## 1marea2022001 — 1. An Illustrative Faster Fiscal Consolidation Path

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### Recent developments and macroeconomic context
- Economic growth and activity:
  - Moroccan economy contracted by 6.3 percent in 2020 and rebounded with output growing at an average of close to 8 percent in the first two quarters of 2021.
  - Agricultural output benefited from a better-than-average harvest after two consecutive years of drought.
  - Vaccination progress supported the recovery; cases picked up in early 2022 due to the Omicron variant and mobility returned to pre-pandemic levels.
- Prices and labor market:
  - Headline and core inflation: 1.2 percent and 1.5 percent in November (year not specified in source).
  - Unemployment: 11.8 percent in 2021Q3, 1.6 percentage points above pre-pandemic level, driven by a rebound of the participation rate.
- Fiscal position through October 2021:
  - Fiscal deficit estimated at about 4.9 percent of GDP in October 2021 (compared to 4.6 percent for the first ten months of last year and 3.5 percent in 2019).
  - Tax revenues rebounded (personal income taxes and VAT); corporate income taxes still affected by 2020 recession.
  - Current spending increased due to higher public sector wages and energy subsidies; capital spending declined.
- Monetary policy and FX:
  - Central bank policy rate maintained at 1.5 percent in 2021.
  - BAM purchased FX equivalent of USD 1.6 billion between September and December to re-establish market conditions and bolster official reserves; purchases were not sterilized.
- External sector in 2021:
  - Current account (CA) deficit widened to about 2.5 percent of GDP in the first half of 2021 (from 1.5 percent in same period last year).
  - Strong rebound in goods exports (automobile, phosphate, textile) but imports rose, worsening the goods trade balance.
  - Tourism receipts remained weak; remittances grew at a solid pace.
  - International reserves increased by about US$2 billion relative to last year, to around seven months of imports (reflecting SDR allocation US$1.2 billion and BAM FX purchases).

### Financial sector and credit dynamics
- Credit and corporate balance sheets:
  - Credit growth remained subdued.
  - Corporate debt rose by about 6 percentage points of GDP relative to pre-pandemic levels.
  - Credit to non-financial firms was mainly for working capital rather than equipment and machinery.
- Asset quality and bank resilience:
  - Nonperforming loans (NPLs) rose to 8.8 percent of total loans in October 2021 (from 7.5 percent before the pandemic).
  - Banks sharply increased provisioning for loan losses; profitability indicators deteriorated in 2020 (including contributions to COVID-19 fund).
  - Regulatory capital ratios remained well above minimum requirements and liquidity ratios improved aided by BAM support.

### Outlook, potential output, and risks
- Growth and inflation projections:
  - Real GDP projected to grow 6.3 percent in 2021 and 3.1 percent in 2022.
  - Output expected to return to pre-pandemic level in the second half of 2022 but remain below pre-crisis projected trends.
  - Staff expects average headline inflation at 1.3 percent in 2021 and 1.8 percent in 2022.
- Current account outlook:
  - CA deficit expected to widen to 3.0 percent of GDP in 2021 and to around 3.2 percent in 2022.
- Potential output and reform scenarios:
  - Potential growth trended lower pre-pandemic: from about 5 percent before the great financial crisis to about 2½ percent in 2019.
  - Potential output growth estimated at -0.5 percent in 2020.
  - Baseline: absent reforms, potential growth returns to about 2½ percent by 2026.
  - Staff baseline assumes structural reforms add about ¾ percent to potential output by 2026 and about 2 percent in cumulative terms by 2035 relative to a no reform scenario.
  - A more successful scenario could add up to 6 percent to potential output by 2035.
- Key risks:
  - Downside: prolonged health crisis or new variants, greater-than-projected inflationary pressures forcing faster global monetary tightening, fiscal slippages or realization of contingent liabilities.
  - Upside: rapid and efficient implementation of the Mohammed VI Investment Fund and faster implementation of structural reforms under the NMD.

### Policy discussion: rebuilding margins and fiscal consolidation
- Staff recommendation:
  - Accelerate fiscal consolidation given the earlier-than-expected closure of the output gap and rebound in activity.
- Rationale for faster consolidation:
  - Less need for fiscal stimulus in 2022.
  - Frees resources to fund private sector investment, a key component of structural reform agenda.
  - High central government debt ratio (close to 80 percent of GDP) increases vulnerability to shocks and contingent liabilities.
- 2022 Budget projections and measures:
  - 2022 Budget projects fiscal deficit decline from 6.5 percent of GDP in 2021 to 6.3 percent in 2022.
  - Tax revenues expected to increase by about ¾ percent of GDP (lagged recovery effects and tax measures including change in corporate income tax system, renewal of solidarity contribution, introduction of taxes on energy-intensive goods).
  - Current expenditure projected to increase by a similar amount due to measures to boost employment (including program to create 250 thousand temporary jobs of public utility in the next two years), transfers to SOEs, and more spending on education and health care.
  - Extension of social protection system will add about 1½ percent of GDP to current spending per year over the next five years, offset by a reduction of gas subsidies (about ¾ percent of GDP) and a gradual decline in the wage bill.
  - Government debt-to-GDP ratio projected to increase somewhat before declining slightly to 78½ percent of GDP by 2026 (about 13 percentage points of GDP above pre-crisis levels).
- Financing of structural reforms:
  - NMD report estimates reform costs about 4 percent of GDP annually over the next five years, rising to 10 percent of GDP per year by 2030.
  - Financing needs expected to be met through higher economic growth and a combination of borrowing and fiscal measures.
- Staff advocacy:
  - Lower fiscal deficit in 2022 and faster reduction of the debt-to-GDP ratio over the medium term to bring it closer to pre-crisis levels by 2026.

### Additional fiscal and contingent liability details
- Change in corporate income taxation:
  - Move from progressive taxation of profits to a proportional system; expected to increase tax revenues by about 1 billion dirhams (0.1 percent of GDP) starting from 2022; includes reimbursement of VAT credits to private sector for about 1 percent of GDP.
- Public guarantees and pandemic measures:
  - Public sector guaranteed debt of SOEs estimated at about 15 percent of GDP.
  - Credit guaranteed schemes launched in response to the pandemic added another 5 percent of GDP.
- Pension reforms:
  - Contingent liabilities from underfunded pension schemes have been reduced by parametric reforms (including change in annual pension indexation for retired workers of SOEs from 100 percent to 75 percent of the wage increase).

