## 1marea2020001

## Source details

**Canonical URL:** [1marea2020001](https://www.imf.org/-/media/files/publications/cr/2020/english/1marea2020001.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2020/english/1marea2020001.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2020/english/1marea2020001.pdf.json)

---

### Executive summary — context and program
- Four successive PLL arrangements since 2012 have supported reforms to strengthen macroeconomic resilience, economic growth and inclusion.
- Economic growth is below 3 percent and "not robust enough"; unemployment remains high, especially among youth and women.
- Elevated external risks include weak economic growth in the euro area and geopolitical risks.
- Priority reform areas: taxation; public governance and the fight against corruption; social spending to reduce inequalities; labor market and education reforms; and greater exchange rate flexibility.
- PLL arrangement: two-year precautionary and liquidity line approved in December 2018 in the amount of SDR 2.15 billion (or 240 percent of quota), equivalent to about US$3 billion.
- Staff recommendation: Morocco continues to meet PLL qualification criteria and staff recommends completion of the second review of the PLL arrangement.
- End-September 2019 quantitative indicative target for net international reserves (NIR) was met; the indicative target for the fiscal deficit was missed by 0.2 percent of GDP.
- The authorities have not drawn on the arrangement and continue to treat it as precautionary.

### Recent macroeconomic developments and program performance
- Growth and labor market:
  - Growth expected to decline to 2.8 percent in 2019 (against 3.0 percent in 2018).
  - Non-agricultural growth projected at 3.4 percent in 2019.
  - Unemployment increased to 9.4 percent in Q3-2019 (against 9.3 percent in Q3-2018).
  - Labor force participation declined to 45.8 percent (from 47 percent in Q2-2018).
  - Unemployment remains high among youth and women: 26 percent and 14 percent in 2018, respectively.
- Fiscal developments:
  - End-September 2019 indicative target for fiscal deficit missed by 0.2 percent of GDP.
  - 2019 fiscal deficit expected at about 4.0 percent of GDP (against 3.7 percent in 2018).
  - Public debt expected to rise to 66 percent of GDP in 2019 (against 65.3 percent in 2018).
  - Fiscal stance (cyclically-adjusted primary deficit, excluding grants) remains neutral.
  - For 2020, fiscal deficit expected to decline marginally to 3.8 percent of GDP, reflecting public wage increases amounting to about 0.6 percent of GDP in 2020 and 0.3 percent of GDP in 2021.
- Monetary and financial sector:
  - Bank-Al-Maghrib policy rate unchanged at 2.25 percent since March 2016.
  - Headline inflation declined to 0.3 percent (y-o-y) in September 2019; core inflation slowed to 0.4 percent.
  - BAM reduced reserve requirements from 4 to 2 percent in September 2019.
  - Credit growth to non-financial private enterprises at 4.2 percent in September (y-o-y).
  - Bank regulatory capital ratio increased to 15.1 percent in June 2019.
  - NPL ratio at 7.7 percent in September 2019; provisioning levels around 70 percent.
  - IFRS9 introduced January 2018; estimated capital need over the five-year phase-in less than one percentage point of regulatory capital ratio.
  - Risks from large credit exposures persist; international exposures of the three largest Moroccan banks represent about 20–30 percent of their total assets and a third of their profits.
- External sector:
  - Exports (y-o-y, end-September): aeronautic +9.9 percent, agriculture +5.4 percent, phosphate-related +0.4 percent, automobile +4.1 percent.
  - Imports (y-o-y, end-September): capital goods +8.9 percent, consumption goods +4.3 percent; energy imports lower due to oil prices.
  - Remittances decreased by 0.4 percent; tourism receipts increased by 5.8 percent (end-September, y-o-y).
  - Current account deficit expected to narrow to 5.1 percent of GDP in 2019.
  - Net international reserves at MAD233 billion (US$24.45 billion at the program exchange rate) at end-September 2019, slightly above the indicative target.
  - NIR projected to reach about US$25.5 billion in 2019, equivalent to 5.2 months of imports and 86 percent of the Fund’s Assessing Reserve Adequacy (ARA) metric.
  - Dirham fluctuation band widened to +/- 2.5 percent in January 2018 (from 0.3 percent previously); central bank has not intervened in the FX market since March 2018.
  - Morocco’s 2018 external position assessed as moderately weaker than implied by fundamentals and desirable policies.

### Medium-term outlook and projections
- Growth and inflation:
  - Growth expected to increase to 3.7 percent in 2020; baseline reaches 4.5 percent over the medium term contingent on continued productivity growth.
  - Inflation projected to increase to 1.2 percent in 2020 and stabilize around 2 percent over the medium term.
- Fiscal balances and public debt:
  - Fiscal deficit projected to decline to 3.8 percent of GDP in 2020, with privatization receipts reducing public financing need to 3.5 percent of GDP.
  - Deficit would then decline and stabilize around 3 percent of GDP after 2021.
  - Expected privatization revenues would contribute to reducing public debt close to about 60 percent of GDP in the medium term.
- External sector and reserves:
  - Current account deficit projected to narrow to 3.9 percent of GDP in 2020 and to 2.8 percent of GDP in the medium term.
  - FDI and other private flows expected to hover around 1.8 and 1.5 percent of GDP, respectively.
  - International reserves expected to increase slightly to around 85 percent of the ARA metric in the medium term (about 110 percent of the ARA metric adjusted for capital controls).
- Assumptions: sustained reform implementation including fiscal prudence, greater exchange rate flexibility, tax and governance reforms, SOE oversight, fiscal decentralization, labor market and business environment reforms; privatization and PPP-related leasing expected to boost revenues.

### Fiscal and tax reform analysis (Box 1 and fiscal framework)
- Historical and projected tax revenue:
  - Tax revenues declined from almost 24 percent of GDP in 2012 to 21.9 percent in 2018.
  - Measures in the 2020 budget and expiration of certain exemptions projected to raise tax revenues by about 0.8 percent of GDP by 2024.
- Potential additional yields:
  - More comprehensive reforms could increase government revenue by an additional 0.8–1.2 percent of GDP over the medium term.
  - Possible measures: aligning VAT on manufacturing goods and services to the standard VAT rate; broad-based reduction in tax exemptions; higher property taxation; better enforcement for self-employed and liberal professions.
- Staff emphasis: accelerate fiscal reforms, notably tax-base broadening and strengthened public governance, to restore fiscal consolidation and put debt on a sustainable path.

### PLL qualification, capacity to repay, and safeguards
- Qualification assessment:
  - Morocco performs strongly in three out of five PLL qualification areas: financial sector and supervision, monetary policy, and data adequacy.
  - Does not substantially underperform in external position and market access, and fiscal policy.
- Capacity to repay and exposure:
  - If Morocco drew the entire PLL amount, Fund credit and liquidity risks would remain low; Fund obligations would represent a maximum of 5.3 percent of Morocco's total external debt over the projection period, 11.6 percent of gross international reserves, and 6.7 percent of exports.
  - Upon approval of the second review Morocco can draw up to 240 percent of quota.
  - GRA credit to Morocco exposure and repayment schedule (SDR million) shown as: 2,150.8 (2019), 2,150.8 (2020), 2,150.8 (2021), 2,150.8 (2022), 1,075.4 (2023), 0.0 (2024 onward in table).
- Safeguards:
  - New BAM Law enacted July 2019 strengthens central bank autonomy and governance.
  - Publication and disclosure of BAM financial statements improved; work underway to facilitate transition to IFRS.

### Financial sector soundness and policy priorities
- Soundness:
  - Banking system resilient per 2015 FSAP stress tests; banks profitable and strengthening capitalization.
  - Regulatory capital to risk-weighted assets increased from 13.7 (2015) to 15.1 (June 2019).
  - NPLs around 7.7 percent (September 2019); specific provisions around 69.1 percent (2019).
- Ongoing policy work:
  - Implement 2015 FSAP recommendations: strengthen supervisory capacity, stress-testing, macroprudential frameworks, consolidated financial monitoring, incentives for syndicated lending.
  - Address AML/CFT deficiencies identified by MENAFATF.
  - Prepare regulation for financial conglomerates and bank resolution framework; designate BAM as resolution authority.
  - Monitor risks from banks' expansion into Africa and large credit exposures.

