## 1marea2023001

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### Recent developments
- Growth and activity:
  - Economic activity slowed in 2022 after a 7.9 percent rebound in 2021; growth averaged 1.1 percent in the first half of 2022.
  - Real GDP outturn Q3 2022: 1.6 percent (y/y); implies average GDP growth for 2022 of 1.1 percent (staff estimate earlier: 1.2 percent).
- Shocks and policy responses:
  - A third drought in five years and fallout from Russia’s war in Ukraine reduced disposable income and demand.
  - Authorities’ policies: subsidies stabilizing the price of wheat and gas, fixed electricity tariffs, cash transfers to the transport sector, and subsidized credit schemes to the agricultural sector.
- Labor market:
  - Unemployment fell somewhat in 2022, primarily reflecting a lower participation rate; employment rate decline especially for women.
- Inflation:
  - Headline inflation: 8.1 percent (y/y) in October; 8.3 percent in November.
  - Core inflation: 7.1 percent in October; 7.6 percent in November.
  - Food and transportation sub-indices contributed about 80 percent of the increase in headline inflation.
  - Inflation expectations: 2-year ahead rose to 3.8 percent in Q3:2022; 3-year ahead broadly unchanged at 2.2 percent. By December, 2-year and 3-year expectations were 4.8 percent and 2.6 percent, respectively.
- Exchange rate and monetary policy:
  - Bank Al-Maghrib (BAM) policy rate: increased by 50 bps to 2 percent in September 2022; raised by 50 bps to 2.5 percent on December 20, 2022.
  - Dirham depreciation in 2022: about 15 percent vs US dollar and about 6 percent vs euro; moved closer to upper side of ±5 percent fluctuation band.
  - Real effective exchange rate depreciated by about 1½ percent; REER depreciated by about 3½ percent as of October 2022.
- Fiscal outcomes through October 2022:
  - Current spending increased by 2.4 percent of GDP vs same period in 2021, driven by gas and wheat subsidies (1.4 percent of GDP), cash transfers to transportation (0.4 percent of GDP), and transfers to national power utility (0.3 percent of GDP).
  - Overall fiscal deficit as of October 2022: 2.2 percent of GDP (about half the 2021 level).
- External sector and reserves:
  - Trade deficit in first ten months of 2022: about 16½ percent of GDP (from around 12 percent in 2021).
  - Tourism receipts returned to 2019 levels; remittances remained strong.
  - International reserves in US dollars declined mainly due to depreciation of the euro vs US dollar; about 60 percent of reserves are in euros.
  - International reserves as of October 2022: around US$31 billion; closed 2022 at US$32.2 billion (staff estimate earlier: US$31.8 billion).
- Banking sector:
  - Private credit growth accelerated in 2022, driven by loans to non-financial private firms.
  - NPLs stable at 8.5 percent of total loans in September 2022; NPL coverage ratio around 67 percent as of mid-2022.
  - Tier 1 capital ratio around 11.8 percent; large credit exposures 2.5 times regulatory capital (vs. 2.8 before the crisis).

### Outlook and key projections
- GDP growth:
  - Real GDP forecast: 1¼ percent in 2022; accelerate to 3 percent in 2023.
  - Medium-term projection: stabilize at around 3½ percent.
- Inflation and current account:
  - Average headline inflation: projected to peak at 6.5 percent in 2022, decline to about 4 percent in 2023, and to 2.5 percent by 2024 (assuming no further external shocks).
  - Current account deficit: projected to increase to around 4 percent of GDP in 2022 before narrowing toward around 3 percent in the medium term.
  - FX reserve coverage: projected to slightly decrease over the next few years but remain well above 100 percent of the adjusted ARA metric.
- Risks:
  - Downside risks predominate: worsening global conditions and fallout from Russia’s war in Ukraine; domestic vulnerability to recurrent droughts; stickier inflation expectations; faster-than-expected monetary tightening abroad.
  - Upside growth risks: faster and more efficient implementation of structural reforms.

### Policy discussion — Monetary policy
- Staff assessment and recommendations:
  - Bringing inflation back to around 2 percent by end-2024 requires further increases in the policy rate to move the real ex-ante policy rate (currently at negative values) closer to the neutral real interest rate (estimated between 1 and 2 percent).
  - Higher-than-projected near-term inflation would call for a more rapid increase in interest rates and potentially a restrictive policy stance.
  - Protect FX reserves given pegged exchange rate regime with a horizontal exchange rate band; preserve reserves as a buffer against downside risks.
  - Diversify financing sources and continue access to international financial markets.
  - Further policy rate increases could help moderate depreciation pressures; recent depreciation largely trade-financing related and expected to ease in 2023.
  - Once inflation and uncertainty are lower, BAM should complete transition to an inflation-targeting framework and allow the dirham to float freely to strengthen resilience.
- Authorities’ views:
  - Future actions data dependent; emphasized price stability as central bank’s contribution to economic activity.
  - Downplayed role of interest rate differentials in driving the dirham; expected depreciation pressures to subside in 2023 with narrowing current account deficit.
  - Acknowledged challenges for final-stage transition to inflation-targeting under high inflation and uncertainty; will continue preparatory work.

### Policy discussion — Fiscal policy
- Fiscal stance and targets:
  - 2023 Budget aims for gradual fiscal consolidation balancing deficit reduction, shock mitigation, and funding structural reforms.
  - Fiscal deficit expected: 5.3 percent of GDP in 2022 (about 0.5 percentage points lower than in the Budget).
  - 2023 Budget projects overall fiscal deficit to fall to 4.9 percent of GDP in 2023 and return to pre-crisis levels by 2026.
  - Central government debt-to-GDP ratio projected to stabilize slightly below 70 percent of GDP.
- Main measures in the 2023 Budget (staff baseline):
  - Reform of subsidies and family allowances:
    - Remaining subsidies on gas butane, wheat, and sugar to be fully eliminated by 2025.
    - Resources freed to finance generalization of health care insurance to all Moroccans and extension of family allowances to 7 million Moroccan families.
    - Additional cost of these reforms: 0.8 percent of GDP (included in Social Benefits); financed by a solidarity contribution paid by firms and an increase in the consumption tax on products with negative public health impact.
  - Corporate income tax reform over four years:
    - Standard rate of 20 percent; companies with net profits above DH 100 Million (about USD 9 million) and financial institutions to pay 35 and 40 percent respectively.
    - Reduce tax on distributed dividends from 15 to 10 percent.
    - Lower minimum corporate income tax rate from 0.5 to 0.25 percent (and to 0.15 percent for companies selling basic products).
    - Projected additional revenue: about 0.1 percent of GDP by 2026.
  - Personal income tax changes:
    - Reduce taxes on employees and pensioners lowering taxable income by about 0.2 percent of GDP; offset by subjecting all personal incomes to PIT and applying withholding taxes on certain incomes.
  - Mobilization of public real estate and SOE dividends: expected additional revenues of 0.3 percent of GDP by 2025.
  - Reforms of health and education: expected to add 1.4 percentage points of GDP to current and capital spending over the next three years.

### Tax reform, social protection, and targeting
- Tax reform—structure and progressivity:
  - Harmonization of statutory corporate tax rates into a single relatively low rate expected to simplify administration, encourage formalization, and remove distortions.
  - Progressivity aided by a solidarity tax on firms and reductions of taxes on wages and pensioners (who generate about 70 percent of total PIT revenues).
  - Withholding tax on certain non-wage earnings to increase fairness and extend the tax base.
  - Mobilizing government real assets recommended within a clear legal framework.
- Unified Social Registry (RSU):
  - Currently under pilot deployment; scheduled to be gradually extended starting from 2023.
  - Operational design: households register and are assigned a score; eligibility for programs based on score below program-specific thresholds.
  - Subsidy reform: replacement of wheat, gas butane, and sugar subsidies with transfers to poor families with children; government should be ready to provide temporary, budget-neutral cash transfers to households (mainly lower three income quintiles) disproportionately affected by inflation.