### Box 1 — Illustrative faster fiscal consolidation path: summary
- Objective and outcome:
  - Illustrative scenario based on a package of tax and spending measures that would reduce the overall fiscal deficit by an average of about 1.5 percentage points of GDP over the next five years and bring debt to about 70 percent of GDP by 2026.
- Fiscal measures in the package:
  - Simplification of the VAT system from four VAT rates (7, 10, 14, 20) to only two rates (a reduced 10 percent rate and the standard 20 percent rate).
  - Reduction of tax expenditure, focusing on VAT exemptions (that account for about half of the total) and exemptions benefiting the real estate sector.
  - Introduction of a carbon tax.
  - Reduction of spending on goods and services, aided by recent public administration reforms (including digitalization).
  - Lower growth in the wage bill reflecting implementation of a civil service reform.
  - Reduction of capital transfers to SOEs.
- Fiscal multipliers and modeling assumptions:
  - Tax multipliers: 0.2 for the VAT reform; 0.4 for the reduction of tax expenditure; 0.5 for the introduction of a carbon tax.
  - Spending multipliers: 0.3 for public consumption of goods and services; 0.7 for capital transfers to SOEs; 0.5 for the changes in the wage bill.
  - Aggregate fiscal multiplier resulting from these specific multipliers is about 0.5.
- Macroeconomic impact:
  - Short-run negative impact on growth: non-agricultural output gap about ¾ percent of GDP higher in 2022 than in the baseline.
  - Output gap returns to baseline in the medium term due to easier monetary policy conditions and compression of risk spreads leading to faster private sector credit and investment.
  - Under the illustrative package, debt projected to be about 70 percent of GDP by 2026.
- Uncertainty and additional revenue potential:
  - Comprehensive tax reform could durably increase revenues by up to 2 percent of GDP in the medium term.
  - New forms of wealth taxation (e.g., taxing inheritances above a threshold) and a carbon tax would raise revenues and improve progressivity.
  - Systematic review of government spending and civil service reform recommended to free resources and manage the wage bill.
- Medium-term fiscal framework and transparency:
  - Recommend a medium-term macro-fiscal framework, greater fiscal transparency, and consideration of a fiscal rule with a medium-term debt anchor and operational limits.
  - Improve monitoring and reporting of fiscal risks (sovereign credit guarantees and PPPs) and integrate Special Treasury Accounts into a unified pluriannual budget process.
  - Better assessment of SOE fiscal risks leveraging IMF SOE health check and stress-test tools.

### Social protection, private sector development, SOEs, and governance
- Social protection:
  - Authorities continue to work to extend health care insurance to about 22 million Moroccans.
  - Decrees in 2021 aim to include about 3.5 million new contributors (self-employed) to the healthcare insurance scheme.
  - Recommended institutional design: separate financing (CNSS) from provision (regional health authorities, hospitals, doctors) and enable CNSS to implement strategic purchasing.
  - Harmonizing social assistance into an extended family allowance scheme from 2023 and implementing the Unified Social Registry (pilot expected early 2022) are priorities.
- Private sector development and structural reforms:
  - Priorities: reduce red tape, strengthen independent regulators, lower business costs (logistic and energy), improve human and physical capital (including broadband), and incentivize high value-added sectors via tax incentives.
  - Policy approach: condition interventions on cost-benefit analysis; prioritize catalyzing private investment (e.g., Mohammed VI Investment Fund) and avoid measures that inhibit imports and induce long-run welfare costs.
- SOEs, governance, and anti-corruption:
  - Overhaul of SOE sector is a pre-condition for leveling the playing field; framework laws in July establish a National Agency to consolidate and optimize SOE portfolio.
  - Implementation challenges: operationalize Agency and ensure market neutrality (break monopolies, eliminate special regimes, set clear targets to avoid cross-subsidization).
  - Corporate governance measures: corporatization of commercial activities, separation of ownership/policy/management, and greater financial transparency.
  - Anti-corruption priorities: implement national anti-corruption strategy, improve coordination and prosecution, publish beneficial ownership for public procurement winners, resubmit bill on illicit enrichment aligned with international standards.
  - Judicial improvements: accelerate digitization, publish court decisions, and create an e-justice platform.

### Energy, climate resilience, and green investment (Box 4 highlights)
- Renewable ambitions and opportunities:
  - Government target: bring renewable energy—wind, solar, and hydroelectric—up to 63 percent of installed capacity by 2030.
  - World Bank tool estimate: investments in solar and wind could generate 25,000 net jobs each year.
  - Example export project proposal: a 3,800 km undersea cable linking Moroccan solar and wind producers with 7 million British homes (presented as an example in the source).
- Current energy mix:
  - Coal represents almost a third of total energy production.
  - Renewables: 33 percent of installed capacity in 2019; 20 percent of production and 7 percent of energy consumption.
- Policy recommendations:
  - Increase competition in electricity sector, unbundle transmission from generation and distribution, and ease access to the grid for renewable providers.
  - Invest in adaptation infrastructure (water, drought resilience); Morocco’s National Water Plan (PNE) aims to invest 33 percent of its 2021 GDP over the next 30 years to improve water supply capacity.
  - IMF (forthcoming) finding: investment in water and irrigation capacity can reduce GDP losses by nearly 60 percent when a severe drought occurs in year five of the scenario compared to standard investment.

### Trade, tariffs, and industrial policy (selected numeric measures)
- MFN tariffs:
  - Increased to 30 percent in January 2020 and to 40 percent in July (in compliance with WTO and PTA commitments), affecting about 10 percent of overall imports outside trade agreements, mainly from Asia.
- Import substitution objective:
  - 2021 Budget objective to substitute imports worth of DH 34 billion (about US$ 3.7 billion) with locally produced goods in targeted sectors (textile, transport, metal, plastic, electrical).
- Public procurement preference:
  - New regulation: offers of foreign companies seeking public procurement contracts would be increased by 15 percent compared to offers from domestic producers.

### Annex I — External Sector Assessment: key points
- Overall assessment:
  - Preliminary data indicates external position in 2021 is broadly in line with fundamentals and desirable policies.
  - CA deficit deteriorated in 2021 driven by rebound in imports; expected to increase slightly in 2022 and gradually converge to estimated medium-term norm.
- NIIP and external position (2021, % GDP):
  - NIIP: -65.0
  - Gross Assets: 43.0
  - Res. Assets: 28.1
  - Gross Liab.: 108.0
  - Debt Liab.: 40.5
  - Staff projects NIIP to slightly improve to about -65 percent of GDP in 2021 and to slightly worsen to around -67 percent of GDP through the medium term in the baseline.
- Current account:
  - CA weakened to -3.7 percent of GDP in 2019; shrank to 1.5 percent of GDP in 2020; expected CA deficit 3.0 percent of GDP in 2021; medium-term CA projected to return to about 3.4 percent of GDP.
- Reserves and FX:
  - Exchange rate pegged to a basket (Euro 60 percent, US Dollar 40 percent); band widened to +-   5 percent at onset of pandemic.
  - Reserves: increased by US$ 9 billion to US$ 35.3 billion in 2020; staff expects reserves to further increase in 2021 to US$ 35.4 billion partly reflecting SDR allocation of $1.2 billion and BAM FX purchases of $ 0.9 billion, and to gradually stabilize to around US$ 39 billion over the medium term.
  - Reserve coverage expected to remain above 104 percent of the standard reserve adequacy metric this year, and slowly fall to around 85 percent by 2026.
  - Assessment: Morocco’s reserves are adequate; moving to an IT flexible ER regime would reduce the need for reserve holdings over the medium term.
- Capital flows and financing:
  - Morocco’s CA deficit financed mainly by external borrowing and net FDI; 2021 financing mainly from net FDI and portfolio flows.
  - Capital controls and external debt structure (long maturity, less than one third FX-denominated) limit vulnerabilities.

