## Morocco: Executive Summary and Staff Report Excerpts (FCL request, March 16, 2023) ## Source details **Canonical URL:** [Morocco: Executive Summary and Staff Report Excerpts (FCL request, March 16, 2023)](https://www.imf.org/-/media/files/publications/cr/2023/english/1marea2023002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1marea2023002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1marea2023002.pdf.json) --- ### Context and recent developments - Post‑pandemic rebound in 2021 followed by a slowdown in 2022 due to another severe drought and spillovers from Russia’s invasion of Ukraine. - Authorities implemented strong fiscal, monetary, and financial policies to preserve macroeconomic stability and protect vulnerable groups. - Structural reform program accelerated; institutional policy frameworks strengthened. - Downside risks remain elevated, notably external environment and climate change (recurrent droughts). - Selected recent indicators and developments: - Real GDP growth: 1.1 percent in 2022. - Headline inflation: 8.9 percent (y/y) in January 2023; core inflation 8.2 percent. - Bank Al‑Maghrib (BAM) policy rate: increased by 50 bps twice (September and December 2022); further increase of 50 bps on March 21, 2023 to 3.0 percent (total increase of 150 bps since September 2022). - BAM purchased US$ 1.6 billion (about 1½ percent of GDP) of Treasury bonds in the secondary market. - Exchange rate: dirham depreciated close to the ±5 percent band upper limit in late 2022; appreciated since early 2023 returning close to the middle of the band. - Fiscal outcome: overall deficit declined from 5.9 percent of GDP in 2021 to 5.1 percent in 2022 (2022 Budget projection: 5.7 percent). - Revenue: stronger-than-expected tax revenues (corporate income tax, VAT, customs); higher dividends from SOEs. - Spending: higher current spending increased by 2.9 percent of GDP, including gas and wheat subsidies (by 1.4 percent of GDP), cash transfers to transportation sectors (0.4 percent of GDP), and transfers to the national power utility (0.3 percent of GDP). - External sector: trade deficit in goods about 20 percent of GDP in 2022 (from around 14 percent in 2021); tourism receipts returned to 2019 levels; net export of services up 3½ pps of GDP relative to 2021. - Reserves: international reserves declined in US$ terms in 2022 partly due to euro depreciation (60 percent of reserves held in euros); reserves increased in recent months and were at 124 percent of adjusted ARA metric in February 2023. - Banking sector: 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 (versus 2.8 before the crisis). *Key contributors: Approved By Taline Koranchelian (MCD) and Natalia Tamirisa (SPR). Document date: March 16, 2023.* ### Flexible Credit Line (FCL) request, qualification, and staff support - Authorities requested a two‑year FCL arrangement of SDR 3.7262 billion (about 417 percent of quota, or US$ 5 billion) to be used precautionarily against plausible tail risks. - Staff assessment: Morocco meets the FCL qualification criteria and staff supports the request. - Authorities committed to an exit strategy at the end of the period, subject to evolution of risks. - Informal Executive Board consultation held on March 6, 2023. - Fund liquidity and safeguards: - Proposed commitment would have a manageable impact on the Fund’s liquidity. - Forward Commitment Capacity (FCC) would decline by 2.3 percent to SDR 156,829 million (from 160,555 SDR millions). - Safeguards procedures will be conducted; BAM previously subject to safeguards assessment in 2018 PLL; transition to IFRS in progress. ### Staff assessment of macroeconomic outlook and risks - Baseline projections: - GDP growth: 3 percent in 2023; medium‑term growth stabilizing around 3½ percent. - Average headline inflation: about 4½ percent in 2023 and 2¾ percent by 2024 (peaked at 6.6 percent in 2022 per one estimate; alternative series: CPI end‑period 2022 8.3 percent). - Current account deficit: around 4 percent of GDP in 2022, narrowing toward a norm of around 3 percent in the medium term. - Central government debt-to‑GDP: expected to stabilize at around 68 percent. - International reserves (gross, US$ billions): 2022: 31.8; 2023: 32.7; 2024: 33.0; 2025: 35.3. - Key risk factors: - External: worsening geopolitical tensions, greater fallout from Russia’s war in Ukraine, commodity price volatility, tighter external financial conditions. - Domestic: climate change and recurrent droughts given large agricultural employment share. - External Economic Stress Index (EESI): in an adverse scenario external pressures would exceed levels around the Euro area debt crisis (2012). ### Policy assessments and recommendations - Monetary policy: - Tackling high inflation will require higher interest