### Distributional impact of inflation (Box 1)
- Methodology:
  - Uses Morocco's 2019 household survey (ONDH) and detailed 4-digit consumer price indices (HCP).
  - Households classified into income quintiles; expenditure shares on about 1300 items regrouped into 27 expenditure categories mapped to 4-digit CPIs.
  - Inflation index for household quintile i at time t: q_t^i = sum_{g=1}^{27} s_g^i * (p_{g,t} / p_{g,t0}), with t set to September 2022.
- Key findings (September 2022):
  - Effective y/y inflation rate for the lower three income quintiles was about 2 to 3 percent higher than the top quintile.
  - Average effective y/y inflation for the lower five income quintiles: about 10.4 percent, compared to the 8.3 percent increase in the headline CPI.
  - Food vs non-food:
    - Effective food inflation is monotonically declining with income; effective food inflation for the lower three quintiles was about 5 percent higher than for the top quintile.
    - Effective non-food inflation is monotonically increasing with income, reflecting higher shares of “use of personal vehicles” in higher-income baskets and pass-through of higher international oil prices.
- Short-term support recommendation: temporary and budget-neutral cash transfers targeted mainly to the lower three income quintiles.

### Financial stability and regulatory reforms
- Regulatory progress:
  - Basel III standards fully phased in, including minimum leverage ratio and maximum exposure to interest rate risks.
  - IFRS9 introduced in January 2018 and to be fully phased in at the end of 2022.
  - Work on legal/tax aspects to develop a secondary market for NPLs; improvements to bank resolution framework.
- Banking resilience:
  - BAM stress-test (July 2022) shows banks’ solvency resilient to a severe adverse macro scenario.
  - World Bank (2022) estimates 35 percent share of bank assets exposed to climate physical risk (droughts and floods).
- AML/CFT:
  - FATF plenary (October 2022) made initial determination that Morocco has substantially completed its action plan; on-site assessment scheduled for January 2023 with discussion in February 2023.
- Staff recommendations:
  - Integrate climate factors into stress tests; continue developing secondary NPL market and strengthen bank resolution tools.

### Structural reforms: health, education, SOEs, electricity, water, and gender
- Health care:
  - About 11 million Moroccans previously benefiting from free health care will transit into the new insurance scheme in 2023.
  - Opt-in rate remains low (about 15 percent); efforts needed to ensure agricultural workers and artisans contribute.
  - Reform includes new health centers, national health authority, new hospitals, and recruitment of personnel with efficiency gains via family doctors and digitalization.
- Education reform:
  - Objectives: reduce drop-out rate in compulsory education by one third; double number of students with basic skills at end of primary school; double extracurricular beneficiaries.
  - Measures: more investment in infrastructure; overhaul of teacher recruiting, training, and payment.
- SOE reform and private sector:
  - CEO of National Agency for consolidating SOE portfolio appointed July 2022; reform expected to be completed by 2025.
  - Mohammed VI Fund for Investment operationalization expected to catalyze private investments.
  - New Charter of Investment approved in 2022; competition and consumer protection laws strengthened.
- Electricity and renewable energy:
  - Liberalize electricity production to accelerate RE transition and reduce cost; recent legal/regulatory steps in 2022 to allow direct sale of RE to small industrial customers and self-consumption inject-to-grid.
- Water scarcity:
  - Three severe droughts in last 5 years; water resources projected to reach absolute scarcity threshold (500 cubic meter per person per year) by 2050.
  - Policy priorities: infrastructure investment (desalination, recycling), demand management, tariff reform with RSU protections, separate regulator recommended.
- Gender gaps:
  - Female to male ratio in secondary education: 95 percent.
  - Women’s labor force participation: 21 percent in 2021; women employment rate fell from 30 percent in 1999 to slightly below 20 percent in 2019.
  - Illiteracy: women 42 percent vs. men 22 percent.
  - New Model target: double female employment rate to 40 percent by 2035; achieving this could generate additional annual GDP growth between 0.2 and 2 percent.
  - Policy recommendations: legal reforms on gender equality, public childcare investment, transport access, gender budgeting.

### Annex I — External Sector assessment (selected)
- Overall assessment:
  - Morocco’s external position in 2022 is broadly in line with fundamentals and desirable policies.
  - Projected CA deficit: 4.3 percent of GDP in 2022; gradually return to about 3.0 percent of GDP over the medium term.
- NIIP and reserves:
  - NIIP: about -60 percent of GDP in 2022 (historical range noted: about -61 percent over 2014-2019; slightly worse in 2020-21).
  - NIIP components presented for 2022 (% GDP): NIIP -60.0, Gross Assets 35.0, Res. Assets 23.0, Gross Liabilities 95.0, Debt Liabilities 36.1.
  - FX reserves: increased by about US$10 billion in 2020-21; fell by some US$5 billion in 2022 to around US$31 billion as of October due to euro depreciation; closed 2022 at US$32.2 billion.
  - Reserves assessed at around 120 percent of the ARA metric (adjusted for capital controls) in 2022.
- Current account decomposition (2022, % of GDP): Actual CA -4.3; Cyclical Contributions -1.4; Cyclically adjusted CA -2.9; Cyclically Adjusted CA Norm -3.0; Total Gap 0.1.
- Capital and financial accounts:
  - CA financed mainly by net FDI inflows and external borrowing; in first half 2022 net FDI and trade credit were main sources.
  - External debt structure: 85 percent with long maturity.
- FX regime:
  - Pegged to basket (weights: euro 60 percent, US dollar 40 percent); fluctuation band ±5 percent.
  - Staff: moving to IT with more flexible ER would reduce need for reserves, though reserve buffer remains important.

### Risk Assessment Matrix — selected risks and policy responses
- Commodity price shocks:
  - Relative Likelihood: High; Expected Impact: High.
  - Policy response: central bank may need to increase policy rates; fiscal policy to protect vulnerable via targeted, temporary, budget-neutral cash transfers using the Unified Social Registry.
- De-anchoring of inflation expectations and stagflation:
  - Relative Likelihood: Medium; Expected Impact: Medium.
  - Policy response: tighter monetary policy; fiscal use of limited space for targeted transfers and reallocation to growth-friendly spending.
- Abrupt global slowdown/recession:
  - Relative Likelihood: High; Expected Impact: High.
  - Policy response: fiscal stimulus targeted to affected sectors, central bank easing, structural reforms.
- Deepening geo-economic fragmentation:
  - Relative Likelihood: High; Expected Impact: High.
  - Policy response: maintain involvement in global value chains; implement structural reforms for competitiveness.
- Drought reducing agricultural production:
  - Relative Likelihood: High; Expected Impact: High.
  - Policy response: replicate recent drought measures including subsidized credit to farmers and debt repayment help.

### Annex III — Public Debt Sustainability (selected)
- Coverage:
  - DSA covers central government debt (Treasury, domestic and external).
  - Consolidation to general government perimeter would reduce debt-to-GDP by about 6½ percent of GDP in 2021 (to about 62 percent).
- Historical debt ratios:
  - Central government debt ratio: 2020: 72.2 percent of GDP; 2021: 68.9 percent of GDP.
- Baseline projections:
  - Central government debt-to-GDP expected to remain below 70 percent in medium term.
  - General government public debt: hover around 63 percent of GDP until 2025; fall to 61.0 percent in 2027.
  - Gross financing needs projections: 2022: about 14 percent of GDP; 2023: 16.6 percent of GDP; 2027: 11.3 percent of GDP.
- Key baseline assumptions (selected):
  - Baseline real GDP growth (percent): 2022: 1.2; 2023: 3.0; 2024: 3.1; 2025: 3.1; 2026: 3.2; 2027: 3.4.
  - Baseline inflation (GDP deflator, percent): 2022: 6.6; 2023: 4.1; 2024: 2.5; 2025: 2.4; 2026: 2.0; 2027: 2.0.
  - Baseline primary balance (percent of GDP): 2022: -3.2; 2023: -2.6; 2024: -2.0; 2025: -1.5; 2026: -0.9; 2027: -0.6.
  - Baseline effective interest rate (percent): 2022: 3.2; 2023: 3.6; 2024: 3.6; 2025: 3.5; 2026: 3.6; 2027: 3.6.
- Debt profile and vulnerabilities:
  - Weighted average maturity: about 6 years.
  - Share denominated in FX: about 25 percent.
  - Contingent liabilities: guarantees to commercial SOEs external debt about 8 percent of GDP; subsidized credit schemes under Covid-19 about 5 percent of GDP; unfunded public pension schemes partly recognized as Treasury bonds by about 10 percentage points of GDP.
- Stress tests:
  - Under a severe real GDP growth shock, central government debt could increase to about 80 percent of GDP before resuming a downward path.
- Policy implications:
  - Accelerate fiscal consolidation to reduce debt-to-GDP below 70 percent.
  - Continue active debt management to preserve long maturities and favorable borrowing terms.
  - Use privatization receipts (projected about 1½ percent of GDP in 2022-25) to help reduce financing needs.
  - Address contingent liabilities and strengthen institutional arrangements.