### Risks and policy responses (selected entries from Risk Assessment Matrix)
- Global resurgence of Covid-19 pandemic:
  - Relative Likelihood: Medium; Expected Impact: High.
  - Policy responses include allowing automatic stabilizers, targeted support, reduce less essential spending, adopt medium-term fiscal framework, and explore quantitative easing measures if needed.
- De-anchoring of US inflation expectations:
  - Relative Likelihood: Medium; Expected Impact: Medium.
  - Policy responses: avoid premature monetary tightening, maintain fiscal credibility, limit SOEs’ new external borrowing with government guarantee.
- Intensified geopolitical tensions:
  - Relative Likelihood: High; Expected Impact: High.
  - Policy responses: accelerate transition to inflation targeting with flexible ER, maintain involvement in global value chains, implement structural reforms.
- Rising commodity prices:
  - Relative Likelihood: Medium; Expected Impact: Medium.
  - Policy responses: use hedging/automatic price adjustments, accelerate renewables deployment.
- Higher frequency and severity of natural disasters:
  - Relative Likelihood: Medium; Expected Impact: Medium.
  - Policy responses: optimize water resources, invest in mitigation and green industries, create disaster-related fiscal buffers.
- Domestic risks (selected):
  - Fiscal slippages or contingent liabilities: Relative Likelihood: Medium; Expected Impact: High. Policy responses: increase transparency on contingent liabilities, implement comprehensive tax reform, contain current spending, adopt credible medium-term fiscal framework, rationalize SOE sector, reform pension system.
  - Slower structural reforms and widespread social discontent: Relative Likelihood: Medium; Expected Impact: Medium. Policy responses: advance new development model, build consensus, strengthen social protection, improve education, and boost active labor market policies.

### Public debt developments, projections, and stress tests
- Debt level and drivers:
  - Central government gross nominal public debt reached 76.9 percent of GDP in 2020.
  - Increase in public debt of 11.6 percent in 2020 mostly driven by: worse real interest rate/growth differential (6.2 percent of GDP) and impact of the pandemic on the primary deficit (5.1 percent of GDP).
  - Public gross financing needs increased to 17.5 percent of GDP in 2020 from 13 percent of GDP in the original budget.
- Baseline projections:
  - Central government debt-to-GDP ratio expected: 76.5 percent of GDP in 2021; gradually increase to 79.5 percent of GDP in 2024; starts falling from 2025 to reach 78.3 percent of GDP in 2026.
  - Primary deficit projected to decrease by 1.7 percentage points of GDP between 2021-24.
  - Growth expected to hover around 3 percent over the medium term.
  - Privatization receipts projected at about 1½ percent of GDP in 2021-24.
- Financing and debt management:
  - Gross financing needs expected to decrease to 14.6 percent of GDP in 2021 and remain around 15 percent of GDP in the medium term.
  - Financing composition for 2021: issuance of Treasury bills and bonds domestically around 11 percent of GDP; external borrowing to cover remaining needs.
  - Mitigating factors: stable cost of debt, improved debt management with long average maturity, significant share of external borrowing concessional.
- Debt profile and vulnerabilities:
  - Weighted average maturity about 7.5 year.
  - Share denominated in FX: about 25 percent.
  - Short-term debt: about 3 percent of GDP at end-2020.
  - Contingent liabilities: guarantees to SOEs 15.0 percent of GDP; subsidized credit schemes under COVID-19 crisis 4.9 percent of GDP; unfunded pension schemes remain a risk.
- Impact of NMD reforms on debt:
  - NMD costs: about 4 percent of GDP annually next five years, rising to 10 percent of GDP per year by 2030.
  - If reform costs fully financed but growth remains as baseline, public debt could increase to around 95.5 percent of GDP by 2026.
  - An acceleration of growth to about 7 percent of GDP per year between 2022 and 2035 would be necessary to double GDP per capita and help stabilize debt ratios.
- Stress test baseline assumptions (selected):
  - Baseline real GDP growth: 6.3 (2021), 3.1 (2022), 3.0 (2023), 3.0 (2024), 3.1 (2025), 3.3 (2026).
  - Baseline inflation (GDP deflator): 1.2 (2021), 1.4 (2022), 1.3 (2023), 1.5 (2024), 1.8 (2025), 1.8 (2026).
  - Baseline primary balance: -4.4 (2021), -4.0 (2022), -3.6 (2023), -2.6 (2024), -1.9 (2025), -1.3 (2026).
  - Public gross financing needs under baseline: 14.6 percent of GDP (2021) and around 15 percent in the medium term.
- Policy implications:
  - Importance of accelerating fiscal consolidation to bring debt-to-GDP closer to the 70 percent benchmark for emerging markets.
  - Role of privatization receipts (about 1½ percent of GDP in 2021-24) and active debt management (longer maturities, lower interest rates, swaps) to reduce financing needs and mitigate vulnerabilities.

*Source: 1marea2022001 - 1. An Illustrative Faster Fiscal Consolidation Path*

### 1. An Illustrative Faster Fiscal Consolidation Path _____________________________________________________ 11

### 1. An Illustrative Faster Fiscal Consolidation Path

### Recent developments and macroeconomic context
- The Moroccan economy rebounded after a 6.3 percent contraction in 2020, with output growing at an average of close to 8 percent in the first two quarters of 2021.
- Agricultural output benefited from a better-than-average harvest after two consecutive years of drought.
- Vaccination progress supported the recovery; however, cases picked up in early 2022 due to the Omicron variant and mobility returned to pre-pandemic levels.
- Headline and core inflation were low despite upward pressure: 1.2 percent and 1.5 percent in November, respectively.
- Unemployment: 11.8 percent in 2021Q3, 1.6 percentage points above pre-pandemic level, driven by a rebound of the participation rate.
- Fiscal position through October 2021:
  - Fiscal deficit estimated at about 4.9 percent of GDP in October 2021 (compared to 4.6 percent for the first ten months of last year and 3.5 percent in 2019).
  - Tax revenues rebounded (personal income taxes and VAT); corporate income taxes still affected by 2020 recession.
  - Current spending increased due to higher public sector wages and energy subsidies; capital spending declined.
- Monetary policy and FX developments:
  - Central bank policy rate maintained at 1.5 percent in 2021.
  - BAM purchased FX equivalent of USD 1.6 billion between September and December to re-establish market conditions and bolster official reserves; purchases were not sterilized.
- External sector in 2021:
  - Current account (CA) deficit widened to about 2.5 percent of GDP in the first half of 2021 (from 1.5 percent in same period last year).
  - Strong rebound in goods exports (automobile, phosphate, textile) but imports rose, worsening the goods trade balance.
  - Tourism receipts remained weak; remittances grew at a solid pace.
  - International reserves increased by about US$2 billion relative to last year, to around seven months of imports (reflecting SDR allocation US$1.2 billion and BAM FX purchases).