### Structural reforms, governance, social safety nets, and labor market
- Structural reform priorities:
  - Civil service reform, strengthened oversight of SOEs, implementation of PIMA recommendations, improved public financial management at local level.
  - Improve education quality, labor market functioning, female labor force participation, and targeting of social programs.
  - Strengthen asset declaration system; legal framework to pursue illicit enrichment expected in 2020.
- Social welfare reform roadmap:
  - Expand basic health and pension coverage; replace nontargeted subsidies with direct assistance based on a single social registry to be introduced by end-2020 / 2020.
  - Introduce and expand unemployment insurance; consolidate RAMED.
- Privatization and SOEs:
  - Ongoing privatization program expected to contribute about 2 percent of GDP to the budget during 2019-24.
  - Draft law reinforcing SOE governance and oversight to be submitted to parliament in 2020.

### Risks, scenarios, and balance of risks
- Downside domestic risks:
  - Delays in implementing fiscal and structural reforms or failure to contain public wage bill could reduce fiscal space, affect growth, and impede reaching 60 percent public debt-to-GDP target.
  - Social tensions could adversely affect tourism receipts and FDI.
- Downside external risks:
  - Higher oil prices, weaker euro area growth, geopolitical tensions, and volatile global financial conditions could slow activity via exports, tourism, FDI, and remittances.
- Upside factors:
  - Lower international oil (and butane gas) prices and increased regional integration in the Maghreb could improve resilience and medium-term growth.
- Adverse fiscal scenario:
  - Slower tax reforms (tax revenues reaching 22.4 instead of 22.9 percent of GDP in 2024) and slower reduction in public wage bill (remaining above 11 percent of GDP) would raise public debt-to-GDP continuously; a slightly lower growth rate (by about 0.2 percentage point) compounds deterioration.
- External Economic Stress Index (Box 2):
  - Weights: Euro area growth 0.580; Change in oil price 0.324; VXEEM 0.095.
  - Downside scenario: euro area growth 0.5 percentage point lower than baseline, US$10 increase in oil prices, and VXEEM increase by two standard deviations.
  - Index indicates a moderately heightened stress level at present.

### Key selected numeric indicators (highlights from tables and charts)
- Real GDP growth: 4.5 (2015), 1.0 (2016), 4.2 (2017), 3.0 (2018), 3.0 (2019), 2.8 (Proj. 2020), 3.7 (2021), 4.1 (2022), 4.3 (2023), 4.4 (2024), 4.5 (2025).
- Consumer prices (end of period): 0.6 (2015), 1.8 (2016), 1.9 (2017), 0.1 (2018), 0.6 (2019), 0.4 (Proj. 2020).
- Total government debt: 63.7 percent of GDP (2015); projected 61.1 percent of GDP (2024).
- Gross official reserves (US$ billions): 22.8 (2015), 25.1 (2016), 26.2 (2017), 24.4 (2018), 26.0 (2019), projected 25.5 (2020), 25.8 (2021), 27.8 (2022), 28.7 (2023), 31.0 (2024), 33.1 (2025).
- Current account including official transfers (percent of GDP): -2.1 (2015), -4.1 (2016), -3.4 (2017), -5.5 (2018), -4.0 (2019), projected -5.1 (2020), improving to -2.8 (2024).
- Budget balance (percent of GDP): -4.2 (2015); projected around -3.0 percent of GDP in the medium term.
- NPLs to total loans: 7.4 (2015) through 7.5/7.7 (2019 series).
- Regulatory capital to risk-weighted assets: 13.7 (2015) through 15.1 (2019, provisional).
- Fiscal targets and program specifics: fiscal deficit 4.0 percent of GDP in 2019 (3.6 percent including privatizations); fiscal deficit target 3.8 percent of GDP in 2020; privatization receipts expected to contribute about 2 percent of GDP over 2019-24.
- Program exchange rate noted in table notes: 9.527 MAD/$ (program exchange rate fixed on November 9, 2018).
- Sovereign bond issuance: one-billion-euro on November 21, 2019 at 1.5 percent.

### Staff appraisal and policy recommendations
- Overall:
  - PLL arrangement continues to serve Morocco; Morocco continues to meet PLL qualification criteria.
  - Performance weaker than projected in fiscal and external sectors due to materialized external risks, higher fiscal deficits, and lower tax revenues.
- Policy recommendations (priority actions):
  - Stepped up fiscal and public sector reforms to enhance resilience and improve efficiency and quality of public investment and services.
    - Decisive tax reforms and specific commitments in the forthcoming five-year framework law beyond 2020.
    - Broaden tax base through reduced exemptions and stronger enforcement; simplify VAT and corporate tax rates.
    - Better-enforced tax payments by self-employed and liberal professions.
    - Contain public wage bill via civil service reform: limit net creation of positions, simplify salary structures, and introduce merit-based progression.
    - Careful implementation of fiscal decentralization with mechanisms to control risks.
  - Overhaul public sector governance, accelerate fight against corruption, and strengthen SOE oversight; submit draft law reinforcing SOE governance in 2020.
  - Continue transition to a more flexible exchange rate regime, ultimately enabling inflation targeting; sequence and communication are important.
  - Sustain structural reforms to achieve higher growth and reduce unemployment: improve business environment, boost financial inclusion, improve education and labor market functioning, and better-target social programs.
  - Continue implementation of 2015 FSAP recommendations to further strengthen financial sector policy framework.

*Source: EXECUTIVE SUMMARY and selected sections (1marea2020001).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and policy priorities
- Four successive PLL arrangements since 2012 have supported reforms to strengthen macroeconomic resilience, economic growth and inclusion.
- Economic growth is below 3 percent and "not robust enough"; unemployment remains high, especially among youth and women.
- Elevated external risks include weak economic growth in the euro area and geopolitical risks.
- Priority reform areas identified: taxation; public governance and the fight against corruption; social spending to reduce inequalities; labor market and education reforms; and greater exchange rate flexibility.

### PLL arrangement assessment and recommendation
- PLL arrangement: two-year precautionary and liquidity line approved in December 2018 in the amount of SDR 2.15 billion (or 240 percent of quota), equivalent to about US$3 billion.
- Staff considers Morocco continues to meet the PLL qualification criteria and recommends completion of the second review of the PLL arrangement.
- Key judgments:
  - Morocco’s economic fundamentals and policy frameworks are sound; authorities have a track record of implementing sound policies and remain committed to maintaining them.
  - Morocco performs strongly in three out of five PLL qualification areas: monetary, financial, and data adequacy; does not substantially underperform in fiscal policy, and external position and market access.
  - The end-September 2019 quantitative indicative target for net international reserves (NIR) was met; the indicative target for the fiscal deficit was missed.
- The authorities have not drawn on the arrangement and continue to treat it as precautionary.

### Recent macroeconomic developments and program performance
- Growth and labor market:
  - Economic growth expected to decline to 2.8 percent in 2019 (against 3.0 percent in 2018).
  - Non-agricultural growth projected at 3.4 percent in 2019.
  - Unemployment increased to 9.4 percent in Q3-2019 (against 9.3 percent in Q3-2018).
  - Labor force participation declined to 45.8 percent (from 47 percent in Q2-2018).
  - Unemployment remains high among youth and women: 26 percent and 14 percent in 2018, respectively.
- Fiscal developments:
  - End-September 2019 indicative target for fiscal deficit missed by 0.2 percent of GDP.
  - Reasons for fiscal underperformance: higher investment spending (delayed PPP arrangements), weaker-than-expected tax revenues, and increased public wage expenditures from recent social dialogue.
  - 2019 fiscal deficit expected at about 4.0 percent of GDP (against 3.7 percent in 2018).
  - Public debt expected to rise to 66 percent of GDP in 2019 (against 65.3 percent in 2018).
  - Fiscal stance (cyclically-adjusted primary deficit, excluding grants) remains neutral.
  - For 2020, fiscal deficit expected to decline marginally to 3.8 percent of GDP, reflecting public wage increases amounting to about 0.6 percent of GDP in 2020 and 0.3 percent of GDP in 2021.
- Monetary and financial sector:
  - Bank-Al-Maghrib policy rate unchanged at 2.25 percent since March 2016.
  - Headline inflation declined to 0.3 percent (y-o-y) in September 2019 (compared to 1.1 percent in September 2018); core inflation slowed to 0.4 percent.
  - BAM reduced reserve requirements from 4 to 2 percent in September 2019.
  - Credit growth to non-financial private enterprises at 4.2 percent in September (y-o-y).
  - Bank regulatory capital ratio increased to 15.1 percent in June 2019.
  - NPL ratio at 7.7 percent in September 2019; provisioning levels around 70 percent.
  - IFRS9 introduced January 2018; estimated capital need over the five-year phase-in less than one percentage point of regulatory capital ratio.
  - Risks from large credit exposures persist; international exposures of the three largest Moroccan banks represent about 20–30 percent of their total assets and a third of their profits.
- External sector:
  - Exports: aeronautic +9.9 percent, agriculture +5.4 percent, phosphate-related +0.4 percent, automobile +4.1 percent (y-o-y, end-September).
  - Imports: capital goods +8.9 percent, consumption goods +4.3 percent (y-o-y, end-September); energy imports lower due to oil prices.
  - Remittances decreased by 0.4 percent; tourism receipts increased by 5.8 percent (end-September, y-o-y).
  - Current account deficit expected to narrow to 5.1 percent of GDP in 2019.
  - Net international reserves at MAD233 billion (US$24.45 billion at the program exchange rate) at end-September 2019, slightly above the indicative target.
  - NIR projected to reach about US$25.5 billion in 2019, equivalent to 5.2 months of imports and 86 percent of the Fund’s Assessing Reserve Adequacy (ARA) metric.
  - Dirham fluctuation band widened to +/- 2.5 percent in January 2018 (from 0.3 percent previously); central bank has not intervened in the FX market since March 2018.
  - Morocco’s 2018 external position assessed as moderately weaker than implied by fundamentals and desirable policies.