rates; staff view that returning inflation to around 2½ percent by end‑2024 will require further policy rate increases to bring real ex‑ante policy rate closer to neutral (estimated between 1 and 2 percent). - Protect FX reserves given pegged exchange rate with a horizontal band and exceptional uncertainty. - Once inflation and uncertainty are lower, proceed with final stages of transition to an inflation‑targeting framework and allow the dirham to float freely. - Fiscal policy: - Continue fiscal consolidation to rebuild fiscal space used during the pandemic. - 2023 Budget forecasts gradual deficit decline over next three years with overall deficit returning to pre‑pandemic level in 2025. - Revenue measures to raise resources: i) reform of the VAT regime, ii) streamlining tax expenditures, iii) gradual introduction of a carbon tax, iv) expand tax base and improve tax administration. - Spending measures: broad‑based civil service reform to reduce wage bill; SOE reform to reduce capital and current transfers. - Staff estimates these reforms could generate at least 2 percent of GDP per year, allowing faster debt reduction to between 60 and 65 percent by 2027. - Financial sector: - Rebuild macroprudential buffers, including a positive neutral countercyclical capital buffer rate. - Support development of a secondary market for NPLs by defining legal and tax framework. - Improve bank resolution framework to provide BAM additional tools for failures or insolvency. - Strengthen regulation and supervision to address climate‑related risks. ### Adverse (tail‑risk) scenario supporting FCL access - Staff illustrative adverse scenario assumptions: - Weaker demand in advanced economies, higher oil and food prices, tighter financing conditions, and a new drought in 2024 (boosting food imports). - Projected macro impacts (adverse scenario, relative to baseline): - GDP growth: about ½ percent in 2023 and 2024 (weak growth). - Current account deficit: widen from about 4¼ percent of GDP in 2022 to about 8½ percent of GDP in 2023 and 2024. - Goods export volumes: contract by about 10 percent in both 2023 and 2024 relative to baseline. - Overall value of goods exports: fall by around US$ 7 billion cumulatively over 2023–2024. - Exports of services: fall by about 15 percent in both years; tourism receipts remain well above pandemic trough. - Remittances: decline by 10 percent in both years relative to baseline but remain above pre‑pandemic levels. - Import volumes: fall by about 7 percent in both years relative to baseline; terms‑of‑trade shock leaves overall value of goods imports broadly unchanged relative to baseline. - Net direct investments (FDI): fall by around 35 percent in 2023 and 30 percent in 2024 relative to baseline; average FDI: 0.8 percent of GDP in 2023‑2024 (compared to 1.2 percent on average over 2017‑2021). - Public sector rollovers and private flows: public sector rollover about 150 percent of bonds maturing over 2023‑2024 (vs 280 percent baseline); private portfolio flows dry out; public sector gross external loans rollover about 90 percent (vs 130 percent baseline). - Reserve use and financing gap: - Drawdown of international reserves of US$ 5.9 billion in 2023 and US$ 6.6 billion in 2024. - Reserves decline would bring international reserves just above 100 percent of the adjusted ARA metric (slightly below 80 percent of unadjusted ARA). - Despite decumulation, a financing gap of US$ 5 billion would remain—consistent with requested FCL access. - Illustration of access adequacy: - Access illustrated: SDR 3.7262 billion (416.6 percent of quota, or US$ 5 billion) would provide sufficient insurance against plausible tail risks. - Selected scenario numerical highlights (preserved): - Financing Gap (USD Billion): 3.0 5.0 5.0 5.0 - SDR (0.745208 USD/SDR, February 08, 2023): 3.73 3.7 - Percent of quota: 416.6 416.6 - Gross international reserves: 26.4 36.0 35.6 31.8 32.7 25.1 33.0 25.5 - Percentage of adjusted ARA metric: 113 143 133 122 123 100 118 100 - Percentage of unadjusted ARA metric: 87 109 101 93 95 78 91 77 - Months of imports of GNFS: 6.9 7.2 5.8 5.5 5.4 4.5 5.3 4.7 ### Staff appraisal of qualification, access appropriateness, and Fund risks - Qualification and support: - Morocco meets all FCL qualification criteria: sustainable external position, sovereign market access track record, reserve adequacy, public finances and debt sustainability, financial system soundness, data transparency, and institutional framework. - Morocco exited the FATF grey list on February 24, 2023 after AML/CFT law amendment and Action Plan completion. - Appropriateness of access: - Staff considers proposed access of about 417 percent of quota appropriate given elevated downside external risks intensified over the past three years. - An