### Financial sector and credit dynamics
- Credit growth remained subdued; corporate debt rose by about 6 percentage points of GDP relative to pre-pandemic levels.
- Credit to non-financial firms was mainly for working capital rather than equipment and machinery.
- Nonperforming loans (NPLs) rose to 8.8 percent of total loans in October 2021 (from 7.5 percent before the pandemic).
- Banks sharply increased provisioning for loan losses; profitability indicators deteriorated in 2020 (including contributions to COVID-19 fund).
- Regulatory capital ratios remained well above minimum requirements and liquidity ratios improved aided by BAM support.

### Outlook and risks
- Growth projections:
  - Real GDP projected to grow 6.3 percent in 2021 and 3.1 percent in 2022.
  - Output expected to return to pre-pandemic level in the second half of 2022 but remain below pre-crisis projected trends.
- Inflation outlook: staff expects average headline inflation at 1.3 percent in 2021 and 1.8 percent in 2022.
- Current account outlook: CA deficit expected to widen to 3.0 percent of GDP in 2021 and to around 3.2 percent in 2022.
- Potential output and structural reforms:
  - Potential growth trended lower pre-pandemic: from about 5 percent before the great financial crisis to about 2½ percent in 2019.
  - Potential output growth estimated at -0.5 percent in 2020.
  - Baseline: absent reforms, potential growth returns to about 2½ percent by 2026.
  - Staff baseline assumes structural reforms add about ¾ percent to potential output by 2026 and about 2 percent in cumulative terms by 2035 relative to a no reform scenario.
  - A more successful scenario could add up to 6 percent to potential output by 2035.
- Key risks:
  - Downside: prolonged health crisis or new variants, greater-than-projected inflationary pressures forcing faster global monetary tightening, fiscal slippages or realization of contingent liabilities.
  - Upside: rapid and efficient implementation of the Mohammed VI Investment Fund and faster implementation of structural reforms under the NMD.

### Policy discussion: rebuilding margins and fiscal consolidation
- Staff recommendation: accelerate fiscal consolidation given the earlier-than-expected closure of the output gap and rebound in activity.
- Rationale for faster consolidation:
  - Less need for fiscal stimulus in 2022.
  - Frees resources to fund private sector investment, a key component of structural reform agenda.
  - High central government debt ratio (close to 80 percent of GDP) increases vulnerability to shocks and contingent liabilities.
- 2022 Budget projections and measures:
  - 2022 Budget projects fiscal deficit decline from 6.5 percent of GDP in 2021 to 6.3 percent in 2022.
  - Tax revenues expected to increase by about ¾ percent of GDP (lagged recovery effects and tax measures including change in corporate income tax system, renewal of solidarity contribution, introduction of taxes on energy-intensive goods).
  - Current expenditure projected to increase by a similar amount due to measures to boost employment (including program to create 250 thousand temporary jobs of public utility in the next two years), transfers to SOEs, and more spending on education and health care.
  - Extension of social protection system will add about 1½ percent of GDP to current spending per year over the next five years, offset by a reduction of gas subsidies (about ¾ percent of GDP) and a gradual decline in the wage bill.
  - Government debt-to-GDP ratio projected to increase somewhat before declining slightly to 78½ percent of GDP by 2026 (about 13 percentage points of GDP above pre-crisis levels).
- Financing of structural reforms:
  - NMD report estimates reform costs about 4 percent of GDP annually over the next five years, rising to 10 percent of GDP per year by 2030.
  - These financing needs are expected to be met through higher economic growth and a combination of borrowing and fiscal measures.
- Staff advocates for a lower fiscal deficit in 2022 and a faster reduction of the debt-to-GDP ratio over the medium term to bring it closer to pre-crisis levels by 2026 (Box 1).

### Additional fiscal and contingent liability details
- Change in corporate income taxation: move from progressive taxation of profits to a proportional system; expected to increase tax revenues by about 1 billion dirhams (0.1 percent of GDP) starting from 2022; includes reimbursement of VAT credits to private sector for about 1 percent of GDP.
- Public sector guaranteed debt of SOEs estimated at about 15 percent of GDP.
- Credit guaranteed schemes launched in response to the pandemic added another 5 percent of GDP.
- Contingent liabilities from underfunded pension schemes have been reduced by parametric reforms (including change in annual pension indexation for retired workers of SOEs from 100 percent to 75 percent of the wage increase).

*Source: 1marea2022001 - 1. An Illustrative Faster Fiscal Consolidation Path*

### Box 1. An Illustrative Faster Fiscal Consolidation Path

### Box 1. An Illustrative Faster Fiscal Consolidation Path

### Overview
- Illustrative scenario based on a package of tax and spending measures that would reduce the overall fiscal deficit by an average of about 1.5 percentage points of GDP over the next five years and bring debt to about 70 percent of GDP by 2026.
- Measures are in line with the objectives of the Framework Law on the Tax Reform and the NMD report of simplifying the tax system and improving its efficiency and equity.

### Fiscal measures in the package
- Simplification of the VAT system from four VAT rates (7, 10, 14, 20) to only two rates (a reduced 10 percent rate and the standard 20 percent rate).
- Reduction of tax expenditure, focusing on VAT exemptions (that account for about half of the total) and exemptions benefiting the real estate sector.
- Introduction of a carbon tax.
- Reduction of spending on goods and services, aided by recent public administration reforms (including digitalization).
- Lower growth in the wage bill reflecting implementation of a civil service reform.
- Reduction of capital transfers to SOEs.

### Fiscal multipliers and modeling assumptions
- Staff used a small macroeconomic model for Morocco with an aggregate fiscal multiplier derived from specific tax and spending multipliers.
- Tax multipliers used:
  - 0.2 for the VAT reform
  - 0.4 for the reduction of tax expenditure
  - 0.5 for the introduction of a carbon tax
- Spending multipliers used:
  - 0.3 for public consumption of goods and services
  - 0.7 for capital transfers to SOEs
  - 0.5 for the changes in the wage bill
- The aggregate fiscal multiplier resulting from these specific multipliers is about 0.5.

### Macroeconomic impact and projections
- Faster fiscal consolidation is expected to have a negative impact on growth in the short run, with the non-agricultural (negative) output gap about ¾ percent of GDP higher in 2022 than in the baseline.
- The output gap returns to baseline in the medium term, as the faster decline of the fiscal deficit and public debt ratio leads, in the model, to easier monetary policy conditions and a compression of risk spreads, which in turn lead to faster growth of private sector credit and investment.
- Under the illustrative package, debt is projected to be about 70 percent of GDP by 2026.