### Structural reforms, risks, and vulnerabilities
- Fiscal policy framework:
  - Progress: implementation of the Organic Budget Law, introduction of a three-year budget framework in 2019, adoption of a deconcentration charter, and transparent criteria for transfers to regions.
  - Stalled fiscal consolidation in 2018–20 due to public wage increases decided for 2019–21.
  - Reducing public debt to 60 percent of GDP over the medium term (from 65.3 percent in 2018) will require more ambitious tax reforms focused on broadening the tax base (reducing exemptions, fighting tax evasion/fraud).
  - Civil service reform, strengthened oversight of SOEs, implementation of PIMA recommendations (including effective PPP framework), and improved public financial management at local level are recommended.
- Financial sector framework:
  - Upgrades in progress in line with 2015 FSAP recommendations: strengthened supervisory capacity, stress-testing, macroprudential frameworks, improved monitoring of consolidated financials, incentives for syndicated lending.
  - Key weaknesses in AML/CFT are being addressed; MENAFATF 2018 assessment identified deficiencies to be remedied.
  - New BAM Law enacted July 2019 strengthens central bank autonomy and governance.
- Exchange rate regime:
  - Greater exchange rate flexibility is recommended to preserve reserve buffers and competitiveness and better absorb external shocks.
  - Authorities committed to sequencing and communication; gradual relaxation of capital outflow restrictions for residents planned at a later stage.
- Business environment and labor market:
  - Reforms: reactivation of the Competition Council; measures to limit public-sector payment delays; comprehensive financial inclusion strategy launched in early 2019; strengthened legal frameworks for collateralization and microcredit.
  - Further efforts needed to improve education quality, labor market functioning, reduce inequalities and middle-class vulnerabilities via better targeted social programs, and forceful implementation of national strategy against corruption.
  - Strengthened asset declaration system; legal framework to pursue illicit enrichment expected in 2020.
  - National strategy for employment adopted in 2015 requires finalization of specific measures.

### Medium-term tax reform assumptions and potential yields (Box 1)
- Recent history and need:
  - Tax revenues declined from almost 24 percent of GDP in 2012 to 21.9 percent in 2018.
  - 2019 national tax conference reinforced consensus to broaden the tax base and make the tax system more efficient and equitable.
- Current assumptions underpinning medium-term tax revenue projections:
  - Measures already announced or expected (e.g., in the 2020 budget, expiration of certain tax exemptions) that should raise tax revenues by about 0.8 percent of GDP by 2024.
  - Expected measures include: boosting VAT revenues based on prior TA recommendations; better enforcement of tax payments by self-employed and liberal professions; further corporate tax reform to prevent tax avoidance from recently introduced corporate tax brackets; broader base for property tax.
- Potential additional payoffs from more decisive reforms:
  - More comprehensive reforms could increase government revenue by an additional 0.8–1.2 percent of GDP over the medium term.
  - Possible measures: aligning VAT on manufacturing goods and services to the standard VAT rate; broad-based reduction in tax exemptions; higher property taxation.
- Projected increase in tax revenues (2020–24) from current assumptions: about 0.8 percent of GDP; possible additional 0.8–1.2 percent of GDP from more comprehensive reforms.

### Staff appraisal and program outlook
- Performance under the program has been weaker than projected in fiscal and external sectors due to materialized external risks (e.g., oil price increases), higher fiscal deficits (wage and investment spending), and lower tax revenues.
- As a result, public debt has not yet been placed on a downward trajectory.
- Staff emphasizes the importance of accelerating fiscal reforms, notably tax-base broadening and strengthened public governance, to restore fiscal consolidation and put debt on a sustainable path.
- Continued financial-sector vigilance is needed given NPLs, credit concentration, and bank expansion in Africa.
- Conditions are supportive for continuing the transition to greater exchange rate flexibility in a carefully sequenced and communicated manner.

*Source: EXECUTIVE SUMMARY (1marea2020001).*

### 9.      Gradually increasing growth, moderate inflation, and stronger external and fiscal

### 9.      Gradually increasing growth, moderate inflation, and stronger external and fiscal buffers are expected over the medium term

### Medium-term outlook and projections
- Growth
  - Growth is expected to increase to 3.7 percent in 2020, driven by a combination of agricultural recovery, increased domestic demand, and productivity gains (from the recent acceleration in reform implementation).
  - In the baseline, it would reach 4.5 percent over the medium term, contingent upon continued productivity growth.
- Inflation
  - Inflation is projected to increase to 1.2 percent in 2020, driven by an increase in core inflation.
  - Inflation is projected to stabilize around 2 percent over the medium term.
- Fiscal balances and public debt
  - The fiscal deficit is projected to decline to 3.8 percent of GDP in 2020, with privatization receipts reducing the public financing need to 3.5 percent of GDP.
  - The deficit would then decline and stabilize around 3 percent of GDP after 2021.
  - Expected privatization revenues would contribute to reducing public debt close to about 60 percent of GDP in the medium term.
- External sector and reserves
  - The current account deficit is projected to narrow to 3.9 percent of GDP in 2020 and further to 2.8 percent of GDP in the medium term.
  - This narrowing reflects increasing automobile exports (with new factories reaching export stage) and subdued energy imports (due to both lower international oil prices and higher domestic electricity production capacity).
  - Foreign direct investment and other private flows are expected to remain stable and hover around 1.8 and 1.5 percent of GDP, respectively.
  - International reserves are expected to increase slightly to around 85 percent of the ARA metric in the medium term (about 110 percent of the ARA metric adjusted for capital controls).

### Assumptions underpinning projections
- Projections assume sustained reform implementation in line with the government’s commitments, including:
  - fiscal prudence,
  - progress toward greater exchange rate flexibility,
  - reforms of taxation, governance, SOE oversight, fiscal decentralization, the labor market, and the business environment.
- Privatization and PPP-related leasing of public assets are expected to boost public revenues in the medium term (“Other revenues” item in Table 2).

### Balance of risks
- Downside risks (domestic)
  - Delays in implementing key fiscal (e.g. tax and civil service) and structural reforms, or in containing the (already high) public wage bill, could:
    - affect growth prospects,
    - reduce fiscal space,
    - undermine the authorities’ objective of reducing public debt to 60 percent of GDP.
  - Such delays could contribute to social tensions, which could adversely affect the external sector (e.g., through lower tourism receipts and FDI inflows) and the expected pickup in potential growth.
  - The authorities reiterated their determination to implement promptly the fiscal measures included in the 2020 budget law and contain the wage bill to expand fiscal space and reduce the public debt ratio under 60 percent of GDP in the medium term.
- Downside risks (external)
  - Higher oil prices, heightened global uncertainty and risks to euro area growth prospects, and geopolitical tensions could slow economic activity through lower exports, tourism, FDI flows, and remittances.
  - Increasingly volatile global financial conditions, and a sharp rise in risk premia, may increase borrowing costs and weaken investor confidence.
- Upside factors
  - Lower international oil (and butane gas) prices could help further enhance the economy’s resilience.
  - Increased regional integration in the Maghreb region could be an added source of medium-term growth for Morocco.

### Scenario notes on public debt (as presented)
- Adverse fiscal scenario relative to the baseline:
  - Combines slower tax reforms (tax revenues reaching 22.4 instead of 22.9 percent of GDP in 2024) and a slower reduction in the public wage bill (remaining above 11 percent of GDP over the projection period).
  - A slightly lower growth rate than projected in the adverse scenario (by about 0.2 percentage point) would also lead to a continuous increase in the public debt-to-GDP ratio.