FCL arrangement would enhance external buffers and provide temporary insurance against plausible tail risks. - Fund credit exposure and risks: - In a full‑draw adverse scenario, Fund credit to Morocco would represent 3.8 percent of total GRA credit outstanding (as of 02/20/2023) and 16.8 percent of current precautionary balances. - Peak outstanding GRA credit at peak (2023) would amount to 5 percent of GDP, 28.1 percent of gross international reserves, and 11.4 percent of total external debt. - Staff assesses the proposed FCL arrangement carries moderate risks to the Fund; impact on FCC is manageable (FCC decline of 2.3 percent). - Projected GRA credit repayments and charges show a peak in debt service to the Fund in 2027 at about SDR 2 billion (about 1.5 percent of GDP, 4.3 percent of exports of goods and services), with rapid decline thereafter. ### Public debt, debt sustainability, and policy priorities - Public debt and financing: - Central government debt: about 69 percent of GDP in 2022 (central government debt projection around 68‑69 percent in 2022‑2024 then stabilizing and declining gradually). - General government debt‑to‑GDP: about 62½ percent in 2022 (lower due to netting out Treasury bonds held by public pension funds, about 15 percent of GDP). - External debt: rose to 54.1 percent of GDP in 2020, fell to 45.4 percent in 2021, expected to stabilize at about 43 percent going forward. - Debt sustainability assessment: - Public debt assessed sustainable with high probability; overall sovereign stress risk assessed as moderate. - Mitigating factors: relatively small share of foreign currency debt (about a quarter), large domestic institutional investor base (national savings averaged about 27½ percent of GDP over past 5 years), long average maturity about 6.5 years. - Contingent liabilities and vulnerabilities: guarantees to commercial SOEs’ external debt about 8 percent of GDP; subsidized credit schemes under Covid‑19 about 5 percent of GDP. - Policy recommendations to strengthen sustainability: - Continue and accelerate fiscal consolidation to reduce debt‑to‑GDP below 70 percent over the medium term. - Reinforce the Medium‑Term Fiscal Framework (MTFF) and implement a debt‑anchored fiscal rule. - Advance pension reform and manage contingent liabilities (subnational debt, SOE guarantees). - Maintain active debt management and use projected privatization receipts of about 1½ percent of GDP in 2022‑25 to reduce financing needs. - Implement structural reforms to reduce climate‑related vulnerabilities (water and energy sector reforms). ### Selected medium‑term numeric projections and indicators (preserved) - Real GDP: 2022 1.1; 2023 3.0; 2024 3.1; 2025 3.1; 2026 3.2; 2027 3.4; 2028 3.4. - Real agriculture GDP: 2022 -14.0; 2023 10.1; 2024 3.0. - Consumer prices (end of period): 2022 8.3; 2023 3.7; 2024 2.5; 2025 2.4; 2026 2.0; 2027 2.0; 2028 2.0. - Unemployment rate (end of period): 2022 12.9; 2023 11.0; 2024 10.5; 2025 10.0. - Budget balance (Percent of GDP): 2022 -5.1; 2023 -4.9; 2024 -4.4; 2025 -3.8. - Central government debt (Percent of GDP): 2022 68.8; 2023 68.3; 2024 68.4; 2025 68.1. - Gross reserves (US$ billions): 2022 31.8; 2023 32.7; 2024 33.0; 2025 35.3. - In percent of adjusted ARA metric: 2022 121; 2023 123; 2024 118; 2025 119. ### Ongoing and planned reforms (selected) - Social protection: extend health insurance to about 11 million uninsured starting 2023; replace energy and food subsidies with targeted family allowances starting 2024; relax unemployment insurance access from 2025; pension coverage expansion by 2025. - SOE reform: National Agency for valuation and strategic management of SOEs operationalization expected by 2025. - Tax reform: framework law approved July 2021; 2023 corporate tax overhaul phased over 4 years to a standard rate of 20 percent; introduction of a single tax for low‑income self‑employed (2022); PIT withholding tax for certain self‑employed transactions (2023). - Business environment and investment: Mohamed VI Fund (2021) to catalyze private investment; new Charter of Investment to improve environment for very small, small, and medium enterprises. - Education reform roadmap (2022): targets include 100 percent preschool enrollment, reduce drop‑out in compulsory education by one third, double basic skills outcomes at the end of primary school. - Climate and resource adaptation: renewable energy measures (2022 decree on direct RE sales, draft law to allow injection of surplus into network, ANRE transmission access regulations); National Water Plan (2020) to close demand‑supply gap by 2050 via desalination, wastewater treatment, dams, pipelines, and new tariffication. *Source: International Monetary Fund — Morocco: Executive Summary and staff report excerpts (March 16, 2023; staff appraisal and related annexes).