### Additional information since staff report
- New data and updates:
  - Q3 2022 real GDP growth: 1.6 percent (y/y) vs staff estimate 1.8 percent.
  - CPI headline inflation: 8.3 percent in November (from 8.1 in October).
  - Core inflation: 7.6 percent in November (from 7.1 percent).
  - Current account deficit widened to about 3.6 percent of GDP in Q3 2022 (from about 1.9 percent in Q3 2021).
  - International reserves closed 2022 at US$32.2 billion.
  - BAM raised policy rate to 2.5 percent on December 20, 2022.
  - Treasury and BAM memorandum: Treasury authorized to use remaining funds withdrawn in 2020 under PLL corresponding to MAD 21.1 billion (or about US 2 billion at current rates) for domestic currency financing needs.

*International Monetary Fund staff report content unit.*

### 1. Distributional Impact of Inflation in Morocco __________________________________________________ 13

### 1. Distributional Impact of Inflation in Morocco

### Recent developments
- Economic activity slowed in 2022 after a 7.9 percent rebound in 2021; growth averaged 1.1 percent in the first half of 2022.
- Contributing factors:
  - A third drought in five years and economic fallout from Russia’s war in Ukraine reduced disposable income and demand.
  - Authorities’ policy responses included subsidies stabilizing the price of wheat and gas, fixed electricity tariffs, cash transfers to the transport sector, and subsidized credit schemes to the agricultural sector.
- Labor market:
  - Unemployment rate fell somewhat in 2022, primarily reflecting a lower participation rate that more than offset the decline in the employment rate (especially for women).
- Inflation dynamics:
  - Headline inflation: 8.1 percent (y/y) in October, slightly decelerated from 8.3 percent in September — the highest rate since the 1990s.
  - Food and transportation sub-indices contributed to about 80 percent of the increase; inflation pressures have become increasingly broad-based across the CPI basket.
  - Core inflation: 7.1 percent in October (y/y).
  - Inflation expectations: 2-year-ahead rose to 3.8 percent in Q3:2022; 3-year-ahead remained broadly unchanged at 2.2 percent.
- Exchange rate and monetary response:
  - Bank Al-Maghrib (BAM) increased its policy rate by 50 bps to 2 percent in September 2022.
  - Dirham depreciated in 2022 by about 15 percent against the dollar and about 6 percent against the euro; moved closer to the upper side of its ±5 percent fluctuation band.
  - Real effective exchange rate depreciated by about 1½ percent.
- Fiscal outcomes through October 2022:
  - Current spending increased by 2.4 percent of GDP compared to the same period in 2021, driven mainly by gas and wheat subsidies (1.4 percent of GDP), cash transfers to transportation (0.4 percent of GDP), and transfers to the national power utility (0.3 percent of GDP).
  - Stronger tax revenues (corporate income tax, VAT, customs) and higher non-tax revenues (dividends from SOEs) more than offset the spending increase.
  - Overall fiscal deficit stood at 2.2 percent of GDP as of October 2022 — about half the 2021 level.
- External sector and reserves:
  - Trade deficit increased to about 16½ percent of GDP in the first ten months of 2022 (from around 12 percent in 2021), driven by higher import values for energy and food.
  - Tourism receipts returned to 2019 levels; remittances remained strong.
  - Net FDI inflows contributed to financing needs; international reserves in US dollars declined mainly due to the depreciation of the euro against the US dollar (60 percent of reserves are in euros).
  - Morocco’s external position in 2022 was broadly in line with fundamentals and desirable policies (Annex I).
- Banking sector:
  - Private credit growth accelerated in 2022, driven by loans to non-financial private firms (working capital needs).
  - Forbearance measures did not lead to significant deterioration in credit quality.
  - NPLs stable at 8.5 percent of total loans in September 2022; NPL coverage ratio around 67 percent as of mid-2022.
  - Tier 1 capital ratio around 11.8 percent; large credit exposures 2.5 times regulatory capital (vs. 2.8 before the crisis).

### Outlook and key projections
- GDP growth:
  - Real GDP forecast: 1¼ percent in 2022; accelerate to 3 percent in 2023.
  - Medium-term projection: stabilize at around 3½ percent as structural reforms offset pandemic and war scarring effects.
- Inflation and current account:
  - Average headline inflation projected to peak at 6.5 percent in 2022, decline to about 4 percent in 2023, and to 2.5 percent by 2024, assuming no further external shocks.
  - Current account deficit projected to increase to around 4 percent of GDP in 2022 before narrowing toward a norm of around 3 percent in the medium term.
  - FX reserve coverage projected to slightly decrease over the next few years due to valuation changes and repayment of the PLL, albeit remaining well above 100 percent of the adjusted ARA metric.
- Risks:
  - Downside risks predominate (Annex II). Key risks include:
    - Worsening global conditions and fallout from Russia’s war in Ukraine (lower external demand, commodity price volatility, tighter financial conditions).
    - Domestic vulnerability to recurrent droughts.
    - Stickier inflation expectations, more persistent global supply shocks, stronger pass-through of past energy and food price increases.
    - Faster-than-expected monetary policy tightening in the United States and the euro area could tighten financial conditions and add depreciation pressures on the dirham.
  - Upside growth risks: faster and more efficient implementation of structural reforms.

### Policy discussion — Monetary policy
- Staff assessment:
  - Bringing inflation back to around 2 percent by end-2024 requires further increases in the policy rate to move the real ex-ante policy rate (currently at negative values) closer to the neutral real interest rate (estimated between 1 and 2 percent).
  - Higher-than-projected near-term inflation would call for a more rapid increase in interest rates and potentially a restrictive policy stance.
  - Protecting FX reserves is a priority given the pegged exchange rate regime with a horizontal exchange rate band; reserves should be preserved as a buffer against downside risks.
  - Diversify financing sources and continue access to international financial markets; recent efforts to shore up bilateral and multilateral lending are welcomed.
  - Further policy rate increases could help moderate depreciation pressures, though recent depreciation is largely trade-financing related and expected to ease in 2023.
  - Once inflation and uncertainty are lower, BAM should complete transition to an inflation-targeting framework and allow the dirham to float freely to strengthen resilience.
- Authorities’ views:
  - Did not rule out need for further action; future actions will be data dependent, focusing on inflation outcomes and expectations.
  - Emphasized price stability as the central bank’s best contribution to economic activity.
  - Downplayed the role of interest rate differentials in driving the dirham given limited volatile portfolio flows and capital controls on residents.
  - Expected depreciation pressures to subside in 2023 with a narrowing current account deficit.
  - Acknowledged challenges for transitioning to the final stage of inflation-targeting under high inflation and elevated uncertainty but will continue preparatory work.