### Uncertainty, reform financing, and additional revenue potential
- Uncertainty over the size and timing of the impact of structural reforms on output suggests caution in considering that the reforms will pay for themselves.
- Given the already high level of debt, authorities should introduce fiscal measures that create enough fiscal space to finance structural reforms while ensuring a steady downward path for the government debt ratio.
- A comprehensive tax reform along lines suggested by the framework law approved in July 2021 could help extend the tax base and durably increase revenues by up to 2 percent of GDP in the medium term.
- New forms of taxation of wealth (for example, by taxing inheritances above a certain threshold) and a carbon tax would raise revenues, improve tax progressivity, and contribute to Morocco’s green transition.
- A systematic review of government spending, with clear medium-term objectives and integration into the annual budget process, would re-prioritize outlays, increase efficiency and targeting, and free additional resources to fund reforms.
- The high level of the wage bill and risks around its projected decline over the medium term call for implementation of a civil service reform that would change the national statute of 1958 and include simpler and more flexible regulation and salary structures, greater mobility, and reliance on merit-based career progression.

### Medium-term fiscal framework and transparency
- A medium-term macro-fiscal framework and greater fiscal transparency would enhance credibility and increase fiscal space.
- Consideration could be given to a fiscal rule consisting of a well-calibrated medium-term debt anchor with operational limits (on budget balance or government expenditure) and pre-determined escape clauses to better anchor expectations.
- Improved monitoring and reporting of fiscal risks (including from sovereign credit guarantees and Public-Private Partnerships - PPPs) and more transparent fiscal accounting (including more limited use of Special Treasury Accounts and their integration within a unified pluriannual budget process) would improve accountability and ensure consistency with broader macroeconomic and social objectives.
- Better assessment of fiscal risks related to SOEs requires continued development of capacity for assessing budgetary costs and risks stemming from state support to SOEs and including these costs in the budget process (also leveraging on new IMF SOEs health check and stress-test tools).

*Source: Staff calculations and Box 1 text from the provided IMF chapter.*

### 24.      Extending social protection to all Moroccans remains an urgent priority. The authorities have

### Extending social protection to all Moroccans remains an urgent priority

### Social protection and health care insurance
- Authorities continue to work to extend health care insurance to about 22 million Moroccans.
- A series of decrees approved in 2021, or expected to be approved shortly, clear the way to include about 3.5 million new contributors (self-employed) to the healthcare insurance scheme.
- While the reform will improve equity, further changes are needed to improve quality of care and ensure the overall cost remains manageable. Recommended institutional design features:
  - Clear separation of financing (to be managed by the Social Security National Fund or CNSS) from provision of health care (regional health authorities, hospitals, and doctors).
  - Enable CNSS to implement a strong strategic purchasing system to align incentives across the health care system and pay providers based on their ability to deliver cost effective and high-quality care.
- Harmonizing all current social assistance programs into an extended family allowance scheme (from 2023) will improve the efficiency of Morocco’s social safety net.
- The equity, efficiency, and sustainability of the new social protection system will depend on full implementation of the Unified Social Registry, expected to be introduced as a pilot project in early 2022.

### Developing the private sector
- Structural reform priorities to develop Moroccan private sector:
  - Reduce red tape and regulatory burden.
  - Strengthen independent regulators.
  - Lower business costs (e.g., logistic and energy).
  - Improve the quality of human and physical capital (including increasing broadband access across Morocco).
  - Create incentives for allocating resources to sectors with high value-added and job multipliers (mainly through tax incentives).
- Policy approach:
  - Address obvious cases of policy and market failures, conditioning intervention on cost-and-benefit analysis that considers socioeconomic returns and budgetary impact.
  - For proposals such as creating new special economic zones and the activity of the Mohammed VI Investment Fund, prioritize catalyzing private investment toward key sectors by providing equity or quasi-equity to local firms.
  - Limit measures that could unnecessarily inhibit imports and import-substitution strategies, which may provide only short-term relief while imposing long-run welfare costs.
- Development of private sector and strengthening human capital will help Morocco move to higher value-added stages of production and further integrate local firms into global value chains.

### State-owned enterprises (SOEs), governance, and anti-corruption
- Overhaul of the SOE sector is a pre-condition for leveling the playing field between private and public firms.
- July approval of framework laws sets reform objectives and establishes the National Agency responsible for consolidating and optimizing Morocco’s SOEs portfolio.
- Implementation challenges include making the Agency fully operational and ensuring market neutrality by:
  - Breaking SOEs’ monopolistic positions in key sectors (like electricity and communication).
  - Eliminating special tax and regulatory regimes.
  - Setting clear targets and objectives to guard against distorting cross-subsidization practices.
- Recommended corporate governance measures:
  - Corporatization of activities of a commercial nature.
  - Clear separation of SOE ownership, policy, and management functions.
  - Greater financial transparency of commercial SOEs.
- Anti-corruption priorities:
  - Continue implementation of the national anti-corruption strategy (including government’s identified priority actions for 2020) with stronger focus on effectiveness of existing measures.
  - Improve national coordination on anti-corruption across agencies, including through more effective prosecution and convictions for corruption-related offences.
  - Publish beneficial ownership information of legal entities awarded public procurement contracts on a government website.
  - Urgently resubmit a bill on illicit enrichment aligned with international standards and conventions and prioritize its implementation.
- Judicial system improvements needed: accelerate digitization of internal procedures, publish court decisions, and create an e-justice platform.

### Energy, climate resilience, and green investment
- Morocco has a unique opportunity to make green investment a key driver of growth and jobs.
- Current energy mix and targets:
  - Most energy is produced from fossil fuels, with coal representing almost a third of the total.
  - Morocco increased the share of renewables to 33 percent of installed capacity in 2019.
  - Renewable energy represents only 20 percent of production and 7 percent of energy consumption, reflecting relatively higher cost of this type of energy.
- Policy options to boost renewables and resilience:
  - Increase competition in the electricity sector to reduce costs and boost production and consumption of renewable energy.
  - Invest more in adaptation infrastructure to bolster resilience to climate change given more frequent droughts, which likely contributed to lower potential growth.

### Trade, tariffs, and industrial policy (selected numeric measures)
- MFN tariffs were increased to 30 percent in January 2020 and to 40 percent in July (in compliance with WTO and PTA commitments), affecting about 10 percent of overall imports outside trade agreements, mainly from Asia.
- The 2021 Budget included the objective to substitute imports worth of DH 34 billion (about US$ 3.7 billion) with locally produced goods in targeted sectors (textile, transport, metal, plastic, electrical).
- New regulation operationalizes measures from previous legislation, including that offers of foreign companies seeking to secure public procurement contracts would be increased by 15 percent compared to offers from domestic producers.