### Box 2 — External Economic Stress Index (summary)
- Purpose
  - 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 FCL and PLL arrangement countries.
- Main external risks for Morocco (based on August 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 dislocations to capital flows and tourism receipts;
  - (iii) a sharp rise in risk premia, resulting in higher borrowing costs and disruption to portfolio flows.
- Proxy variables
  - Euro area growth (captures lower exports, remittances, FDI, and tourism receipts from Europe).
  - Oil prices (captures higher oil import costs).
  - Emerging markets volatility index (VXEEM) (captures impact of global financial volatility on portfolio flows and borrowing costs).
- Weights (data-based, estimated using balance of payments and IIP data as a share of GDP)
  - Euro area growth weight: 0.580.
  - Change in oil price weight: 0.324.
  - VXEEM weight: 0.095.
- Scenarios
  - Baseline: October 2019 WEO projections for euro area growth and oil prices; VXEEM consistent with VIX futures as of end-September 2019.
  - Downside scenario: broadly consistent with staff’s adverse scenario; assumes euro area growth that is 0.5 percentage point lower than the baseline, a US$10 increase in oil prices relative to the baseline, and an increase in the VXEEM by two standard deviations.
- Overall assessment
  - The external economic stress index suggests external pressures abated between 2012–16 but increased more recently; at present, the index indicates a moderately heightened stress level.

### Review of PLL qualification — General assessment (key points)
- Staff assesses that Morocco continues to qualify for a PLL arrangement.
- Performance across PLL qualification areas:
  - Performs strongly in three out of five areas: financial sector and supervision, monetary policy, and data adequacy.
  - Does not substantially underperform in the other two areas: external position and market access, and fiscal policy.
- Macroeconomic developments summary
  - Growth averaged 3.3 percent during 2012–18.
  - Inflation remained below 2 percent.
  - The fiscal deficit increased to 3.7 percent of GDP in 2018 and is expected to reach 4 percent of GDP in 2019.
  - After a significant deterioration in 2018 to 5.5 percent of GDP due to increased energy imports (higher international oil prices), the current account deficit is expected to narrow modestly to 5.1 percent of GDP in 2019.
  - The banking system remains resilient.
- Program performance and policy priorities
  - Recent progress towards reducing the fiscal deficit has stalled, in part due to increased public wage spending from recent social dialogue.
  - More decisive fiscal reforms will be critical to meet authorities’ objectives and preserve fiscal space.
  - Authorities should take advantage of favorable conditions to further increase exchange rate flexibility.
  - Over the medium term, authorities plan to secure strong revenue performance, contain current spending, and reduce public debt to about 60 percent of GDP.
  - Tax reforms are being advanced in line with recommendations of the 2019 national tax conference, starting with the 2020 budget and a five-year framework law expected to be adopted by end-February 2020; specific tax reform plans beyond 2021 are yet to be formulated.
  - Structural reforms to improve public sector efficiency, enhance competition, lower hiring costs, increase SME financial inclusion, and strengthen governance are underway and will be key to raise growth potential and boost job creation, especially for youth and women.
- Institutional and policy framework strengths
  - Implementation of the OBL continues to improve the fiscal policy framework, including by maintaining current spending within budgeted levels.
  - Morocco performs relatively well in the fiscal policy area for countercyclical capacity.
  - BAM has a clear mandate to implement monetary and exchange rate policies and is in the process of upgrading its monetary policy regime as part of the transition to greater exchange rate flexibility and inflation targeting.
  - Morocco performs well relative to peers in the Worldwide Governance Indicators (WGI) on control of corruption and government effectiveness.

*Source: IMF staff report section titled "Gradually increasing growth, moderate inflation, and stronger external and fiscal buffers are expected over the medium term."*

### 13.      Morocco performs strongly in three out of the five PLL qualification areas (financial

### 13.      Morocco performs strongly in three out of the five PLL qualification areas (financial

### Overview
- Morocco performs strongly in three out of five PLL qualification areas: financial sector and supervision, monetary policy, and data adequacy.
- Morocco does not substantially underperform in the other two areas: external position and market access, and fiscal policy.
- The underlying current account deficit remains large, with a substantial trade deficit; the external position weakened in 2018 but is expected to improve in 2019.
- Public debt is assessed to be sustainable with a high probability and resilient to various shocks.
- This qualification assessment has not changed since the request of the PLL arrangement.

### External position and market access (Criteria 1–4)
- Criterion 1 — Sustainable external position:
  - 2018 EBA: Morocco’s external position is moderately weaker than implied by fundamentals and desirable policies.
  - Current account deficit widened substantially in 2018 due to higher imports of energy and capital goods, and lower remittances, official grants from the Gulf states, and tourism receipts.
  - Current account expected to improve moderately in 2019 and over the medium term as export growth benefits from expansion of higher value-added export sectors (reflecting strong FDI in the aeronautics and automotive sectors) and import growth slows in an environment of lower commodity prices.
  - Preliminary 2019 EBA indicates external position continues to be moderately weaker than implied by fundamentals and desirable policies.
  - External debt: about 30 percent of GDP in 2018 and expected to decline to about 25 percent of GDP in the medium term.
  - Authorities view current conditions as a window to continue the exchange rate transition but are waiting for the opportune moment to move to the next phase.
- Criterion 2 — Capital account position dominated by private flows:
  - Private capital flows ≈ around 80 percent on average between 2015 and 2018.
  - FDI is the largest component of private flows.
  - Access to international financial markets by nonfinancial corporations remains modest compared to other emerging markets.
  - Private external debt ≈ about 2 percent of GDP.
  - Public capital flows mainly from loans by bilateral and development partners.
- Criterion 3 — Track record of steady sovereign access:
  - Morocco issued a 1-billion euro sovereign bond on November 21, 2019.
  - Country continues to be rated favorably by major ratings agencies; sovereign spreads remain low and Morocco is expected to tap international markets on a durable and substantial basis.
  - New issuance: maturity 12 years and interest rate 1.5 percent; previous issuances listed in the source.
- Criterion 4 — Reserve position:
  - On average, reserves were below 100 percent of the ARA metric in the last three years, but not below 80 percent of the ARA metric in any of the current and two previous years.
  - End-2018 reserves equivalent to 85 percent of the ARA metric.
  - Reserves adequacy metrics at end-2018: 5.2 months of imports; ample coverage of short-term debt and broad money; 113 percent of the ARA metric adjusted for capital controls.
  - By 2024, reserves expected to be about 5.2 months of imports, 85 percent of the ARA metric, and 110 percent of the ARA metric adjusted for capital controls.

### Fiscal policy (Criterion 5)
- Morocco does not substantially underperform in the fiscal area.
- Criterion 5 — Sound public finances and sustainable public debt:
  - A deficit of 4 percent of GDP is expected in 2019.
  - Authorities aim to reduce public debt to 60 percent of GDP over the medium term (against 65.3 percent in 2018).
  - Achieving 60 percent of GDP will require bringing the fiscal deficit to about 3 percent of GDP by 2022.
  - Morocco's public debt is sustainable with high probability and resilient to various shocks; gross financing needs projected to decline over the medium term, aided by longer average maturities.
  - Future fiscal consolidation needed to meet public sustainability objectives.
  - Required measures include:
    - More decisive tax reform implementation and greater clarity on specific reforms planned for coming years.
    - Broadening the tax base through reduced exemptions and fight against tax evasion and fraud.
    - Simpler VAT regime and corporate tax rates.
    - Better-enforced tax payments by self-employed and liberal professions.
  - Public wage bill considerations and civil service reform:
    - Authorities intend to strictly limit net creation of new civil servant positions in the medium term, including as a result of attrition.
    - Civil service reform (simpler and more flexible salary structures and merit-based career progression) needed to contain the relatively high wage bill and improve public service quality.
  - Institutional measures:
    - Mechanisms to control risks from fiscal decentralization are being put in place.
    - Authorities intend to submit to parliament in 2020 a draft law reinforcing SOE governance and oversight.
    - Ongoing privatization program expected to enhance SOE performance.

### Monetary policy (Criterion 6)
- Morocco performs strongly in monetary policy.
- Criterion 6 — Low and stable inflation:
  - Inflation single digits over the last five years; 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 comprising the euro and the U.S. dollar.
  - Transition to greater exchange rate flexibility initiated in January 2018 is expected to last several years and to lead to inflation targeting, allowing better absorption of external shocks (W-COM.-¶14).
  - Staff assesses transition likely to proceed smoothly; recommends accelerating the move to the next phase although authorities have not provided a specific timeline.