### Policy discussion — Fiscal policy
- Fiscal stance and targets:
  - 2023 Budget aims for gradual fiscal consolidation that balances deficit reduction, shock mitigation, and funding structural reforms.
  - Fiscal deficit expected: 5.3 percent of GDP in 2022 (about 0.5 percentage points lower than in the Budget).
  - 2023 Budget projects overall fiscal deficit to fall to 4.9 percent of GDP in 2023 and return to pre-crisis levels by 2026.
  - Central government debt-to-GDP ratio projected to stabilize slightly below 70 percent of GDP.
- Main measures in the 2023 Budget (also in staff baseline):
  - Reform of subsidies and family allowances:
    - Remaining subsidies on gas butane, wheat, and sugar to be fully eliminated by 2025.
    - Resources freed will finance generalization of health care insurance to all Moroccans and extension of family allowances to 7 million Moroccan families.
    - Additional cost of these reforms: 0.8 percent of GDP (included in Social Benefits); financed by a solidarity contribution paid by firms and an increase in the consumption tax on products with negative public health impact (e.g., sugar-based beverages).
  - Comprehensive reform of corporate income tax over four years:
    - Replace multiple tax rates with a standard rate of 20 percent, except companies with net profits above DH 100 Million (about USD 9 million) and financial institutions, which will pay 35 and 40 percent respectively.
    - Reduce taxation on distributed dividends from 15 to 10 percent.
    - Lower minimum corporate income tax rate from 0.5 to 0.25 percent (and to 0.15 percent for companies selling basic products).
    - Projected additional revenue: about 0.1 percent of GDP by 2026.
  - Changes in personal income taxation:
    - Reduce taxes on employees and pensioners via revision of deductions and exemptions, lowering taxable income by about 0.2 percent of GDP.
    - Revenue loss expected to be entirely offset by subjecting all personal incomes (including from real assets and non-wage activities) to the PIT and applying a withholding tax for certain income sources (e.g., professionals providing services to government entities).
  - Mobilization of public real estate portfolio and SOE dividends:
    - Expected additional revenues of 0.3 percent of GDP by 2025.
  - Reforms of health and education sectors:
    - Expected to add 1.4 percentage points of GDP to current and capital spending over the next three years.

*International Monetary Fund staff summary, Morocco country report content unit.*

### 16.      Staff welcomed the changes to the tax system, as they should increase its efficiency

### 16.      Staff welcomed the changes to the tax system, as they should increase its efficiency

### Tax reform: structure, progressivity, and revenue measures
- Harmonization of statutory corporate tax rates into a single relatively low rate is expected to:
  - simplify the system;
  - facilitate administration;
  - encourage formalization; and
  - remove potential distortions in the allocation of resources.
- Overall progressivity benefits from:
  - a solidarity tax on firms (as a function of their sales) to help cover the cost of the generalization of social protection; and
  - reductions of taxes on wages and pensioners, who are responsible for generating about 70 percent of total PIT revenues in Morocco.
- Imposing a withholding tax on certain non-wage earnings should increase fairness and durably extend the tax base.
- Mobilizing government real assets could be an effective source of revenues, but framing these transactions within a clear legal framework is recommended to reassure about viability and ultimate fiscal impact.

### Social protection: Unified Social Registry (RSU) and targeting
- The Unified Social Registry (RSU):
  - currently under deployment in a pilot phase in some regions;
  - scheduled to be gradually extended over the country starting from 2023.
- Operational design:
  - All Moroccan households wishing to apply for social programs should register and will be assigned a score based on (self-declared and verified) socio-economic indicators.
  - Eligibility: only households with a score below a program-specific threshold will be eligible to receive assistance.
- Subsidy reform and short-term support:
  - Replacement of remaining subsidies on wheat, gas butane, and sugar with transfers to poor families with children helps better target social assistance.
  - In the short term the government should stand ready to provide temporary and budget-neutral cash transfers to those households—mainly the lower three income quintiles—whose purchasing power has been disproportionately affected by higher inflation.

### Pension reform
- Recent parametric reforms have reduced funding gaps of many pension schemes, but more is needed for long-term financial viability.
- Authorities are working on a comprehensive overhaul to harmonize different existing schemes into just two schemes (one public and one private).
- The details and phasing of the new system should be determined to achieve a fair, efficient, and financially sustainable pension system for all Moroccans.

### Fiscal consolidation: revenue and spending measures to reduce debt-to-GDP
- Staff notes more efforts are needed on tax and spending fronts to accelerate reduction of the debt-to-GDP ratio.
- Revenue-side measures that could generate additional resources include:
  - announced reform of the VAT regime, with the harmonization of the current four rates toward one standard rate (this could yield about 0.6 percent of GDP annually);
  - streamlining (non VAT related) tax expenditures, with savings of about 0.3 percent of GDP;
  - a gradual introduction of a carbon tax; and
  - further measures to expand the tax base, improve tax administration, and reduce informality.
- Spending-side measures include:
  - a broad-based civil service reform placing more weight on productivity over seniority to help reduce the wage bill in the medium term;
  - reform of state-owned enterprises (SOEs) to generate additional dividends and reduce capital and current transfers;
  - increased use of digitalization and further efforts to strengthen the public finance management system to boost efficiency and rationalize spending.
- Staff estimates these reforms could generate at least 2 percent of GDP per year and allow a faster reduction of the debt-to-GDP ratio than projected in the baseline, to between 60 and 65 percent by 2027.
- Additional fiscal-revenue references:
  - The World Bank Country Climate and Development Report (November 2022) suggests a carbon tax could yield close to 1 percent of GDP in revenues per year in the short run (with revenues declining over time as relative prices adjust).
  - IMF (2022) estimates the “tax gap” in Morocco is about 10 percent of GDP; BAM estimates a gap of 6.7 percent of GDP.

### Distributional impact of inflation (Box 1)
- Methodology:
  - Uses Morocco's 2019 household survey (ONDH) and detailed 4-digit consumer price indices (HCP).
  - Households classified into income quintiles; expenditure shares on about 1300 items regrouped into 27 expenditure categories mapped to 4-digit CPIs.
  - Inflation index for household quintile i at time t: q_t^i = sum_{g=1}^{27} s_g^i * (p_{g,t} / p_{g,t0}), with t set to September 2022.
- Key findings (September 2022):
  - The effective y/y inflation rate for the lower three income quintiles was about 2 to 3 percent higher than the top quintile.
  - The average effective y/y inflation for the lower five income quintiles was about 10.4 percent, compared to the 8.3 percent increase in the headline consumer price index.
  - Food vs non-food heterogeneities:
    - Effective food inflation is monotonically declining with income; on average, effective food inflation for the lower three quintiles was about 5 percent higher than for the top quintile.
    - Effective non-food inflation is monotonically increasing with income, reflecting higher shares of “use of personal vehicles” in higher-income baskets and pass-through of higher international oil prices.
- These findings are broadly consistent with HCP (2022), “Evolution des inégalités sociales dans un contexte marqué par les effets de la COVID-19 et de la hausse des prix”.

### Budget transparency and fiscal rule
- Publication of three-year budget plans (the 2023 Budget’s three-year plan) is a step forward in enhancing fiscal credibility and transparency and fully implements the Organic Budget law.
- Benefits of a credible medium-term fiscal plan:
  - reassure markets about commitment to fiscal discipline;
  - facilitate mobilization of external and domestic financial support.
- Staff recommends introduction of a new fiscal rule based on 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.
- IMF collaboration:
  - A technical assistance mission scheduled for January 2023 to discuss fiscal rule design, improvement of three-year planning and budgeting, and ways to strengthen oversight and accountability.
- Authorities indicated confidence that measures in the 2023 Budget may generate more revenues than conservatively projected in the three-year plan and broadly agreed on need to create additional fiscal space.

### Financial stability and regulatory reforms
- Progress made in strengthening regulatory and supervisory frameworks:
  - Basel III standards fully phased in, including minimum leverage ratio and maximum exposure to interest rate risks.
  - Work on legal and tax aspects to develop a secondary market for NPLs to strengthen banks’ balance sheets and support credit provision.
  - Improvements to bank resolution framework to provide BAM with additional tools to handle failures or insolvency and avoid contagion risks.
  - IFRS9 introduced in January 2018 and to be fully phased in at the end of 2022, with a positive impact on provisioning requirements.
- Risks and recommendations:
  - BAM stress-test (July 2022) shows banks’ solvency is resilient to a severe adverse macro-economic scenario including escalation of the war in Ukraine, supply disruptions, and a new pandemic outbreak.
  - Given increased relevance of climate change-related events, further efforts to integrate climate factors into stress tests are important.
  - World Bank (2022) estimates 35 percent share of bank assets exposed to climate physical risk (droughts and floods).
- AML/CFT:
  - FATF plenary (October 2022) made initial determination that Morocco has substantially completed its action plan to address deficiencies in AML/CFT framework.
  - On-site assessment scheduled for January 2023 with a progress report and FATF decision to be discussed in February 2023.
- Authorities’ stance:
  - Confident in financial system resilience and plan to regularly update macro stress-tests, consider climate-change effects, and continue improving AML/CFT legislation and regulations.