### Authorities’ views
- Authorities concurred with staff on the crucial importance of structural reforms and the need for a pragmatic approach to their design and implementation; they stressed strong political will to push reforms forward.
- Emphasized prudence in factoring reform impacts on growth when planning financing.
- Agreed on the need to prioritize reforms, design their sequencing within a macro-fiscal framework, and measure ex-post impacts.
- On energy, authorities emphasized reinforcing access to international supply of natural gas and increasing competition in both renewable resource and natural gas markets.
- Restated commitment to open trade and investment in full compliance with bilateral and multilateral commitments; plan to promote domestic production is intended to strengthen national manufacturing and integration into global value chains, not to pursue protectionist measures.

*Source: IMF staff summary of Morocco chapter content (as provided).*

### Box 4. Climate Mitigation and Adaption in Morocco

### Box 4. Climate Mitigation and Adaption in Morocco

### Renewable energy ambitions and economic opportunities
- Government target: bring renewable energy—wind, solar, and hydroelectric—up to 63 percent of installed capacity by 2030.
- World Bank’s Clean Energy Employment assessment tool estimate: investments in solar and wind technologies could generate 25,000 net jobs each year and enhance interconnectedness.
- Export potential: Morocco could become a renewable energy exporter drawing on favorable wind and solar climate; example project proposal: a 3,800 km undersea cable linking Moroccan solar and wind producers with 7 million British homes.

### Risks to energy mix and emissions targets
- Current heavy reliance on coal and natural gas generation risks undercutting Morocco’s energy mix and emissions targets.
- Nationally Determined Contribution (NDC) target: to reduce emissions by 45 percent in 2030.
- Structural constraints cited:
  - Lack of effective competition in the generation segment.
  - Many private players locked in inflexible, long-term power purchase agreements (PPA) for thermal energy generation.
  - Absence of a wholesale electricity market; electricity distribution companies need to purchase electricity from the public company that acts as a single buyer, ONEE (National Office for Electricity and Potable Water).
- Policy recommendation: splitting the national utility’s transmission from generation and distribution segments to provide easier access to the Moroccan energy grid for renewable energy providers.
- Additional expected benefits of unbundling the utility: increase tariff transparency and help boost competition among both fossil fuel and renewable energy producers.

### Progress, regulatory changes, and concentration of production
- Recent legislative progress (footnote):
  - Legislation allowed independent producers to join the transmission network and sell their surplus of renewable energy to the ONEE.
  - Zoning requirements for solar energy projects were removed.
  - Introduced the national grid carrying capacity, a new regime allowing distribution network operators to acquire up to 40 percent of the total energy supplied from renewable energy sources.
- Implementation gap: only a few private players have been able to take advantage of these changes; most renewable energy is produced by the national agency MASEN (Moroccan Agency for Sustainable Energy).

### Climate adaptation: water infrastructure and economic resilience
- Morocco’s National Water Plan (PNE) aim: invest 33 percent of its 2021 GDP over the next 30 years to improve ability to meet future water demand (new dams, irrigation systems, desalination plants).
- Economic rationale: this type of investment is likely to have a higher economic return compared to other infrastructure investments.
- IMF (forthcoming IMF paper, IMF 2022) finding: compared to standard investment of the same size (starting in year 1 for 1 percent of GDP every year), investment in water and irrigation capacity can reduce GDP losses by nearly 60 percent when a severe drought occurs in year five of the scenario.

*Source: Box 4. Climate Mitigation and Adaption in Morocco (extracted from the IMF staff appraisal).*

### Annex I. External Sector Assessment  Report

### Annex I. External Sector Assessment  Report

### Overall assessment
- Preliminary data indicates the external position of Morocco in 2021 is broadly in line with the level of fundamentals and desirable policies.
- Assessment is based on a deteriorating CA deficit in 2021, driven by a strong rebound in imports after the pandemic.
- The CA deficit is expected to increase slightly in 2022 and to gradually converge to the estimated medium-term norm.
- Assessment subject to great uncertainty related to the evolution of the pandemic and its impacts on trade in both Morocco and its trading partner countries.

### Foreign assets and liabilities: position and trajectory
- Background:
  - NIIP deteriorated sharply between 2005 and 2012 (by around 30 percentage points of GDP, on the back of an increase in foreign liabilities, mainly FDIs).
  - NIIP remained relatively stable at about -66 percent of GDP over 2014-2020.
  - Staff projects NIIP to slightly improve to about -65 percent of GDP in 2021, on the back of lower liabilities.
  - In staff baseline, NIIP projected to worsen only slightly to around -67 percent of GDP through the medium term, reflecting gradual widening of current account deficits.
- Assessment:
  - Morocco should be able to sustain its larger net debtor position following the pandemic, assuming the CA deficit will increase slowly towards its estimated norm amidst implementation of structural reforms and fiscal consolidation.
- NIIP components (2021, % GDP):
  - NIIP: -65.0
  - Gross Assets: 43.0
  - Res. Assets: 28.1
  - Gross Liab.: 108.0
  - Debt Liab.: 40.5

### Current account
- Background:
  - CA improved by 7 pps of GDP between 2012-2015, supported by sustained automobile industry exports and favorable terms of trade shocks.
  - CA weakened to -3.7 percent of GDP in 2019 due to higher imports of capital goods and weaker export growth.
  - In 2020, CA deficit shrank to 1.5 percent of GDP due to a sharp fall in imports that more than offset lower exports (and the collapse of tourism revenues) and resilient remittances.
  - CA deficit expected to deteriorate in 2021 to 3.0 percent of GDP, on the back of the strong rebound in imports and higher energy prices.
  - Medium-term CA projected to gradually return to about 3.4 percent of GDP as recovery continues, tourism revenues recover slowly, and structural reforms boost private sector competitiveness and savings (with fiscal consolidation also sustaining national savings).

### Real exchange rate (REER)
- Background:
  - REER on a modest appreciating trend since 2012; at end-2020 it was about 5 percent stronger than in mid-2012.
  - In 2021 REER remained broadly stable as relatively low inflation offset nominal effective appreciation of the dirham.
- Assessment:
  - Based on the EBA current account assessment, the REER was broadly aligned with fundamentals and desirable policies in 2021.
  - The external sustainability (ES) approach for 2021 suggests a somewhat stronger REER (by about 4 percent) would be consistent with a NIIP-stabilizing current account balance.