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - After a robust post-pandemic recovery in 2021, another severe drought and spillovers from Russia’s invasion of Ukraine slowed growth and raised inflation in 2022. - The authorities’ policy response has been very strong, with fiscal, monetary, and financial policies appropriately calibrated to preserve macroeconomic stability while protecting the most vulnerable from the impact of the shocks. - The authorities have accelerated the implementation of a vast program of structural reforms to make growth stronger, more resilient, and more inclusive, and have made progress in further strengthening their institutional policy frameworks. - Downside risks to the economic outlook remain elevated and stem primarily from the external environment and the impact of climate change. Recurrent droughts are a key domestic vulnerability given the large share of the labor force employed in agriculture. - Despite the authorities’ sustained track record of very strong policies, materialization of these risks may slow implementation of structural reforms and hinder the planned transition to a new model of development. ### Flexible Credit Line (FCL) request and qualification - The authorities requested a two-year FCL arrangement in the amount of SDR 3.7262 billion ( about 417 percent of quota, or US$5 billion) that will be used as precautionary to address plausible tail risks. - In staff’s assessment, Morocco meets the qualification criteria for access under the FCL arrangement, and staff supports the authorities’ request. - The authorities are committed to an exit strategy at the end of the period, the evolution of risks permitting. ### Fund liquidity - The proposed commitment would have a manageable impact on the Fund’s liquidity position. ### Process and dates - An informal meeting to consult with the Executive Board on a possible FCL arrangement for Morocco was held on March 6 , 2023. - Document date: March 16, 2023. ### Key contributors - Approved By: Taline Koranchelian (MCD) and Natalia Tamirisa (SPR). - Report prepared by a team led by Roberto Cardarelli (head), with Hippolyte Balima, Olivier Bizimana and Nordine Abidi (all MCD), David Bartolini (FAD) and Hector Perez‑Saiz (SPR), with support from Ananta Dua, Abigail Korman and Tatiana Pecherkina (all MCD). ### Recent developments (selected findings) - Real GDP growth: After the strong rebound in 2021, real GDP increased at a mere 1.1 perc ent in 2022. - Inflation: Headline inflation accelerated to 8.9 percent (y/y) in January 2023, with core inflation at 8.2 percent; driven by a strong increase in food prices. - Monetary policy response: Bank Al‑Maghrib increased its policy rate by 50 bps twice, in September and December 2022. BAM purchased US$ 1.6 billion (about 1½ percent of GDP) of Treasury bonds in the secondary market. - Exchange rate: After depreciating close to the upper limit (5 percent) of the fluctuation band in late 2022, since the beginning of 2023 the dirham has appreciated against both the dollar and the euro and returned to close to the middle of the band. - Fiscal outcome: The overall deficit declined from 5.9 percent of the GDP in 2021 to 5.1 percent in 2022, against the 5.7 percent projected in the 2022 Budget. - Revenue: Stronger-than-expected increase in tax revenues mainly from the corporate income tax, and VAT and customs revenues; non-tax revenues lifted by higher dividends from SOEs. - Spending: Higher current spending increased by 2.9 percent of GDP, including gas and wheat subsidies (by 1.4 percent of GDP), cash transfers to the transportation sectors (0.4 percent of GDP), and transfers to the national power utility (0.3 percent of GDP). - External sector: Trade deficit in goods increased to about 20 percent of GDP in 2022 (from around 14 percent in 2021) due to soaring import values, particularly energy and food; tourism receipts returned to 2019 levels; net export of services were up 3½ pps of GDP relative to 2021. - Reserves: International reserves expressed in US dollars declined somewhat in 2022 largely because of euro depreciation against the US dollar (60 percent of reserves held in euros). Reserves increased over recent months with the euro appreciation and remained at a comfortable level (124 percent of adjusted ARA metric in February 2023). - Banking sector: NPLs were stable at 8.5 percent of total loans in September 2022 with NPL coverage ratio around 67 percent as of mid‑2022. Tier 1 capital ratio around 11.8 percent. Large credit exposures at 2.5 times regulatory capital (versus 2.8 before the crisis). ### Policies — assessment and recommendations - Monetary policy - Tackling high inflation will require higher interest rates. Staff view that taking