### Structural reforms: health care
- Ongoing health care reform aims to improve access, efficiency, and quality.
- Key elements:
  - About 11 million Moroccans previously benefiting from free health care will transit into the new insurance scheme in 2023; a large number of self-employed have been registered to join.
  - Opt-in rate remains low (about 15 percent); further efforts needed to ensure agricultural workers and artisans start contributing (including by making contribution a necessary condition to access public services and assistance).
  - Complete overhaul includes restructuring health care supply around new health care centers coordinating regionally under a new national health authority.
  - Reform will require building new hospitals and recruiting more personnel, while seeking efficiency gains via protocols favoring family doctors and local practices, discouraging immediate access to costly special care, and better use of digitalization for patient information exchange.

*Italic: IMF staff report (excerpt).*

### 28.      The announced reform of the education system is key to enhance Morocco’s human

### 28.      The announced reform of the education system is key to enhance Morocco’s human capital

### Education reform: objectives and implementation
- Reform objectives:
  - Reducing by one third the drop-out rate in compulsory education.
  - Doubling the number of students with basic skills at the end of primary school.
  - Doubling the number of students who benefit from extracurricular activities.
- Implementation measures:
  - More investment in school infrastructure.
  - Overhaul of the recruiting, training, and payment of teachers.
- Monitoring and governance:
  - Successful implementation requires careful monitoring through the definition of clear benchmarks and intermediate objectives, in line with the roadmap presented by the authorities in 2022.

### Development of a buoyant private sector
- Four main axes of progress in 2022:
  - Reform of SOEs:
    - Appointment in July 2022 of the CEO of the National Agency responsible for consolidating and optimizing Morocco’s SOEs portfolio.
    - Reform expected to be completed by 2025.
    - Implementation challenges include redesigning the role of SOEs in strategic sectors consistent with the state’s shareholder policy and limiting state intervention to cases with clear public interest justified by cost-benefit analysis.
  - Operationalization of the Mohammed VI Fund for Investment:
    - Appointment of the Managing Director expected to accelerate operationalization and catalyze private investments toward key sectors.
    - The Fund has been established as a limited-liability company, endowed with an initial allocation from the 2021 Budget, and is expected to manage a series of thematic funds providing equity or quasi equity to local firms.
  - Implementation of a new Charter of Investment:
    - A framework law approved by Parliament in 2022 redesigns the system of incentives for private investment, particularly for very small, small, and medium-sized enterprises and for Moroccan companies that compete internationally.
  - Strengthening competition and consumer protection:
    - Two laws approved in 2022 clarify criteria to quantify fines and notify economic concentrations, enabling a more active role for the Competition Council in sanctioning anticompetitive practices.

### Anti-corruption efforts
- Institutional progress:
  - Legal framework of the National Authority for Probity, Prevention, and the Fight Against Corruption (INPPLC) came into effect in late October 2022 with appointment of the Authority’s secretary general and members of the Board of Directors.
- Staff recommendations to strengthen anti-corruption:
  - Strengthen Morocco’s penal procedural code.
  - Urgently resubmit the bill on illicit enrichment aligned with international standards and conventions and prioritize its implementation.
  - Reinforce the country’s whistleblower legislation.
  - Implement more preventive measures, including regarding asset declarations of public officials and politically exposed persons.

### Electricity market reform and renewable energy (RE)
- Objectives:
  - Liberalize electricity production market to accelerate transition towards renewable energy and reduce the cost of electricity.
  - Ensure tariffs are transparent and competitive.
  - Enable private RE producers to sell energy to eligible end-users with free access to transmission and distribution networks at various voltage levels.
- Recent steps in 2022:
  - Approval of a decree allowing direct sale of electricity produced via RE to small industrial customers.
  - Submission to Parliament of a law allowing investors to produce electricity for self-consumption while injecting surplus into the electricity network.
  - Publication by the new Electricity Regulator (ANRE) of regulations on access to the transmission network.
  - ANRE working on new tariffs for private access to transmission and distribution networks.
  - Continued progress in redesigning the role of the national power utility (ONEE) to focus mainly on managing the transmission network.

### Water scarcity: risks and policy priorities
- Recent climate shocks:
  - Three severe droughts over the last 5 years indicate increased exposure to climate change.
- Resource trends and projection:
  - Availability of water resources has decreased significantly and is projected to reach the absolute water scarcity threshold (of 500 cubic meter per person per year) by 2050.
- Policy responses:
  - Increased infrastructure development, including upgrading the water supply network and building new desalination and water recycling plants.
  - Water demand management policies to incentivize more efficient water use.
  - Possible tariff changes to better reflect true cost of mobilizing and transporting water, while using the Unified Social Registry to ensure access to water remains low cost for the most vulnerable.
  - Recommendation to set up a separate regulator, as recommended in the New Model of Development, to ensure an integrated approach to water production and distribution, define water resource allocation, and set tariffs.

### Reducing gender gaps to improve potential growth
- Education and labor market statistics:
  - Female to male ratio in secondary education: 95 percent.
  - Rural girls’ secondary school enrollment (12-14 years old) trailed urban girls’ rates by 14 percentage points; for girls aged 15-17 the gap was 53 percentage points.
  - Women’s participation in the labor force: 21 percent in 2021 (and has been falling since 2004).
  - Women employment rate: deteriorated from 30 percent in 1999 to slightly below 20 percent in 2019.
  - More than 8 million Moroccan women were not active in the labor market in 2018; among these, almost 2 million had more than a secondary level of education.
  - Illiteracy: women 42 percent vs. men 22 percent.
- Pandemic impacts:
  - A joint study (Morocco’s High Commission for Planning, UN Women, UNDP, and the World Bank, 2020) showed a larger share of women than men reported a decline in income during the Covid-19 crisis; informal sector workers (disproportionately women) suffered higher job losses.
  - Female-headed households were more likely to report that their children were not participating in distance learning.
- Policy recommendations to raise female labor force participation:
  - Legislative changes to correct gender inequalities in remuneration, marriage-related constraints, and gender gaps in property and inheritance laws.
  - Investment in public childcare facilities and incentives to firm-based facilities, given caring for children was listed as the primary reason for women not working in the 2021 New Model of Development Report.
  - Measures to facilitate access to transportation, especially for women living in rural areas.
  - Continue gender budgeting efforts, including assessing gender (and female labor market participation) implications of ongoing reforms of the tax and transfer systems.

### Authorities’ views
- Political commitment:
  - Authorities reiterated strong political determination to carry out their agenda of structural reform and emphasized the need to negotiate with social partners as part of the new Dialogue Social to build wide social consensus.
- Expectations from reforms:
  - Authorities hopeful that operationalization of the Mohammed VI Fund and implementation of the new Charter of Investment would boost private sector investment to two thirds of overall investment by 2035 (from the current one third).
- Water policy:
  - Authorities agreed water scarcity is a key challenge and emphasized stepping up design of a large-scale action plan with large investment in infrastructures and measures to improve efficiency in water consumption.

### Staff appraisal: outlook, monetary policy, and financial stability
- Recent shocks and outlook:
  - Recent shocks (drought and spillovers from Russia’s invasion of Ukraine) slowed activity in 2022.
  - Negative terms-of-trade shock widened the trade balance; strong remittances and tourism recovery to pre-Covid levels acted as stabilizers; international reserve position remains comfortable.
  - Overall, Morocco’s external position in 2022 was broadly in line with the level implied by fundamentals and desirable policies.
  - Staff projects GDP growth to rebound next year to 3 percent and stabilize at around 3½ percent over the medium term, driven by initial positive effects of the structural reforms agenda.
  - Downside risks: further deterioration of the external environment and new droughts; upside potential from continued strong policies and faster reform implementation.
- Inflation and monetary policy:
  - Reducing inflation to around 2 percent by end of 2024 would warrant further monetary policy tightening.
  - BAM’s September interest rate hike has moved monetary policy to a less accommodative stance, but the real ex-ante policy rate remains negative.
  - Recent CPI prints indicate inflation pressures have become more broad-based and short-term inflation expectations have drifted up.
  - Securing the projected fall of inflation would require further policy rate increases to bring the real policy rate back to a neutral stance.
  - Once inflation falls and uncertainty dissipates, BAM should move forward the planned transition to an inflation-targeting framework regime, with a more flexible exchange rate.
- Financial sector:
  - Authorities have strengthened supervisory and regulatory frameworks to safeguard financial stability.
  - Progress should continue on development of a secondary market for NPLs and improvement of the bank resolution framework.
  - Staff welcomes completion of the Action Plan designed with FATF, which addresses or largely addresses outstanding issues.