### Financial sector soundness and supervision (Criteria 7–8)
- Morocco performs strongly in the financial sector area.
- Criterion 7 — Sound financial system and absence of systemic solvency problems:
  - Banks have adequate capital buffers and benefit from stable funding (mainly non-remunerated deposits).
  - 2015 FSAP stress tests showed banking system could withstand severe shocks.
  - NPLs remain relatively high at 7.7 percent; provisioning levels comfortable at 70 percent.
  - Risks from large credit exposures have been gradually declining from their peak in 2007.
  - Moroccan banks' expansion into Africa provides diversification and profit opportunities but increases risks given riskier operating environment and lower regulatory standards in some host countries.
- Criterion 8 — Effective financial sector supervision:
  - Bank supervision capacity improving along 2015 FSAP recommendations.
  - Enhancements to macroprudential policy framework and intensified oversight of banks expanding into Africa in collaboration with host-country supervisors.
  - Measures to reduce large credit exposures: corporate groups required to prepare consolidated financial statements; risk weights raised for large connected exposures.
  - Supervision becoming more risk-based and forward-looking.
  - Authorities are addressing weaknesses identified in Morocco's AML/CFT framework (W-COM.-¶13).

### Data adequacy (Criterion 9)
- Data provision and quality are fully adequate.
- Criterion 9 — Data transparency and integrity:
  - Overall data quality adequate for effective surveillance and program monitoring.
  - Morocco subscribes to the Special Data Dissemination Standard.
  - Authorities committed to improving data quality and access.

### Other program issues, PLL capacity, and safeguards
- End-September 2019 quantitative indicative targets (IT):
  - Net international reserves (NIR) IT was met.
  - Fiscal deficit IT was missed by 0.2 percent of GDP (even after adjusting for lower grants) due to delays in PPP implementation during 2019.
- PLL drawdown implications:
  - Should Morocco draw on the entire amount available, it would have adequate capacity to repay the Fund.
  - Credit and liquidity risks to the Fund would remain low (Table 6 referenced in source).
  - Fund obligations would represent only a small share of Morocco's total external debt (a maximum of 5.3 percent over the projection period), gross international reserves (11.6 percent), and exports (6.7 percent).
  - Impact of the PLL arrangement on the Fund's liquidity and potential exposure continues to be moderate; commitment to Morocco is modest and reduces the Fund's forward commitment capacity only marginally.
- Safeguards:
  - BAM has taken steps to strengthen safeguards following the 2019 safeguards assessment.
  - A new BAM Law enacted in July 2019 strengthens central bank autonomy and improves governance arrangements.
  - Publication process of BAM’s financial statements improved; key disclosures enhanced in 2018 financial statements.
  - Work underway to address interim steps to facilitate transition to International Financial Reporting Standards (IFRS).
- Exit strategy considerations:
  - Given projected improvements in economic resilience and growth, authorities will need to communicate about their exit strategy from the PLL arrangement.
  - Under the baseline scenario, by end of the arrangement:
    - Primary fiscal deficit would fall below the debt-stabilizing balance.
    - Public debt would be on a downward path.
    - Current account deficit would be close to expected level for an emerging market country like Morocco.
    - Reserves would be at a comfortable level (about 82 percent of the ARA metric, or 107 percent of the adjusted metric).
  - Authorities agreed but stressed the importance of the PLL arrangement in supporting public confidence in implementation of key reforms.

### Staff appraisal and policy recommendations
- Overall assessment:
  - The PLL arrangement is serving Morocco well and remains on track.
  - Despite a challenging external environment, macroeconomic vulnerabilities have been reduced and reform implementation sustained.
  - IMF Executive Board's assessment in the context of the 2019 Article IV consultation was positive.
  - Morocco continues to meet PLL qualification criteria; economic fundamentals and institutional frameworks are sound.
  - End-September 2019 NIR IT met; fiscal IT missed.
- Key recommendations and priorities:
  - Stepped up fiscal and public sector reforms needed to enhance macroeconomic resilience and improve efficiency and quality of public investment and services.
    - Decisive tax reforms and specific commitments in the forthcoming five-year framework law beyond 2020.
    - Overhaul public sector governance and continue fight against corruption.
    - Accelerate civil service reform.
    - Careful implementation of fiscal decentralization.
    - Increase project implementation and risk management capacity, including in SOE sector.
  - Continue transition to a more flexible exchange rate regime, ultimately enabling inflation targeting; staff recommends proceeding with the transition to strengthen resilience, preserve competitiveness, and increase growth potential.
  - Sustain structural reform implementation to achieve higher growth and reduce unemployment:
    - Improve business environment and financial inclusion to shift to a more private sector-led growth model.
    - Reforms to improve education quality, labor market functioning, and female labor force participation.
    - Ensure social programs better targeted at the most vulnerable groups.
  - Continue to implement 2015 FSAP recommendations to further strengthen the financial sector policy framework.

*Source: IMF staff report text provided in content unit 1marea2020001.*

### 22.      Against this background, staff recommends the completion of the second review

### 22. Against this background, staff recommends the completion of the second review under the PLL arrangement.

### Recommendation
- Staff recommends the completion of the second review under the PLL arrangement.

### Real sector developments
- Agricultural growth drove the decline in overall growth in 2018 and 2019.
- Unemployment has declined since 2017 but remains high for the youth and women.
- Investment and private consumption remain key growth drivers.
- Surveys point to increasing business confidence and declining household confidence.
- Tourism activity remains strong; construction activity subdued.
- Inflation has remained low despite volatile food prices.
- Key datapoints (projections/indicators shown in figures):
  - GDP growth series shown for 2009–2020 (2020 projected).
  - Household and industry confidence indices plotted through Sep-19.
  - CPI General Index, CPI Core, CPI Food annual percent change through Sep-19.

### Fiscal developments
- Fiscal consolidation stalled in 2018–19, but cyclical and structural fiscal balances continued to improve.
- Revenues stable since 2016; expenditures remain contained.
- Public debt is sustainable and projected to decline gradually in the medium term.
- Sovereign spreads have remained low.
- Key fiscal figures (from tables and charts):
  - Budget Balance and Public Debt shown as percent of GDP for 2010–2020 (2020 projected).
  - Cyclically adjusted balance and Structural balance series through 2020 (projected).
  - Government revenue and expenditure composition by category through 2020 (projected).

### Financial sector developments
- Banks continue to be profitable and are strengthening capitalization following IFRS9 implementation.
- NPLs remain relatively high for household loans.
- Provisioning is relatively high while liquidity conditions are stable.
- Private credit growth has been recovering in 2019; lending to households, private financial institutions, and non-financial corporates support credit growth.
- The policy rate remains unchanged since 2016 while lending rates have marginally decreased since 2018.
- Key financial metrics (selected):
  - Liquid assets to total assets, Specific provisions to total loans, Specific provisions to NPLs plotted through 2019 (June 2019).
  - NPLs distribution and levels shown (national currency, Billions; data as of September 2019).
  - Private credit growth and loan-to-deposit ratio series through 2019.
  - Bank profitability and capitalization series including Return on assets, Interest rate average spread, Cost of risk, Regulatory capital to risk-weighted assets (through June 2019).

### External sector developments
- Export growth driven by emerging manufacturing sectors; imports of capital and semi-finished goods increased; energy imports stabilized.
- The current account deficit is projected to improve slightly in 2019 after a sharp increase in 2018.
- Private borrowing and FDI are playing a key role in financing the current account deficit in 2018 and 2019.
- Morocco’s reserves level remains adequate.
- The real effective exchange rate has appreciated since 2018.
- Key external figures (selected from tables and charts):
  - Imports and exports by type (US$, Billions) series through 2019 (est.).
  - Current Account Components (US$ Billions) series through 2019 (est.).
  - Reserve Adequacy Metrics (US$ billions): Reserves, 3M of Imports, Standard metric 20% of broad money, Adjusted metric Reserves/(ST debt + CA deficit) plotted through 2019 (est.).
  - Real and Nominal Effective Exchange Rates index (Jan. 2010 = 100) through 2019.

### Structural reforms
- Morocco fares relatively well in overall business climate and competitiveness.
- Recent reforms include a new bankruptcy law improving the insolvency regime and streamlining administrative procedures.
- Limited progress in improving innovation capacity and labor market functioning.
- Education priorities: increase years of schooling, teachers’ training, and vocational training.
- Labor market priorities: reduce regulatory rigidities and strengthen labor market policies.
- Facilitation of access to finance for SMEs is a priority.
- Indicators referenced: World Bank's 2020 Doing Business Report; World Economic Forum's 2019 Global Competitiveness Report.