inflation back to around 2½ percent by end 2024 will require further increases in the policy rate, bringing the real ex‑ante policy rate (currently at negative values) closer to the neutral real interest rate (estimated at between 1 and 2 percent). - Protecting FX reserves should be a priority given the pegged exchange rate regime with a horizontal exchange rate band and exceptional uncertainty. - Once inflation and uncertainty are lower, BAM should move forward with the final stages of the transition to an inflation‑targeting framework and allow the dirham to float freely. - Fiscal policy - Continued fiscal consolidation is needed to rebuild the fiscal space utilized in response to the pandemic. - The 2023 Budget forecasts a gradual decline of the fiscal deficit over the next three years, with the overall deficit returning to pre pandemic level in 2025. - The central government debt‑to‑GDP ratio is expected to stabilize at around 68 percent; further changes in tax and spending systems are needed to ensure faster debt reduction. - Revenue measures that could generate additional resources include: i) the announced reform of the VAT regime, ii) streamlining tax expenditures, iii) a gradual introduction of a carbon tax, and iv) further measures to expand the tax base, improve tax administration, and reduce informality. - Spending measures include: broad‑based civil service reform to reduce the wage bill over the medium term and SOE reform to reduce capital and current transfers. - 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. - Financial sector - Continue strengthening resilience by: i) rebuilding macroprudential buffers, including implementing a positive neutral countercyclical capital buffer rate; ii) supporting development of a secondary market for NPLs by defining regulatory framework (legal and tax aspects); iii) improving the bank resolution framework to provide BAM with additional tools to deal with failures or insolvency of credit institutions; and iv) strengthening regulation and supervision to ensure banks adequately assess, measure, mitigate and control climate‑related risks. ### Outlook and risks - Growth and inflation projections - GDP growth is expected to accelerate to 3 percent in 2023, mainly driven by the rebound in agricultural output and positive spillovers. - Average headline inflation is projected to gradually decline to about 4½ percent in 2023 and 2¾ percent by 2024, after peaking at 6.6 percent in 2022. - Over the medium term, GDP growth is projected to stabilize at around 3½ percent, reflecting initial positive effects of structural reforms. - Current account and reserves - Current account deficit widened to around 4 percent of GDP in 2022 and should narrow towards its norm of around 3 percent in the medium term. - FX reserve coverage would slightly decline over the next few years (also on account of the repayment of the PLL) albeit remaining well above 100 percent of the adjusted ARA metric. - Risk factors - External: Worsening geopolitical tensions and greater economic fallout from Russia’s war in Ukraine could lower external demand (especially from the euro area), increase commodity price volatility, and tighten external financial conditions, raising inflation and reducing fiscal space. - Domestic: Climate change raises the risk of droughts, which would negatively impact growth and inflation. - The External Economic Stress Index (EESI) analysis indicates that in an adverse scenario external pressures would increase well above levels observed around the Euro area debt crisis (2012). - Adverse scenario implications - Lower growth and higher inflation could worsen inequalities and create social tensions. - Monetary policy would need to accelerate tightening at a time of scarce fiscal space, and some structural reforms may be delayed. *International Monetary Fund — Morocco: Executive Summary (March 16, 2023).* ### 14. Staff’s assessment is that Morocco meets all the qualification criteria for an FCL ### 14. Staff’s assessment is that Morocco meets all the qualification criteria for an FCL arrangement ### Sustainable external position and capital flows - The 2022 External Balance Assessment (EBA) concludes Morocco’s external position was broadly in line with fundamentals and desirable policies. - EBA model estimates negligible CA and REER gaps: 0.1 percent of GDP and 0.3 percent, respectively. - External debt remains relatively low, largely (85 percent) of long-term maturity, and is projected to stabilize at around 43 percent of GDP going forward. - Private capital flows constitute the largest share of Morocco’s capital account, averaging about 52 percent of total flows between 2019 and 2022. FDIs are among the largest component and are expected to pick up in the medium term. ### Track