*Source: IMF staff report chapter excerpt.*

### Box 3. Gender Inequality and Growth in Morocco (concluded)

### Box 3. Gender Inequality and Growth in Morocco (concluded)

### Key empirical findings on gender gaps and growth
- Dadam and others (2017) draw upon analysis by Cuberes and Teigner (2016) and show that in Morocco, gender gaps in labor force participation and entrepreneurship could reduce income per capita by as much as 46 percent.
- They find that closing overall gender gaps would help Morocco reduce its GDP per capita gap with benchmark countries in other regions by up to 1 percentage point.

### Policy targets and projected economic impact
- Morocco’s New Model of Development Report aims at doubling the female employment rate to 40 percent by 2035.
- Achieving that target would generate additional annual GDP growth of between 0.2 and 2 percent.

### IMF staff commentary and reform priorities
- Staff commends the authorities’ strong commitment to implement a vast program of structural reforms (social protection reform, Unified Social Registry, new governance of health care supply, comprehensive education reform, reforms of SOEs, energy reform, and water policies).
- IMF staff emphasize that holistic reforms that encompass all hurdles faced by women are needed to significantly reduce gender inequality in the economy and bolster Morocco’s potential growth.

### Attribution and preparation
- Prepared by Lisa Kolovich and Anta Ndoye.
- References cited in the box: High Commission for Planning, the United Nations Development System, and the World Bank, 2020; Dadam, Kolovich, and Ndoye, 2017; Cuberes and Teigner, 2016.

*Box 3. Gender Inequality and Growth in Morocco (concluded).*

### Annex I. External Sector Assessment Report

### Annex I. External Sector Assessment Report

### Overall Assessment
- Morocco’s external position in 2022 is broadly in line with medium-term fundamentals and desirable policies.
- The projected widening of the CA deficit in 2022 mainly reflects the terms-of-trade shock resulting from Russia’s war in Ukraine, only partly offset by continued buoyancy in remittances and the recovery of tourism inflows to pre-pandemic levels.
- As the shock dissipates and structural reforms and fiscal consolidation continue, the CA deficit is projected to start falling in 2023 and to gradually converge to the estimated medium-term norm.
- This assessment is subject to exceptional uncertainty surrounding the evolution of Russia’s war in Ukraine, and its impacts on both Morocco and its trading partner countries.

### Foreign Assets and Liabilities: Position and Trajectory
- Background:
  - Morocco’s Net International Investment Position (NIIP) has remained relatively stable at about -61 percent of GDP over 2014-2019.
  - During the pandemic years 2020-21, NIIP slightly increased to about -63 percent of GDP.
  - Staff projects NIIP to improve to about -60 percent of GDP in 2022, mainly on the back of lower external liabilities.
  - In staff baseline, Morocco’s NIIP is projected to worsen only slightly to around -63 percent of GDP through the medium term, reflecting the gradual narrowing of current account deficits.
- Assessment:
  - Morocco’s NIIP financing vulnerabilities appear moderate, as foreign direct investment accounts for a large share of the position.
  - Over the medium term, Morocco should be able to sustain its net debtor position as the CA deficit will converge towards its estimated norm amidst implementation of structural reforms (that should increase Morocco’s attractiveness for FDI) and fiscal consolidation (that should reduce the dependence on external debt).
- Key statistics (as presented):
  - NIIP  Gross Assets Res. Assets Gross Liabilities Debt Liabilities 
  - 2022 (% GDP) -60.035.0 23.0 95.0 36.1

### Current Account
- Background:
  - In the wake of the Covid-19 pandemic, the CA deficit shrank to 1.2 percent of GDP in 2020, on account of a sharp fall in imports that more than offset lower exports (and the collapse of tourism revenues), and resilient remittances.
  - The CA deficit increased to 2.3 percent of GDP in 2021, as activity and imports recovered.
  - In 2022, the CA deficit is expected to deteriorate to 4.3 percent of GDP on the back of higher energy and food prices, and to gradually return to about 3.0 percent of GDP over the medium term, as tourism revenues improve, remittances remain resilient, and structural reforms boost private sector competitiveness and savings (with fiscal consolidation also sustaining national savings).
- Assessment:
  - In 2022, the EBA model estimates a cyclically adjusted CA deficit of 2.9 percent of GDP compared with a CA norm of -3.0 percent of GDP, suggesting a relatively small CA gap, of 0.1 percent of GDP.
- Presented decompositions and figures:
  - Actual CA Cyclical Contributions Cyclically adjusted CA Cyclically Adjusted CA Norm Total Gap 
  - 2022 (% of GDP) -4.3-1.4-2.9-3.00.1

### Real Exchange Rate
- Background:
  - The REER has been on a modest appreciating trend since 2012 (at the end of 2021 was about 6 percent stronger than in mid-2012), reflecting the nominal appreciation of the dirham (pegged to a basket including the Euro and US Dollar).
  - As of October 2022, the REER has depreciated by about 3½ percent, reflecting a nominal effective depreciation of the dirham and a narrower inflation differential with main trading partners.
- Assessment:
  - The estimate of the CA gap of 0.1 percent of GDP implies a small REER gap, of –0.3 percent (applying an estimated elasticity of 0.37) in 2022.

### Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - Morocco’s CA deficit tends to be financed mainly by net FDI inflows and external borrowing.
  - In 2020, Morocco benefited from a significant increase in external borrowing from both international markets and IFI and bilateral lenders, as well as positive financing from net FDI flows.
  - In 2021, larger net FDI flows compensated the decline in IFI and bilateral flows, helping preserve the reserve position.
  - In the first half of 2022, net FDI and trade credit have been the main source of external financing.
- Assessment:
  - In the medium term, progress in structural reforms—particularly those aimed at developing the private sector, accelerating the transition to renewable energy, and increasing water resources—are expected to continue to support FDI inflows and external borrowing.
  - Risks of capital flow reversal are limited by remaining capital account controls on residents and the structure of external debt (85 percent of which with long maturity).

### FX Intervention and Reserves Level
- Background:
  - Morocco’s exchange rate is pegged to a basket including the Euro and the US Dollar, with weights of 60 and 40 percent, respectively.
  - The currency can fluctuate within a band that was widened to ±5 percent at the onset of the pandemic.
  - FX reserves increased by about US$10 billion in 2020-21 relative to before the pandemic, reflecting:
    - i) the purchase of US$ 3 billion under the PLL arrangement in April 2020 (about US$ 900 million were reimbursed in January 2021),
    - ii) the issuance of US$ denominated bonds in December 2020 (by about US$3 billion);
    - iii) the 2021 SDR allocation of about US$1.2 billion; and
    - iv) BAM purchase of FX in the market in the second half of 2021, when the dirham appreciated to the lower end of the band (by about US$1 billion).
  - So far in 2022, the strong depreciation of the euro vs the dollar caused the level of reserves (60 percent of reserves are in euros) to fall by some US$5 billion since last December to around US$31 billion as of October.
- Assessment:
  - The level of reserves, projected at around 120 percent of the ARA metric (adjusted for capital controls) in 2022, is assessed to be adequate.
  - Staff expects FX reserves to remain at adequate levels also over the forecasting period, as the improvement in the current account deficit and external financing associated with the continuation of structural reforms offset the repayment of the PLL in 2024 and 2025.
  - Moving to an IT monetary policy regime, with more flexible ER, would reduce the need for reserve holdings, outside a budget that could fund FX interventions in case of excessive market volatility.