### Selected economic indicators and projections (highlights from Table 1)
- Real GDP: 4.5 (2015), 1.0 (2016), 4.2 (2017), 3.0 (2018), 3.0 (2019), 2.8 (Proj. 2020), 3.7 (2021), 4.1 (2022), 4.3 (2023), 4.4 (2024), 4.5 (2025).
- Real agriculture GDP: 11.9 (2015), -13.7 (2016), 15.2 (2017), 4.0 (2018), 0.1 (2019), -2.8 (Proj. 2020), 3.3 (2021), 3.7 (2022), 4.1 (2023), 4.3 (2024), 4.4 (2025).
- Consumer prices (end of period): 0.6 (2015), 1.8 (2016), 1.9 (2017), 0.1 (2018), 0.6 (2019), 0.4 (Proj. 2020), 1.2 (2021–2025 with stable 2.0 percent targets in later years).
- Gross capital formation: 30.8 (2015), 32.4 (2016), 32.6 (2017), 33.5 (2018), 34.0 (2019), 33.1 (Proj. 2020).
- Revenue: 26.5 percent of GDP (2015) and stable around 26.0–26.9 percent of GDP in projections.
- Expenditure: 30.7 percent of GDP (2015) and projected around 29.7–30.0 percent of GDP.
- Budget balance: -4.2 percent of GDP (2015); projected around -3.0 percent of GDP in medium term.
- Total government debt: 63.7 percent of GDP (2015); projected 61.1 percent of GDP (2024).
- Gross reserves (in billions of U.S. dollars): 22.8 (2015), 25.1 (2016), 26.2 (2017), 24.4 (2018), 26.0 (2019), projected 25.5, 25.8, 27.8, 28.7, 31.0, 33.1 in subsequent years.
- Current account including official transfers: -2.1 (2015), -4.1 (2016), -3.4 (2017), -5.5 (2018), -4.0 (2019), projected -5.1 (2020), improving toward -2.8 (2024).

### Budgetary central government finance (selected figures from Tables 2a/2b)
- Revenue (Billions of dirhams): 262.1 (2015), 264.0 (2016), 282.4 (2017), 289.8 (2018), 302.1 (2019), 297.2 (Proj. 2020), 313.4 (2021), 334.8 (2022), 359.4 (2023), 384.0 (2024), 409.3 (2025).
- Expense (Billions of dirhams): 248.5 (2015), 251.6 (2016), 261.6 (2017), 270.3 (2018), 288.2 (2019), 284.5 (Proj. 2020).
- Net lending / borrowing (overall balance) (Billions of dirhams): -41.2 (2015), -45.4 (2016), -37.1 (2017), -41.4 (2018), -43.2 (2019), -45.1 (Proj. 2020).
- Net acquisition of nonfinancial assets (Billions of dirhams): 54.8 (2015), 57.8 (2016), 57.9 (2017), 60.8 (2018), 57.1 (2019), 57.9 (Proj. 2020).
- GDP (Billions of dirhams): 988.0 (2015), 1,013.2 (2016), 1,063.4 (2017), 1,106.8 (2018), 1,155.0 (2019), 1,142.3 (Proj. 2020).

### Balance of payments highlights (selected from Table 3)
- Current account (US$ billions): -2.2 (2015), -4.2 (2016), -3.7 (2017), -6.5 (2018), -4.8 (2019), -6.1 (Proj. 2020).
- Trade balance (US$ billions): -14.7 (2015), -17.6 (2016), -18.0 (2017), -20.2 (2018), -19.1 (2019), -20.0 (Proj. 2020).
- Exports f.o.b. (US$ billions): 18.6 (2015), 19.1 (2016), 21.5 (2017), 24.6 (2018), 26.2 (2019), 25.6 (Proj. 2020).
- Imports f.o.b. (US$ billions): -33.3 (2015), -36.7 (2016), -39.5 (2017), -44.8 (2018), -45.3 (2019), -45.6 (Proj. 2020).
- Tourism receipts (US$ billions): 6.3 (2015), 6.5 (2016), 7.4 (2017), 7.8 (2018), 7.8 (2019), 8.0 (Proj. 2020).
- Financial account (US$ billions): 5.8 (2015), 6.4 (2016), 2.0 (2017), 4.0 (2018), 6.3 (2019), 7.4 (Proj. 2020).
- Gross official reserves (US$ billions): 22.8 (2015), 25.1 (2016), 26.2 (2017), 24.4 (2018), 26.0 (2019), 25.5 (Proj. 2020).
- Months of prospective imports of GNFS: 6.0 (2015), 6.1 (2016), 5.7 (2017), 5.2 (2018), 5.2 (2019), 5.2 (Proj. 2020).

### Monetary and financial soundness highlights
- Broad money growth: 5.7 percent (2015), 4.7 percent (2016), 5.5 percent (2017), 4.1 percent (2018), 4.0 percent (2019).
- Claims to the economy (annual percent change): 1.6 (2015), 5.9 (2016), 3.3 (2017), 3.4 (2018), 5.2 (2019).
- Financial soundness indicators (selected):
  - Regulatory capital to risk-weighted assets: 13.7 (2015) through 15.1 (2019, provisional).
  - Non-performing Loans (NPLs) to total loans: 7.4 (2015) through 7.5 (2019).
  - Specific provisions to NPLs: 68.0 (2015) through 69.1 (2019).
  - Return on assets (ROA): 0.8–1.1 series across 2015–2019.
  - Deposits to loans around 104.3–102.2 range across 2015–2019.

### Capacity to repay (Table 6 highlights)
- Upon approval of the second review of the PLL arrangement Morocco can draw up to 240 percent of quota.
- GRA credit to Morocco exposure and repayment schedule (SDR million):
  - 2,150.8 (2019), 2,150.8 (2020), 2,150.8 (2021), 2,150.8 (2022), 1,075.4 (2023), 0.0 (2024 onward in table).
- Debt ratios (selected):
  - Total external debt (percent of GDP): 31.3 (2018), 35.4 (2019), 35.2 (2020), 34.8 (2021), 32.5 (2022), 30.4 (2023), 26.9 (2024), 24.6 (2025).
  - Total external debt service (percent of GDP): 2.7 (2018), 2.8 (2019), 2.6 (2020), 2.5 (2021), 2.3 (2022), 3.2 (2023), 2.9 (2024), 1.9 (2025).
- Memorandum items:
  - Nominal GDP (US$ billions): 117.9 (2018), 118.1 (2019), 123.6 (2020), 131.7 (2021), 140.5 (2022), 149.9 (2023), 160.0 (2024), 170.8 (2025).
  - Gross international reserves (US$ billions): 24.4 (2018), 25.5 (2019), 25.8 (2020), 27.8 (2021), 28.7 (2022), 31.0 (2023), 33.1 (2024), 34.2 (2025).

*Source: IMF staff presentation of Morocco macro-fiscal, financial, external, and structural developments (figures, tables, and notes as provided).*

### Appendix I. Written Communication

### Appendix I. Written Communication

### Overview
- Date and addressee: Rabat, November 26, 2019; Madame Kristalina Georgieva, Managing Director, International Monetary Fund.
- High-level objectives of the PLL-supported program:
  - Accelerate structural reforms to promote stronger and more inclusive growth, create more jobs, reduce social and spatial disparities, and durably improve standards of living.
  - Further strengthen economic resilience, fiscal space, external operating scope, and stability of the financial system.
  - Reach a new level of growth of 4.5 to 5 percent per year.

### Recent macroeconomic performance and outlook
- 2018 outcomes:
  - Growth: around 3 percent.
  - Inflation: 1.9 percent.
  - Current account deficit: 5.5 percent of GDP (primarily due to the significant increase in oil prices).
  - Budget deficit: did not exceed 3.7 percent of GDP.
  - Public debt ratio: stabilized at approximately 65 percent of GDP.
- 2019 developments and expectations:
  - First half 2019: overall growth decelerated to 2.6 percent year on year due to a decline in agriculture; nonagricultural sector growth accelerated to 3.4 percent.
  - Full-year 2019 projections: growth would be close to 3 percent and inflation 0.4 percent.
  - Unemployment: remained stable at 9.4 percent during the third-quarter of 2019 relative to the same period of 2018.
  - Current account deficit: should decline to approximately 5 percent of GDP due to exports increasing slightly faster than imports.
  - Foreign exchange reserves: expected to remain at a comfortable level, covering just over five months of imports.
- Balance of payments and PLL:
  - Morocco does not require balance of payments financing; the Precautionary Liquidity Line (PLL) approved on December 17, 2018 is treated as precautionary insurance against external shocks and to bolster investor confidence.