record of sovereign market access - Moroccan public sector tapped international markets in four of the last 5 years (2019-2023) for a cumulative amount of US$ 9 billion (more than 7 times Morocco’s quota). - On March 1, 2023, Morocco issued two USD denominated bonds, with 5- and 10-year maturity, each for US$ 1.25 billion, with favorable spreads. - Morocco did not lose market access at any point in the last 12 months. - Limited frequency of issuances attributed to low dependence on external financing and abundant domestic savings. ### Reserves and reserve adequacy - Accumulated about US$ 6.5 billion of reserves since end 2019. - As of end 2022, reserves were equivalent to about 25 percent of GDP and about 5.5 months of imports. - Reserves have averaged about 133 percent of the adjusted ARA metric over 2020-2022. - International reserves were 101 percent of unadjusted ARA on average over 2020-2022 and never fell below 80 percent of adjusted or unadjusted ARA in 2018-2022. ### Public finances and public debt sustainability - Central government debt projected at about 69 percent of GDP in 2022, compared to about 60 percent in 2019. - Public debt assessed to be sustainable with a high probability. - Mitigating factors for debt sustainability: - Relatively small share of foreign currency denominated debt (about a quarter). - Large base of domestic institutional investors: national savings averaged about 27½ percent of GDP over the past 5 years (compared to 19½ on average for other FCL countries). - More than three quarters of Moroccan debt is held by domestic banks, mutual funds, life insurance companies and pension funds. - Relatively long average maturity of the debt (about 6.5 years). - General government debt-to-GDP ratio about 62½ percent of GDP in 2022 (lower than central government debt due to netting out Treasury bonds held by public pension funds, about 15 percent of GDP). - Article IV Staff Report (2022) recommends accelerating reduction of debt toward pre-pandemic levels to rebuild fiscal space. ### Inflation and monetary policy outlook - Low and stable inflation over the last 15 years: annual inflation averaged about 1.5 percent and never exceeded 2 percent between 1996 and 2021. - Increased inflation in 2022 to about 6½ percent. - Staff projects average inflation will fall this year to about 4½ percent and return to levels near 2¾ percent by the end of 2024 (after incorporating the inflationary impact of the removal of subsidies on wheat, gas butane and sugar). - BAM committed to raise interest rates as necessary; progress toward an inflation-targeting regime and potential future free float of the dirham once inflation and uncertainty are lower. ### Financial system soundness and supervision - Banks have stable funding: demand deposits at 105.5 percent of loans in 2022. - Average capital adequacy: Tier 1 capital ratio of 11.8 percent in mid-2022. - Nonperforming loans (NPLs) about 8 percent of total loans in January 2023; provisioning levels 67.5 percent of NPLs. - Large bank exposures declined from 288 percent of Tier 1 capital in 2018 to 264.4 percent in September 2022. - Liquidity Coverage Ratio (LCR) rose from 135 percent at end-2018 to 163 percent in September 2022. - BAM conducts and publishes stress tests (latest published in July 2022) showing banking system resilience to severe macroeconomic shocks. - Expansion of Moroccan banks into Africa so far represents diversification and profit generation. - Progress on supervisory capacity: implementation of Basel III requirements, adoption of ICAAP, IRRBB directive, redesign of risk rating system toward a SREP-like approach. - After amendment of the AML/CFT Law in June 2021 and completion of an Action Plan with FATF, Morocco exited the FATF grey list on February 24, 2023. ### Data transparency - Morocco subscribes to the Special Data Dissemination Standard (SDDS). - Morocco exceeds SDDS publication timeliness requirement for employment and unemployment, the Consumer Price Index, and merchandise trade. ### Track record of implementing strong policies and institutional framework - Morocco meets the qualification criteria on almost all indicators in each of the last 5 years (2018-2022). - AML/CFT framework had strategic deficiencies during this period (reflected in 2021 FATF grey-listing) but shortcomings sufficiently mitigated by recent strengthening and FATF removal in February 2023. - Institutional improvements that strengthened resilience include: - Fiscal policy: Organic Budget Law (2015) strengthened oversight, requires medium-term (three-year) fiscal plans and publication of gender assessment annex. 