### Risk Assessment Matrix — Selected Global Risks, Likelihoods, Impacts, and Policy Responses
- Commodity price shocks
  - Relative Likelihood: High
  - Expected Impact: High
  - Summary: Continuing supply disruptions (e.g., due to conflicts and export restrictions) and negative demand shocks cause recurrent commodity price volatility and social and economic instability.
  - Expected domestic effects: Further increase in commodity prices could push headline inflation higher. Lower household purchasing power, supply disruptions, and higher borrowing costs could further drag down growth.
  - Policy Response:
    - Central bank may need to increase policy rates to keep inflation expectations from becoming unanchored and limit depreciation pressures.
    - Fiscal policy will need to protect the most vulnerable with well-targeted, temporary, and budget-neutral cash transfers, making full use of the Unified Social Registry.
- De-anchoring of inflation expectations and stagflation
  - Relative Likelihood: Medium
  - Expected Impact: Medium
  - Summary: Supply shocks to food and energy prices sharply increase headline inflation and pass through to core inflation, de-anchoring inflation expectations and triggering a wage-price spiral in tight labor markets. Central banks tighten monetary policy more than envisaged leading to weaker global demand, currency depreciations in EMDEs, and sovereign defaults; together, this could lead to the onset of stagflation.
  - Expected domestic effects: A tightening of global financial conditions, on the back of a faster increase in US interest rates, would negatively affect Morocco’s external borrowing costs and exchange rate, but its impact would be cushioned by the current exchange rate arrangement. The peg associated with capital controls on residents’ investment abroad are expected to limit large exchange rate depreciation risk and to prevent capital flight. The impact on government funding should also be contained, as the share of public debt denominated in FX is relatively low (about 25 percent).
  - Policy Response:
    - Monetary policy will need to be tightened more aggressively to anchor inflation expectations and limit the exchange rate depreciation.
    - Fiscal policy should make full use of the limited space available, by i) letting automatic stabilizers work from the tax revenue side; ii) support those affected by inflationary pressures with targeted cash transfers using the Unified Social Registry; iii) reallocate resources within the Budget so as to prioritize growth friendly spending, like public investment projects already started or in the pipeline.
- Abrupt global slowdown or recession
  - Relative Likelihood: High
  - Expected Impact: High
  - Summary: Global and idiosyncratic risk factors combine to cause a synchronized sharp growth slowdown, with outright recessions in some countries, spillovers through trade and financial channels, and downward pressures on some commodity prices.
  - Regional example: Europe: The fallout from the war in Ukraine is exacerbated by a gas shutoff by Russia, resulting in acute gas shortages and further supply disruptions, which triggers an EU recession.
  - Expected domestic effects: Morocco is highly dependent on trade, remittances, tourism, and financial linkages (including FDIs) with the euro area. Hence, a significant slowdown/recession in Europe will dampen economic activity in Morocco. A decline in energy commodity prices will ease pressure on the external accounts and inflation.
  - Policy Response:
    - Fiscal policy should implement growth-friendly stimulus measures and targeted support to the sectors and segments of the population that are most affected. Financing could come from voluntary contributions as in the case of the Covid 19 fund, further mobilization of the central government real asset portfolio, and privatization.
    - Central bank should ease the monetary policy stance and provide necessary support to credit and liquidity.
    - Implement structural reforms to mitigate scarring from the pandemic and the war and bolster potential growth.
- Deepening geo-economic fragmentation and geopolitical tensions
  - Relative Likelihood: High
  - Expected Impact: High
  - Summary: Broadening of conflicts and reduced international cooperation accelerate deglobalization, resulting in a reconfiguration of trade, supply disruptions, technological and payments systems fragmentation, rising input costs, financial instability, a fracturing of international monetary and financial system, and lower potential growth.
  - Expected domestic effects: Morocco is a very open economy, highly dependent on trade (including that associated with key global value chains, like the automotive industry), remittances, tourism, and energy imports. Hence any disruption on each of these areas is bound to deeply affect economic activity.
  - Policy Response:
    - Maintain Morocco’s involvement in key global value chains by working with key trading partners to avoid measures that distort trade flows and hinders FDIs.
    - Implement structural reforms to support international competitiveness and productivity.
- A drought that reduces agricultural production
  - Relative Likelihood: High
  - Expected Impact: High
  - Summary: The frequency of droughts has increased recently, with Morocco experiencing 3 dry rain seasons in three of the last 5 years.
  - Expected domestic effects: Morocco is highly dependent on the agricultural sector. Even if it represents about 10 percent of value added and a quarter of goods exports, about one third of Moroccan workforce is active in this sector.
  - Policy Response:
    - Morocco should replicate the measures that were adopted recently to cope with the effects of the drought, including subsidized credit to farmers and help in repaying debt.

*Annex I. External Sector Assessment Report — extracted from the provided IMF content unit.*

### Annex III. Public Debt Sustainability Analysis

### Annex III. Public Debt Sustainability Analysis

### Debt coverage and definition
- This DSA covers central government debt (debt of the Treasury, both domestic and external).
- Under a general government perimeter (Treasury, extrabudgetary central government, local entities, pension funds, social welfare organizations), consolidation would reduce the debt-to-GDP ratio by about 6½ percent of GDP in 2021 (to about 62 percent).
- Authorities have started to produce general government data, with technical assistance from the Fund.

### Background (historical outcomes)
- Central government debt ratio:
  - 2020: 72.2 percent of GDP
  - 2021: 68.9 percent of GDP
- Drivers of 2021 decline:
  - Real GDP growth rebound: 7.9 percent in 2021 (vs. -7.2 percent in 2020)
  - Reduction in primary deficit by 0.8 percentage points of GDP
- Gross financing needs for central government:
  - 2021: 11.8 percent of GDP (4.7 percentage points of GDP lower than in 2020)
- 2021 levels of debt and gross financing needs were below empirically determined high-risk benchmarks for emerging market economies (70 and 15 percent of GDP, respectively).

### Baseline projections (staff baseline)
- Central government debt-to-GDP is expected to remain below 70 percent in the medium term.
- Projection path:
  - Debt relatively stable over 2022-2025, modest decline thereafter with ongoing fiscal consolidation.
- General government public debt:
  - Hover around 63 percent of GDP until 2025
  - Fall to 61.0 percent in 2027
- Gross financing needs (projections):
  - 2022: about 14 percent of GDP
  - 2023: 16.6 percent of GDP
  - 2027: 11.3 percent of GDP
- Projected effective interest rate on debt revised up relative to 2021 AIV report because of recent domestic and international rate increases.
- Mitigating factors for debt cost:
  - Weighted average maturity of about 6 years
  - Active debt management (swapping old debt for longer maturities and lower rates)
  - Significant share of external borrowing on a concessional basis
  - Privatization receipts projected at about 1½ percent of GDP in 2022-25

### Debt profile and sustainability assessment
- Key debt profile features limiting vulnerabilities:
  - Weighted average maturity: about 6 years
  - Share denominated in foreign exchange: about 25 percent
  - Investor base: large base of domestic institutional 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.
- Central government debt remains sustainable under the baseline.
- Short-term debt share: about 3 percent of GDP at end-2021.
- Stress scenario sensitivity:
  - Under the real GDP growth shock considered, central government debt would increase to about 80 percent of GDP before resuming a downward path in the medium term.
- Contingent liabilities and other vulnerabilities:
  - Guarantees to commercial SOEs external debt: about 8 percent of GDP
  - Subsidized credit schemes under the Covid-19 crisis: about 5 percent of GDP (transmission mitigated by transfer to a new financial institution under BAM supervision)
  - Unfunded public pension schemes represent contingent liabilities (partly recognized as Treasury bonds held by the social security administration by about 10 percentage points of GDP)
- More than half of the indicators exceed the lower early-warning benchmarks but not the upper risk assessment benchmarks; the exchange rate shock and the change in short-term debt do not exceed the lower benchmark.