### Capital and financial accounts: flows and policy measures
- Background:
  - Morocco’s CA deficit tends to be financed mainly by external borrowing (including trade credit) and net FDI inflows.
  - In 2020, Morocco saw a significant increase in external borrowing (from international markets and IFI and bilateral lenders) and positive financing from net FDI flows (mainly as a result of a decrease in direct investment abroad).
  - This funded the CA deficit and boosted reserves.
  - So far in 2021, net FDI and portfolio flows have been the main source of financing.
  - In the medium term, FDIs expected to continue to increase while external borrowing should slow from last year’s highs (mainly on account of lower government financing needs).
- Assessment:
  - Fiscal consolidation and structural reforms that increase attractiveness of key sectors should limit vulnerabilities.
  - Risks limited by remaining capital account controls and the structure of external debt (long maturity and the relatively low share of foreign currency-denominated instruments, slightly less than one third of the total).

### FX intervention and reserves level
- Background:
  - Exchange rate pegged to a basket including the Euro and the US Dollar, with weights of 60 and 40 percent, respectively.
  - Currency can fluctuate within a band that was widened to +-   5 percent at the onset of the pandemic.
  - In 2020, reserves increased by US$ 9 billion to US$ 35.3 billion from 2019.
  - Staff expects reserves to further increase in 2021 to US$ 35.4 billion partly reflecting the new SDR allocation of $1.2 billion and BAM FX purchases of $ 0.9 billion, and to gradually stabilize to around US$ 39 billion over the medium term.
  - Reserve coverage expected to remain at above 104 percent of the standard reserve adequacy metric this year, and slowly fall to around 85 percent by 2026.
- Assessment:
  - Morocco’s reserves are adequate.
  - Moving to an IT flexible ER regime would reduce the need for reserve holdings over the medium term, outside a budget that could fund FX interventions in case of excessive market volatility.

### Risk Assessment Matrix — selected global risks, impacts, and policy responses
- Global resurgence of the Covid-19 pandemic
  - Relative Likelihood: Medium
  - Expected Impact: High
  - Key impacts: costly containment efforts, persistent behavioral changes, negative effects on Morocco’s economic activity, assets repricing, debt vulnerabilities, weakened domestic financial institutions, disrupted trade and GVCs.
  - Policy responses:
    - Allow automatic stabilizers while targeting support to hardest-hit firms and workers.
    - Reduce less essential spending and/or raise additional revenues (voluntary contributions or progressive taxation).
    - Adopt a clear medium-term fiscal framework to support investor confidence.
    - Explore quantitative easing measures if policy rates hit effective lower bound, including reviving funding-for-lending schemes and buying Treasury bonds in secondary markets.
    - BAM may need prompt interventions to maintain liquidity provisions, relax capital buffers, provide longer timeframes for banks to restore solvency, stand ready to provide additional guarantees and create fiscal space to recapitalize systemically important banks.
- De-anchoring of inflation expectations in the U.S. leads to rising core yields and risk premia
  - Relative Likelihood: Medium
  - Expected Impact: Medium
  - Key impacts: front-loaded tightening of financial conditions, higher risk premia, higher external borrowing costs and exchange rate pressure, but impact cushioned by current exchange rate arrangement and capital controls; share of public debt denominated in FX is relatively low (about 25 percent); exposure to SOEs external debt (about 12 per cent of GDP) which is mostly government guaranteed.
  - Policy responses:
    - Avoid premature monetary tightening until clarity on underlying price dynamics.
    - Maintain fiscal credibility.
    - Limit SOEs’ new external borrowing with government guarantee.
- Faster resolution of the Covid-19 pandemic
  - Relative Likelihood: Medium
  - Expected Impact: High/Medium
  - Policy response:
    - Rebuild policy buffers by accelerating fiscal consolidation to bring public debt on a firmly downward path.
- Intensified geopolitical tensions and security risks
  - Relative Likelihood: High
  - Expected Impact: High
  - Key impacts: Morocco’s openness and dependence on trade, remittances, tourism, and energy imports make it vulnerable to disruptions.
  - Policy responses:
    - Accelerate transition to an inflation targeting framework with a flexible exchange rate regime.
    - Maintain involvement in key global value chains and work with trading partners to avoid distortive measures.
    - Implement structural reforms to support international competitiveness and productivity.
- Rising commodity prices amid bouts of volatility
  - Relative Likelihood: Medium
  - Expected Impact: Medium
  - Key impacts: as a net oil importer, higher oil prices increase CA deficit and worsen government deficit via energy subsidies; volatility affects cash-constrained firms and households.
  - Policy responses:
    - Use hedging and/or automatic price adjustments to smooth impact on consumers.
    - Accelerate effort to reduce dependence on imported energy and boost renewables.
- Higher frequency and severity of natural disasters related to climate change
  - Relative Likelihood: Medium
  - Expected Impact: Medium
  - Key impacts: exposure to more frequent droughts affecting agriculture and livelihoods.
  - Policy responses:
    - Optimize water resources in agriculture.
    - Invest in mitigation measures and green industries (solar and wind).
    - Create natural disaster-related buffers to offset fiscal risks.

### Domestic risks — selected entries and policy responses
- Uncontrolled Covid-19 local outbreaks
  - Relative Likelihood: Medium
  - Expected Impact: Medium
  - Notes: Progress to full immunization is well on track but localized outbreaks could delay tourism recovery.
  - Policy responses:
    - Accelerate efforts to reach full immunization.
    - Maintain rescue measures for hardest-hit sectors (i.e., tourism).
- Disorderly transformations (structural reallocation impeded)
  - Relative Likelihood: Medium
  - Expected Impact: Medium
  - Policy responses:
    - Remove barriers to entry and reduce the informal sector.
    - Improve competitiveness and quality of production factors.
    - Improve labor market efficiency, active labor market policies, and vocational training.
- Fiscal slippages or greater-than-expected fiscal contingent liabilities
  - Relative Likelihood: Medium
  - Expected Impact: High
  - Policy responses:
    - Increase transparency on public sector contingent liabilities.
    - Implement a more decisive and comprehensive tax reform.
    - Contain current spending and improve efficiency.
    - Adopt a credible medium-term fiscal framework.
    - Rationalize the SOE sector.
    - Reform the pension system.
- Slower than expected pace of structural reforms
  - Relative Likelihood: Medium
  - Expected Impact: Medium
  - Policy responses:
    - Advance toward a new model of economic development promoting sustainable and inclusive growth.
    - Build strong consensus on reforms to support social welfare, reduce vulnerabilities, strengthen governance, and foster inclusive growth.
- Widespread social discontent
  - Relative Likelihood: Medium
  - Expected Impact: Medium
  - Policy responses:
    - Accelerate structural reforms to improve inclusive growth.
    - Gradually strengthen social protection, improve education quality, and boost active labor market policies.

### Public Debt Sustainability Analysis — overview
- The Covid-19 crisis left a legacy of a significantly higher central government debt-to-GDP ratio and gross financing needs.
- Even under gradual fiscal consolidation in staff baseline, Morocco’s public sector debt remains sustainable, but the worse starting position increases vulnerabilities to shocks considered under the DSA.
- Contingent liabilities from sovereign guaranteed credit to SOEs and unfunded pension schemes reinforce the importance of a cautious fiscal approach and commitment to reforms.
- Debt coverage and definition:
  - DSA covers central government debt (debt of the Treasury, both domestic and external) excluding sovereign guarantees (mainly of external debt to SOEs).
  - Authorities have started to produce general government data (with technical assistance); under that accounting public debt perimeter would include the Treasury, extrabudgetary central government, local entities, pension funds, and social welfare organizations.