2023 Budget included the authorities’ medium-term fiscal framework (MTFF). IMF TA in early February 2023 to discuss a new debt-anchored fiscal rule; authorities committed to bring a new fiscal rule into the Organic Budget Law in 2023 and improve the MTFF in the 2024 Budget exercise. - Monetary policy: New Central Bank charter (2019) enhances governance and operational independence; BAM’s Board has decision-making powers and price stability is primary objective; progress toward inflation targeting and wider exchange rate band (±5 percent in March 2020). - Financial policy: Adoption of the Banking Law, creation of new supervisory authorities for insurance, pensions, and capital markets, and enhancement of crisis management and resolution frameworks; strengthened stress-testing framework with MCM TA. - Governance: Third-party governance indicators generally comparable to other current FCL countries. Progress includes National Strategy Against Corruption (2015-2025), operationalization in 2022 of an Anti-Corruption Agency, Information Access Law (2019), and a unified internet portal for public administration services. - Remaining legal framework reform priorities: i) strengthening the penal procedural code, ii) resubmitting a bill on illicit enrichment, iii) reinforcing whistleblower legislation, iv) improving implementation of preventive measures regarding asset declaration for public officials and politically exposed persons. ### Crisis response and recent policy actions - Fiscal policy measures during the pandemic: cash transfers to employees and informal workers, deferral of tax and debt payments, sovereign guarantees on new loans. - Monetary policy easing in 2020: lower policy rate, reduced reserve requirement ratio, widened exchange rate band, expanded liquidity. - Fiscal measures in 2022 mitigated impact of higher commodity prices; BAM began tightening monetary policy stance in Q4 2022. - Executive Board commended authorities for very strong policy response during the last Article IV consultation on January 17, 2023. ### Ongoing and planned reforms (selected) - Social protection reform: - Extend health care insurance to about 11 million Moroccans without coverage, starting from 2023. - Gradually replace remaining energy and food subsidies with more targeted family allowances (using the new Social Registry), starting from 2024. - Relax conditions for access to unemployment insurance, from 2025. - Reform the pension system to increase coverage of non-wage workers (by 2025). - SOE reform: - Legislation allows eliminating non-essential SOEs, merging those in same sector, transforming commercial SOEs into corporates, and introduces a National Agency for valuation and strategic management of SOEs. - Appointment in July 2022 of the CEO of the National Agency; operationalization expected to be completed by 2025. - Tax reform: - Framework law approved July 2021 for comprehensive tax reform over next 5 years. - 2023 corporate tax overhaul to be phased in over 4 years replacing the current plethora of tax rates with a standard rate of 20 percent. - Introduction in 2022 of a single tax for low-income self-employed. - Adoption in 2023 of a PIT withholding tax for a series of transactions involving self-employed (professionals). - Pension reform: - 2021 change in pension indexation for retired SOE workers from 100 percent to 75 percent of the wage increase. - 2022 modification reducing the minimum years of contribution for self-employed to access a pension. - Business and product market reforms: - Activation in 2019 of the Competition Council. - New Bankruptcy Law adopted in 2018. - Simplification of administrative procedures for business setup and transfers. - Establishment in 2021 of the Mohamed VI Fund to catalyze private investment. - Approval of a new Charter of Investment framework law to improve the business environment for very small, small, and medium-sized enterprises. - Education reform (road map presented in 2022) aims to: - Reach 100 percent enrollment at the preschool level. - Reduce drop-out rate in compulsory education by one third. - Double the number of students with basic skills at the end of primary school. - Double the number of students who benefit from extracurricular activities. - Measures include more investment in school infrastructure and overhaul of teacher recruitment, training, and payment. - Climate and resource adaptation: - Renewable energy (RE) transition measures: 2022 decree allowing direct sale of RE electricity to small industrial customers; draft law to allow producers to inject surplus into the network (draft law has been approved); 2022 ANRE regulations for transmission network access; role redefinition of ONEE. - Water strategy: National Water Plan (2020) aims to close projected demand-supply gap by 2050 through large infrastructure investment (desalination, wastewater treatment, dams, pipelines) and improved water consumption efficiency (new tariffication policy). *Source: IMF staff assessment in the referenced chapter.