### Alternative scenarios and stress tests
- Scenarios reported include: Baseline, Historical, Constant Primary Balance, Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, and Adverse Scenario.
- Selected underlying assumptions (examples from figures):
  - Baseline real GDP growth: 2022: 1.2, 2023: 3.0, 2024: 3.1, 2025: 3.1, 2026: 3.2, 2027: 3.4 (in percent)
  - Baseline inflation (GDP deflator): 2022: 6.6, 2023: 4.1, 2024: 2.5, 2025: 2.4, 2026: 2.0, 2027: 2.0 (in percent)
  - Baseline primary balance: 2022: -3.2, 2023: -2.6, 2024: -2.0, 2025: -1.5, 2026: -0.9, 2027: -0.6 (in percent of GDP)
  - Baseline effective interest rate: 2022: 3.2, 2023: 3.6, 2024: 3.6, 2025: 3.5, 2026: 3.6, 2027: 3.6 (in percent)
- Stress-test outcomes (selected):
  - Under the Adverse Scenario, gross nominal public debt trajectory in percent of GDP increases across 2022–2027 (charts show escalation toward higher percentiles; specific percentiles presented as 10th-25th, 25th-75th, 75th-90th).
  - Public gross financing needs under shocks increase notably in near term (figures show peaks in 2023 under several shocks).

### Realism and forecast track record
- Forecast errors (Morocco median forecast error, 2013-2021):
  - Real GDP growth median forecast error: -0.86 (has a percentile rank of 32%)
  - Primary balance median forecast error: -0.13 (has a percentile rank of 60%)
  - Inflation (deflator) median forecast error: 1.58 (has a percentile rank of 89%)
- Assessment of projected fiscal adjustment realism:
  - 3-year CAPB adjustment greater than 3 percent of GDP places Morocco in roughly the top quartile (percentile rank of 31% in distribution shown)
  - 3-year average level of CAPB greater than 3.5 percent of GDP has a percentile rank of 77%

### Key statistics and indicators (selected from DSA table)
- Sovereign spreads and market indicators:
  - EMBI (bp): 259 (as presented in figure table)
  - CDS (bp): 278 (as presented in figure table)
- Historical and projected public debt and financing (select years, in percent of GDP):
  - Nominal gross public debt: 2020: 57.5; 2021: 72.2; 2022: 68.9; 2023: 69.2; 2024: 69.0; 2025: 69.3; 2026: 69.0; 2027: 68.5; (table continues)
  - Public gross financing needs: 2020: 12.9; 2021: 16.5; 2022: 11.8; 2023: 13.9; 2024: 16.6; 2025: 14.1; 2026: 13.5; 2027: 11.9; 2027 projection: 11.3 (percent of GDP)
  - Real GDP growth (in percent): 2020: 3.5; 2021: -7.2; 2022: 7.9; 2023: 1.2; 2024: 3.0; 2025: 3.1; 2026: 3.1; 2027: 3.2; 2027: 3.4 (table entries)
  - Inflation (GDP deflator, in percent): 2020: 0.8; 2021: 0.1; 2022: 3.2; 2023: 6.6; 2024: 4.1; 2025: 2.5; 2026: 2.4; 2027: 2.0; 2027: 2.0 (table entries)
  - Nominal GDP growth (in percent): 2020: 4.3; 2021: -7.1; 2022: 11.4; 2023: 7.8; 2024: 7.2; 2025: 5.7; 2026: 5.6; 2027: 5.3; 2027: 5.5 (table entries)
  - Effective interest rate (in percent): 2020: 4.4; 2021: 3.9; 2022: 3.3; 2023: 3.2; 2024: 3.6; 2025: 3.6; 2026: 3.5; 2027: 3.6; 2027: 3.6 (table entries)
- Identified debt-creating flows (selected, in percent of GDP, cumulative 2020-2027 in table):
  - Primary deficit (annual figures shown in table): 2020: 2.3; 2021: 4.6; 2022: 3.8; 2023: 3.2; 2024: 2.6; 2025: 2.0; 2026: 1.5; 2027: 0.9; cumulative: 10.7
  - Primary (noninterest) revenue and grants: 2020: 24.8; 2021: 27.0; 2022: 25.1; 2023: 26.9; 2024: 26.9; 2025: 26.8; 2026: 26.5; 2027: 26.5; cumulative: 160.1
  - Primary (noninterest) expenditure: 2020: 27.1; 2021: 31.6; 2022: 28.9; 2023: 30.1; 2024: 29.5; 2025: 28.8; 2026: 28.0; 2027: 27.5; cumulative: 170.9
  - Automatic debt dynamics contribution (annual): 2020: 0.3; 2021: 6.0; 2022: -4.5; 2023: -3.0; 2024: -2.3; 2025: -1.4; 2026: -1.4; 2027: -1.1; cumulative: -10.4
  - CG: Privatization Proceeds (negative): cumulative projected -1.5 (annual -0.3 in several years)
  - Contingent liabilities (table line): 0.0 across reported years

### Policy implications and recommendations (implied by analysis)
- Accelerate fiscal consolidation to reduce the debt-to-GDP ratio below the empirical high-risk level of 70 percent of GDP over the medium term.
- Continue active debt management to preserve long maturities and favorable borrowing terms.
- Use privatization receipts (projected at about 1½ percent of GDP in 2022-25) to help reduce financing needs.
- Address contingent liabilities (unfunded pensions, guarantees to SOEs, credit schemes) and strengthen institutional arrangements (e.g., transfer of first-loss absorption to a supervised financial institution) to mitigate fiscal risks.

*Source: IMF staff.*

### 1. This statement provides additional information that has become available since the Staf f

### 1marea2023001 - 1. This statement provides additional information that has become available since the Staff

### Additional information and general assessment
- This statement provides additional information that has become available since the Staff Report (SM/22/279) was circulated to the Executive Board on December 19, 2022.
- The information does not alter the thrust of the staff appraisal.

### Real activity
- National accounts data for Q3 2022 were released.
- Real GDP growth was 1.6 percent (y/y) in Q3, slightly below staff estimate (of 1.8 percent).
- Leaving everything else unchanged, the Q3 outturn implies an average GDP growth for 2022 of 1.1 percent, compared to 1.2 percent projected in the staff report.

### Inflation developments
- CPI headline inflation slightly accelerated to 8.3 percent in November (from 8.1 in October), mainly driven by food and transportation prices.
- Core inflation also accelerated to 7.6 percent in November (from 7.1 percent the previous month).
- These outcomes are in line with staff’s projected headline inflation of 6.5 percent on average for 2022.

### External sector and international reserves
- The current account deficit widened to about 3.6 percent of GDP in Q3 2022, from about 1.9 percent in the same period in 2021, in line with staff projections.
- Monthly data for November showed an acceleration of tourism receipts and remittances while the trade deficit was about the same.
- Even if they were used to repay the Eurobond that matured in mid-December (for about US$ 1 billion), international reserves expressed in US dollars have closed 2022 at 32.2 billion, above the staff estimate of 31.8 billion.
- The reserve outturn mainly reflects valuation changes, given the strong appreciation of the euro against the US dollar over the last quarter of 2022 and the fact that about 60 percent of Morocco’s international reserves are in euros.

### Monetary policy and inflation expectations
- On December 20, 2022, Bank Al-Maghrib (BAM) raised its policy rate by 50bps to 2.5 percent, after the 50 bps increase in September.
- The Bank cited the need to tighten monetary policy conditions to prevent inflation expectations from becoming de-anchored and preserve price stability.
- 2-year-ahead and 3-year-ahead inflation expectations rose somewhat relative to last September, to 4.8 percent and 2.6 percent, respectively (from 3.7 and 2.2 percent).
- BAM revised upward its inflation forecasts for 2022 and 2023 to 6.6 percent (vs 6.3 before) and 3.9 percent (vs 2.4 before), respectively.
- At 4.2 percent, the average inflation projected for 2024 by BAM is higher than staff’s (2.5 percent) due to BAM’s greater estimated inflationary impact of the removal of gas, wheat, and sugar subsides.
- Staff will discuss with BAM the methodology it used to assess the impact of the subsidy reform on CPI inflation, and stand ready to change the forecast for 2024 as needed.

### Fiscal and Treasury developments
- Morocco’s Minister of Finance and BAM signed a memorandum of understanding in November that allowed the Treasury to use the remaining part of the funds withdrawn in 2020 under the Precautionary and Liquidity Line (PLL) arrangement to fund its domestic currency financing needs.
- The amount corresponds to MAD 21.1 billion (or about US 2 billion at current rates).

*Source: 1marea2023001 - 1. This statement provides additional information that has become available since the Staff (PDF).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1marea2023001.pdf_