### Fiscal policy stance and tax reforms
- Fiscal deficit and debt targets:
  - Fiscal deficit excluding privatization proceeds will be contained at close to 4.0 percent of GDP in 2019 (3.6 percent if privatizations are included).
  - Fiscal deficit to be reduced gradually to 3 percent of GDP to ensure convergence towards the target of 60 percent for the public debt/GDP ratio in the medium term.
- Fiscal policy measures and priorities:
  - Increase tax revenue mobilization and improve expenditure control and efficiency.
  - Prioritize investment in infrastructure and human capital.
  - Adopt a new approach to public asset management and strengthen social safety nets.
- Main tax measures in the 2020 draft budget law:
  - Reduction of the marginal corporate income tax (IS) rate for industrial companies to 28 percent of local turnover.
  - Increasing the rate applicable to exports to 20 percent.
  - Reform preferential tax systems for Casablanca Finance City (CFC) status and export free-trade zones to converge tax rates for domestic and export-oriented activity.
  - Reducing the minimum contribution from 0.75 percent to 0.50 percent.
  - Eliminating value-added tax (VAT) exemptions for certain food products.
  - Introduced option of spontaneous regularization of assets and cash resources held abroad and a special legal framework for individuals to voluntarily regularize tax situations involving professional or agricultural income.
- National tax conference (May 2019) outputs:
  - Wide-ranging reform to increase efficiency, equity, and contribution to growth.
  - Draft framework law on taxation prepared to be submitted to parliament to guide tax reform over the next five years.
  - Priorities: expand tax base (reduce exemptions, integrate informal sector), VAT simplification (reduce number of rates), strengthen tax administration, harmonize and simplify local taxation.

### Public expenditure, administration, and decentralization
- Personnel expenditure target:
  - Objective to keep personnel expenditure, including social welfare contributions, below 10.5 percent of GDP in the medium term.
  - Measures: limit net job creation to core requirements, eliminate positions vacated through retirement, accelerate public administration reform, promote contractual employment, implement staff mobility, and introduce performance-based remuneration and promotion systems.
- Public investment:
  - Maintain level of public investment and enhance efficiency with improved project selection based on impact on employment, reduction of disparities, and improvement of living conditions.
  - Adopt integrated system for centralized management of public investments and introduce public-private partnerships (PPPs); a unified legal framework for public investment management is being prepared.
  - Draft law on PPPs to make procedures more flexible and expand scope to local governments submitted to parliament and expected to be adopted during the current session.
- Fiscal decentralization and regionalization:
  - Advanced regionalization with prudently introduced fiscal decentralization to protect fiscal sustainability.
  - National administrative decentralization charter adopted in November 2018 to define responsibilities, ensure inter-ministerial consistency at regional level, and establish transparent criteria for revenue sharing and use of new solidarity and cross subsidy funds.
  - Draft law on reform of local taxation being prepared, expected to incorporate national tax conference recommendations.
  - Emphasis on capacity, transparency, and accountability at local level.

### Public finance statistics and transparency
- Government finance and debt statistics:
  - First consolidated government finance and debt statistics report for 2017 completed for general government (covering local government units, retirement and social security funds, most non-commercial public enterprises, and budgetary central government).
  - Report for 2018 to be prepared as soon as required data collected; gradual expansion of coverage planned to include all non-commercial public enterprises with IMF technical assistance.

### Monetary policy and central bank reform
- Bank Al-Maghrib (BAM) actions:
  - Maintained an accommodative monetary policy stance in 2019 amid low inflation, gradual recovery in nonagricultural and credit activity, and satisfactory foreign exchange reserves.
  - Continue to promote adequate financing of the economy with special support for VSMEs.
- Central bank charter reform:
  - Law on reform of the central bank charter adopted in July 2019.
  - Strengthens institutional independence of BAM, gives exclusive, full authority in monetary policy definition and implementation.
  - Expands missions to include national objectives on financial stability and financial inclusion; provides broader means to carry out missions.
  - Emergency liquidity assistance (ELA) introduced into the new Charter.
  - Reform consistent with IMF safeguards assessment which highlighted operational control strengths in key functions of BAM.

### Financial sector and supervision
- Banking sector soundness:
  - Banking sector described as sound and resilient.
  - Nonperforming loans: still relatively high but declining and well provisioned.
- Regulatory and supervisory measures:
  - Increase supervisory capacity; finalize regulation governing financial conglomerates before end-June 2020.
  - Accounting rules strengthened with adoption of International Financial Reporting Standards (IFRS 9) in January 2018; impact on banks’ prudential capital spread over five years and first year well absorbed.
  - Intensify coordination with supervisory authorities in countries where Moroccan banks are established and promote good risk management practices.
  - Strengthen supervisory framework for AML/CFT in line with MENAFATF April 2019 assessment recommendations.
  - Strengthen macroprudential and bank resolution frameworks; prepare legal framework for resolution in line with international standards and designate BAM as the resolution authority. A first draft amendment to the Banking Law is being prepared.

### Exchange rate regime reform
- Transition to more flexible foreign exchange system:
  - January 2018: widened dirham fluctuation band to + 2.5 percent (from + 0.3 percent) around reference parity.
  - Since April 2018: dirham has been moving within its fluctuation band without central bank intervention.
  - Reform accompanied by strengthening of banks’ foreign assets and deepening of interbank foreign exchange market.
  - Authorities plan to move to next phase at the opportune time.
  - Emphasis on ensuring SMEs and other economic agents understand risks from greater dirham fluctuations and have access to hedging instruments.
  - Expected benefits: better absorption of external shocks, preserve competitiveness, support diversification and global integration.

### Structural reforms, business environment, and governance
- Business environment improvements:
  - Morocco gained 7 positions in the Doing Business ranking; reforms to continue.
  - Measures: modernize incentives and legal environment, improve infrastructure and public services, simplify and digitize administrative procedures.
  - Draft law revising Regional Investment Centers (CRIs) adopted in 2019; Investment Charter revision under way.
  - New legal framework for moveable collateral introduced to facilitate financing; national electronic register of moveable collateral planned at beginning of 2020.
  - Strengthened protection for minority investors; new Competition Council Chair and members appointed to enhance governance and competition.
  - Accelerated program to settle VAT credits and reduce payment delays in public and private sectors to improve firms’ cash flows.
- Anti-corruption and transparency:
  - National anti-corruption strategy implementation underway; progress report for 2016-18 published May 2019 noting significant progress in citizen reception, simplification of procedures, complaint processing, and electronic data sharing.
  - New Chair of National Body on Probity and the Prevention and Combating of Corruption appointed December 2018.
  - Digitization progress: November 2018 law mandatory for electronic completion of business creation formalities; January 2019 law creating electronic platform to digitize legal formalities across the life of enterprises.
  - Draft law on simplification of administrative procedures under discussion in Parliament.
  - Law on public access to information entered into effect in March 2019.
  - Morocco improved its Corruption Perception Index ranking by 8 positions in 2019 and joined the Open Government Partnership (OGP) in July 2018.

### Human capital, labor markets, and financial inclusion
- Education and employment reforms:
  - Strategic vision for 2015-30 reform of education and national employment strategy to improve quality of human resources, productivity, and matching of training to jobs.
  - Framework law on education, training, and scientific research promulgated on July 22, 2019.
  - New roadmap on vocational training adopted in April 2019 to create professional and skills centers in the 12 regions, associating private sector to training program development.
- Financial inclusion and SME support:
  - National financial inclusion strategy approved by National Financial Inclusion Council (CNIF) on April 1, 2019.
  - Specific measures targeting VSMEs, young people, women, and rural populations underway.
  - Review of SME support instruments and preparation of a roadmap submitted to Strategic Council for approval on November 26, 2019.
  - Work to introduce a Small Business Act covering financing, legal framework, market access, taxation, and support; entrepreneur portal launch on December 20, 2019.
  - Revision of microcredit legal framework underway; maximum authorized amount of microcredit increased threefold.

### Public enterprises and privatization strategy
- Governance and fiscal risk management for EEPs:
  - Continue to improve efficiency and governance of public enterprises and establishments (EEPs), promote transparency and accountability.
  - Draft law to enhance governance, performance, and government financial control over EEPs to enter approval process in 2020.
  - Discussions, with IMF support, to establish integrated system for monitoring and assessing risks, particularly fiscal risks from EEP sector.
  - In-depth reform of EEP economic model under discussion: gradual government divestment from activities suitable for private sector, focus EEPs on core business, sale of non-mission assets, outsourcing related activities.
- Privatization program:
  - Expected to contribute the equivalent of approximately 2 percent of GDP to the budget during 2019-24.
  - List of enterprises that could potentially be privatized updated; members of assessment body and transfer commission provided by Law 39.89 appointed.