*Source: 1marea2022001 - Annex I. External Sector Assessment  Report*

### 76.9   percent of GDP in 2020. This increase in public debt (11.6 percent in  2020) was mostly driven

### 1marea2022001 - 76.9   percent of GDP in 2020. This increase in public debt (11.6 percent in  2020) was mostly driven

### Debt developments and drivers
- Central government gross nominal public debt reached 76.9 percent of GDP in 2020.
- The increase in public debt of 11.6 percent in 2020 was mostly driven by:
  - Worse real interest rate/growth differential: 6.2 percent (of GDP).
  - Impact of the pandemic on the primary deficit: 5.1 percent (of GDP).
- Public gross financing needs increased to 17.5 percent of GDP in 2020, from 13 percent of GDP in the original budget.
- Both debt level and gross financing needs were above empirically determined high-risk benchmarks for emerging market economies (70 and 15 percent of GDP, respectively).

### Baseline projections (staff baseline scenario)
- Central government debt-to-GDP ratio:
  - Expected to reach 76.5 percent of GDP in 2021.
  - Gradually increase to 79.5 percent of GDP in 2024.
  - Starts falling from 2025 to reach 78.3 percent of GDP in 2026.
- Comparison and drivers:
  - Projected debt path slightly deteriorated relative to the 2020 AIV report due to slower fiscal consolidation over the next 3 years.
  - Primary deficit is projected to decrease by 1.7 percentage points of GDP between 2021-24.
  - Growth is expected to hover around 3 percent over the medium term.
- Privatization receipts:
  - Projected at about 1½ percent of GDP in 2021-24 and expected to help reduce financing needs.

### Financing needs and debt management
- Gross financing needs:
  - Expected to decrease to 14.6 percent of GDP in 2021.
  - Projected to remain around 15 percent of GDP in the medium term.
- Financing composition for 2021:
  - Issuance of Treasury bills and bonds in the domestic market for around 11 percent of GDP.
  - External borrowing to cover remaining needs.
- Mitigating factors noted by staff:
  - i) A relatively stable cost of debt, as both domestic and international interest rates are projected to remain low.
  - ii) Improved debt management, which helped maintain a long average maturity and low interest payment in 2022.
  - iii) A significant share of external borrowing on a concessional basis.
- Debt management operations:
  - Accounting for operations that will swap old debt with new debt at more favorable terms (longer maturities and lower interest rates), financing needs projected to remain around the benchmark of 15 percent over the projection period.

### Debt sustainability and profile
- Overall assessment:
  - Morocco’s central government debt remains sustainable.
- Features limiting vulnerabilities:
  - Weighted average maturity of about 7.5 year.
  - Relatively low share denominated in FX: about 25 percent.
  - Investor base made mostly of local investors, many long-term investors.
- Market access:
  - Steady access to international capital markets at favorable terms over the last 10 years, and more recently after the health crisis.
- Short-term debt:
  - Represents about 3 percent of GDP at end-2020.
- Contingent liabilities and additional vulnerabilities:
  - Guarantees to SOEs: 15.0 percent of GDP.
  - Subsidized credit schemes under the COVID-19 crisis: 4.9 percent of GDP.
  - Contingent liabilities from unfunded public pension schemes represent a risk.
  - Transmission of subsidized credit scheme liabilities to a new financial institution under BAM supervision (which will absorb the first layer of losses) is a mitigating factor.
- Early-warning benchmarks:
  - Relevant indicators (except bond spread over U.S. bonds, and change in short-term debt) exceed the lower early-warning benchmarks, but not the upper risk assessment benchmarks.

### Impact of the New Model of Development (NMD) reforms
- Cost estimates from NMD report:
  - Cost of reforms about 4 percent of GDP annually over the next five years.
  - Rising to 10 percent of GDP per year by 2030.
- Growth scenarios and debt implications:
  - An acceleration of growth to about 7 percent of GDP per year between 2022 and 2035 would be necessary to double Morocco’s GDP per capita in this period and would help maintain the debt-to-GDP at relatively stable levels if realized.
  - Under a scenario where the cost of reforms is fully accounted for in financing needs but growth remains as in staff baseline projections, public debt will increase to around 95.5 percent of GDP by 2026.

### Stress tests and scenarios
- Increased near-term sensitivity:
  - Worse starting conditions after the pandemic increase public debt sensitivity to shocks in the near term.
  - Debt level remains well above the 70 percent of GDP benchmark for emerging markets when various shocks are considered, although it resumes a downward path in the medium term in scenarios analyzed.
- Stress test findings (selected underlying assumptions and outcomes):
  - Baseline real GDP growth: 6.3 (2021), 3.1 (2022), 3.0 (2023), 3.0 (2024), 3.1 (2025), 3.3 (2026).
  - Baseline inflation (GDP deflator): 1.2 (2021), 1.4 (2022), 1.3 (2023), 1.5 (2024), 1.8 (2025), 1.8 (2026).
  - Baseline primary balance: -4.4 (2021), -4.0 (2022), -3.6 (2023), -2.6 (2024), -1.9 (2025), -1.3 (2026).
  - Public gross financing needs under baseline: 14.6 percent of GDP (2021) and around 15 percent in the medium term.
- Adverse and combined shocks:
  - Scenarios considered include Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, and Adverse Scenario.
  - Under several shocks, the debt-to-GDP can exceed the 70 percent benchmark in the near term; public gross financing needs can exceed the 15 percent benchmark under some shocks.
- Risk assessment indicators:
  - Debt-level benchmark: 70 percent of GDP (lower/upper risk assessment context used in analysis).
  - Gross financing needs benchmark: 15 percent of GDP.
  - Other benchmarks used: bond spreads (200 and 600 basis points), public debt held by non-residents (15 and 45 percent), share of foreign-currency denominated debt (20 and 60 percent), change in share of short-term debt (0.5 and 1 percent of GDP).

### Policy implications highlighted
- Importance of accelerating fiscal consolidation:
  - The report highlights the importance of accelerating the path of fiscal consolidation in the context of a renewed commitment to structural reforms to bring the debt-to-GDP ratio closer to the empirical high-risk level of 70 percent of GDP over the medium term.
- Role of privatization receipts and debt operations:
  - Privatization receipts (about 1½ percent of GDP in 2021-24) and active debt management operations (longer maturities, lower interest rates, swaps) are important to reduce financing needs and mitigate vulnerabilities.

*Source: IMF staff report (Morocco—Staff Report for the 2021 Article IV Consultation, informational annex).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1marea2022001.pdf_