) = sum of: - Foreign currency assets in convertible currencies held abroad and as vault cash under BAM’s direct and effective control; - Reserve position of Morocco in the IMF; - Holdings of SDRs; - Monetary gold. - Exclusions from GIR: encumbered or pledged foreign currency assets; foreign currency assets in nonconvertible currencies; precious metals other than gold; foreign currency claims on entities incorporated in Morocco; any other foreign currency claims on residents; capital subscriptions in international institutions. - Net international reserves (NIR) = GIR less: - All outstanding liabilities of Morocco to the IMF, excluding SDR allocation; - Foreign currency liabilities in convertible currencies to nonresidents and contingent commitments to sell foreign exchange arising from derivative transactions. - Adjustors: - Indicative targets on NIR will be adjusted downward (upward) by the amount below (above) official grants and loans received by the central government from bilateral and multilateral agencies relative to program projections. Adjustors are cumulative from end-September 2018. - Indicative targets on the fiscal deficit will be adjusted upward (downward) by the amount below (above) budgetary grants received by the central government from bilateral and multilateral agencies relative to program projections. Adjustors for 2019 are cumulative from end-December 2018; for 2020 they will be cumulative from end-December 2019. - Continuous zero ceiling on accumulation of new external payment arrears: - Payment arrears defined as external debt-service obligations (principal and interest) due as specified in contractual agreements on central government and central government-guaranteed debt. - Overdue debt and debt-service obligations that are in dispute will not be considered external payment arrears. ### Macroeconomic performance, policy stance, and reforms (authorities’ summary) - Macroeconomic outcomes and buffers: - Fiscal deficit reduced by one half since 2012; fiscal deficit at 3.6 percent of GDP in 2018. - Public debt stabilized at some 65 percent of GDP; objective to lower debt-to-GDP ratio to 60 percent over the medium term. - Inflation maintained at less than 2 percent over the past decade. - Impact of higher oil prices in 2018: estimated budget impact about 0.4 percent of GDP; impact on external position 1.3 percent of GDP; increase in current account deficit projected at 0.9 percent of GDP. - Fiscal and social policy measures: - Draft 2019 budget includes tax measures increasing revenue by some 0.4 percent of GDP. - Spending on education significantly increased (including teachers’ hiring); budget appropriations for health increased. - Social protection reform underway; Tayssir cash transfer beneficiaries tripled in 2019 budget (2.1 million instead of 0.7 million). - Pension coverage extended; compulsory health coverage and RAMED expanded. - Remaining energy subsidies to be replaced with targeted transfers after unified social registry established by end-2019. - Public financial management and SOE reform: - New Organic Budget Law (OBL) strengthening budgetary framework; multiyear budgeting and strengthened parliamentary control. - SOE reform broadened; new SOE law to be presented to parliament during April 2019 session. - Risk management system reform and ambitious privatization program underway. - Monetary and financial sector policies: - Transition to a more flexible exchange rate regime started in January (exchange rate around the middle of the band without central bank intervention since March). - New central bank law strengthening independence and expanding role expected to be adopted by end-2018. - Banking sector: NPLs moderately elevated but well-provisioned; IFRS 9 introduced in January with gradual capital strengthening over a 5-year period. - Measures to address payment delays and accumulation of VAT credits: late payment penalties introduced; initiative to repay VAT credit backlog over a 5-10 year period and pay all new credits within the same year. - Structural reforms and competitiveness: - Progress on Doing Business rank: 60 in 2019 report (69 in 2018; 115 in 2011); goal to reach rank 50 by 2020. - Reforms: easing insolvency procedures; anti-corruption efforts; activation of Competition Council; creation of investment and export promotion agency (end-2017) and planned regional investment centers; draft law on PPPs before parliament. - National Employment Strategy adopted end-2017 focuses on active labor market policies and improving labor market functioning. - Agricultural reforms to facilitate land ownership for small farmers and reduce vulnerability to drought. ### PLL stance, access decision, and authorities’ intentions - Authorities treat the PLL as precautionary and refrained from drawing under previous PLLs despite materialized risks. - For the new PLL request, authorities reduced access request to 240 percent of quota ($3 billion) from an initially considered 280 percent of quota ($3.5 billion) to align with intention to reduce reliance on PLL and exit as soon as conditions permit. - Authorities intend to continue treating the PLL as precautionary and engage with the Fund toward success of economic policies. ### Conclusion and commitments - Authorities believe the policies and reforms in the written communication are adequate to achieve economic goals supported by the PLL and commit to take additional measures if necessary. - Continued reinforcement of resilience through strengthening fiscal and external buffers and diversifying the economy is intended to position Morocco to exit the PLL once exogenous risks have significantly declined. - Authorities commit to ongoing engagement with the Fund in accordance with relevant Fund procedures and to preserve social stability and cohesion while pursuing reforms and fiscal consolidation. *Document: Written communication and technical appendix for Morocco’s PLL arrangement (as provided).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1924-morocco.pdf_