*Rabat, November 26, 2019 — Appendix I. Written Communication*

### 20.      The enhancement of social welfare programs and improvement of their consistency,

### 20.      The enhancement of social welfare programs and improvement of their consistency, targeting, and efficiency

### Social welfare reform: objectives and roadmap
- National conference on social welfare (November 2018) identified deficiencies and established a roadmap to:
  - Expand basic health and pension coverage to the entire population.
  - Replace nontargeted subsidies with direct assistance to vulnerable sectors based on a single social registry to be introduced by end-2020 / 2020.
  - Simplify procedures to obtain severance payments.
  - Enhance the legal framework for work-related accidents.
  - Introduce and expand unemployment insurance.
  - Consolidate the Medical Assistance System (RAMED).

### Performance under the PLL arrangement and quantitative targets
- In terms of the indicative targets established in the PLL arrangement for end-September 2019:
  - The benchmark established for net international reserves (NIR) was met.
  - The benchmark for the fiscal deficit was exceeded with a margin of 0.2 percent of GDP.
- The authorities will provide the IMF with required information to monitor economic policies and will respect PLL requirements on:
  - Import and foreign exchange restrictions.
  - Bilateral payment arrangements.
  - Multiple currency practices.
  - Continuous performance criterion on non-accumulation of payment arrears on external debt.

### Macroeconomic outlook and key macro indicators
- Growth projections and recent performance:
  - Growth is projected to accelerate to 3.7 percent in 2020 and to 4 ½ percent by 2024.
  - Slowdown in 2019 attributed to contraction in agricultural output because of low rainfall.
  - Non-agriculture growth would rise to 3.4 percent in 2019 and higher thereafter.
- Labor market:
  - Unemployment was at 9.4 percent in the second quarter of 2019.
  - Participation rate declined to 45.8 percent (second quarter of 2019); urban job creation and stronger participation noted in the third quarter.
- Inflation and external sector:
  - Headline inflation declined to 0.3 percent in September 2019 but is expected to accelerate moderately over the medium term.
  - Current account expected to narrow to 5.1 percent of GDP in 2019, to narrow further to 3.9 percent of GDP in 2020, and stabilize at 3 percent or less starting in 2022.
  - Foreign reserves projected to rise gradually from the present 5 months of imports.
- Market signals:
  - Sovereign bond issue: one-billion-euro at 1.5 percent.
  - S&P lifted Morocco’s outlook in October 2019 from negative to stable.

### Fiscal policies, reform priorities, and outcomes
- Fiscal stance and targets:
  - Priority: maintain fiscal and debt sustainability while creating fiscal space for infrastructure, human development, and social protection.
  - Medium-term target: 60 percent debt-to-GDP ratio.
  - Uptick in the fiscal deficit to 4 percent (3.6 percent, including privatization receipts) in 2019 due to lower tax revenues, higher investment reflecting PPP delays, and a larger wage bill.
  - Target on fiscal deficit missed by only 0.2 percent of the GDP as a result of delays in the implementation of PPPs.
- Revenue and tax reform:
  - 2019 national tax conference recommendations to underpin a comprehensive reform over five years: broaden tax base, reduce exemptions, fight tax evasion and fraud.
  - 2020 budget incorporates measures: simpler VAT regime and corporate tax rates, eliminating VAT exemptions, better enforcement on self-employed and professions.
  - Framework law being prepared for submission to Parliament in the current session.
- Spending and privatization:
  - Continued stronger revenue collection and tighter control of non-priority spending expected to reduce fiscal deficit and debt ratio.
  - Privatization receipts from 2019 and planned programs to contribute to reducing financing needs in 2020 and beyond.
  - Ongoing privatization program expected to contribute about 2 percent of GDP to the budget during the 2019-24 period.
- Public wage bill and social dialogue:
  - Recent wage increase for civil servants implemented over three years, favoring lower income civil servants; first increase after seven years of wage freeze.

### Monetary, exchange rate, and financial sector policies
- Monetary policy and central bank reforms:
  - Bank Al-Maghrib (BAM) maintained an accommodative policy stance in a context of negligible inflation, low credit growth, and satisfactory reserves, with attention to SME needs.
  - First phase of transition to a more flexible exchange rate regime successful; exchange rate remained well within the band without central bank interventions since March 2018.
  - New central bank law adopted by parliament in July 2019: enhances BAM’s independence, broadens role to include financial stability and inclusion, improves governance, and introduces an emergency liquidity assistance facility.
- Financial sector resilience and regulatory enhancements:
  - IFRS9 introduced for banks in 2018.
  - Regulatory framework for conglomerates under preparation.
  - Macroprudential and crisis resolution frameworks being enhanced in line with 2015 FSAP recommendations.
  - Law on secured transactions adopted in April 2019 to promote claims recovery outside court, reduce NPLs, and encourage bank lending, particularly to SMEs.
  - Ongoing strengthening of AML/CFT framework in line with MENAFATF recommendations.
  - Law published in March 2018 introduced compulsory exchange of information with foreign partners.
- Financial inclusion and small business support:
  - National strategy for financial inclusion approved; measures target SMEs, youth, women, and the rural population.
  - Increase in cap on microcredit to help develop microcredit activity.
  - Reform of law on cooperatives adopted to ease establishment procedures and enhance governance.

### Structural reforms, governance, and social inclusion
- Structural reform priorities:
  - Accelerate pace of growth to improve living standards and reduce unemployment, particularly among youth and women in urban areas.
  - Promote higher, private sector-led, job-rich and inclusive growth through:
    - Improving business climate and competitiveness.
    - Strengthening governance and efficiency in public service delivery.
    - Upgrading human resources and vocational training.
    - Reforming the labor market while strengthening social protection and reducing inequalities.
- Business environment and state-owned enterprises (SOEs):
  - Morocco gained 7 positions in the 2019 World Bank Doing Business Indicators (to 53rd out of 190); cumulative rise of 62 positions since 2010.
  - Recent corporate law revisions to enhance minority shareholder protection; Mediator’s office established in 2018 to promote dispute settlement outside courts.
  - Draft law to strengthen SOE governance being prepared; authorities reconsidering role and economic model of SOE sector and intend to gradually divest from sectors that could be served by the private sector.
  - Framework for assessing and mitigating fiscal risks in SOEs being established with Fund assistance.
- Governance, anti-corruption, and transparency:
  - High priority attached to strengthening governance and fighting corruption.
  - Recent strengthening of the asset declaration system; legal framework to investigate illicit enrichment scheduled for 2020.
  - New chair of the anti-corruption agency (ICPC) appointed in 2018.
  - Morocco improved its Corruption Perception Index ranking by 8 positions in 2019 and became a member of the Open Government Partnership initiative in July 2018.
- Education and labor market reforms:
  - Framework law for education, vocational training and scientific research adopted in July 2019.
  - Roadmap on vocational training to create regional professional and skill centers in 12 regions adopted in association with the private sector.
  - Discussions with labor unions initiated on labor market reform to enhance flexibility and employee protection; reforms expected to require careful political-economy consideration.

### Key program-related numeric facts and operational figures
- Growth projections: "3.7 percent" in 2020; "4 ½ percent" by 2024; non-agriculture growth "3.4 percent" in 2019.
- Labor indicators: unemployment "9.4 percent" (Q2 2019); participation rate "45.8 percent" (Q2 2019).
- Inflation: headline inflation "0.3 percent" in September 2019.
- Current account: "5.1 percent of GDP" in 2019; "3.9 percent of GDP" in 2020; stabilizing at "3 percent or less" starting in 2022.
- Fiscal deficit: uptick to "4 percent" ("3.6 percent, including privatization receipts") in 2019; missed indicative target by "0.2 percent of the GDP".
- Privatization contribution: about "2 percent of GDP" to the budget during the "2019-24" period.
- External reserves expressed as coverage: present "5 months of imports".
- Sovereign bond: "one-billion-euro" at "1.5 percent".
- Central bank/exchange rate: program exchange rate fixed on November 9, 2018 - "9.527 MAD/$" (mentioned in table notes).
- PLL access and amounts referenced in program tables: "1,250.66", "1,747.47", "2,150.80", "3,005.19" (Million Dollars / Million SDR context in program tables).

*Statement and program text provided by the Moroccan authorities and IMF staff as contained in the source document.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1marea2020001.pdf_