* ### 19. The authorities’ request. The authorities intend to treat the FCL arrangement as ### 19. The authorities’ request. ### Authorities’ intent and requested arrangement - The authorities intend to treat the FCL arrangement as precautionary, with the requested level of access providing insurance against a wide range of adverse external and domestic shocks and supporting the authorities’ macroeconomic policy and structural reform agenda. - If external risks faded, the authorities would consider exiting the arrangement, in line with their strategy of viewing the use of the instrument as temporary. - Requested access: SDR 3.7262 billion (about 417 percent of Morocco’s quota, or US$ 5 billion). ### Staff assessment of required access and adverse tail-risk scenario - Staff’s view: an access level of about 417 percent of quota could provide sufficient insurance against a plausible adverse tail-risk scenario (Box 2). - Adverse scenario assumptions: - A worsening of global economic conditions as described in Box 1, and a new drought in 2024. - Weaker trading partners’ growth and higher commodity prices would slow economic activity and worsen Morocco’s external position over the next two years. - Projected macro impacts under the adverse scenario: - GDP growth: weak growth of about ½ percent in 2023 and 2024. - Current account deficit: widen from about 4¼ percent of GDP in 2022 to about 8½ percent of GDP in 2023 and 2024. - Drivers: mainly a contraction in exports of goods and non-tourism services; a negative terms-of-trade shock and greater import of food items in 2024 would offset import-volume compression from weaker domestic demand. - Lower net capital inflows (especially FDIs and external borrowing) would add to external financing needs. - Financing response under the scenario: - Covering the external financing gap while ensuring international reserves remain at 100 percent of the adjusted ARA metric will require accessing the proposed FCL arrangement of SDR 3.7262 billion (about 417 percent of quota, or US$ 5 billion). ### Box 2 — Illustrative Adverse Scenario: key parameters and impacts - Access illustrated: SDR 3.7262 billion (416.6 percent of quota, or US$ 5 billion) would provide sufficient insurance against plausible tail risks. - Scenario drivers: weaker demand in advanced economies, higher oil and food prices, tighter financing conditions, and another drought in 2024 (boosting food imports). - Current account and trade: - Goods export volumes: contract by about 10 percent in both 2023 and 2024, compared to baseline. - Overall value of goods exports: fall by around US$ 7 billion cumulatively over 2023-2024 despite higher phosphate prices. - Exports of services: fall by about 15 percent in both years; tourism receipts remain well above pandemic trough. - Remittances: projected to decline by 10 percent in both years relative to baseline but remain above pre-pandemic levels. - Import volumes: fall by about 7 percent in both years relative to baseline; the terms-of-trade shock causes the overall value of goods imports to remain broadly unchanged relative to baseline. - Foreign Direct Investment (FDI): - Net direct investments fall by around 35 percent in 2023 and 30 percent in 2024 relative to baseline. - Average FDI: 0.8 percent of GDP in 2023-2024 (compared to 1.2 percent on average over 2017-2021). - Portfolio and public financing: - Public sector can rollover about 150 percent of bonds maturing over 2023-2024 (compared to 280 percent in the baseline). - Private portfolio flows: dry out in net terms, though CFMs reduce risk of large capital flight by residents. - Public sector gross external loans rollover: about 90 percent over 2023-2024 (compared to 130 percent in the baseline).1/ - Private sector borrowing constrained; assumed rollover rates: 80 percent for amortization of private sector debt (trade credit and loans) in 2023, slightly higher in 2024. - Net private sector borrowing: remains flat as share of GDP in 2023-24 (compared to 0.4 percent in the baseline). - Other net inflows: remain close to the average over the last 3 years (about ¼ percent of GDP). - Use of reserves: - Drawdown of international reserves of US$5.9 billion in 2023 and US$6.6 billion in 2024. - Reserves decline would bring international reserves just above 100 percent of the IMF’s adjusted-ARA (slightly below 80 percent of the unadjusted ARA metric). - Despite decumulation, a financing gap of US$ 5 billion would remain—consistent with the requested level of access. - Tabular highlights from the scenario (selected figures preserved exactly as presented): - Financing Gap (USD Billion): 3.0 5.0 5.0 5.0 - SDR (0.745208 USD/SDR, February 08, 2023): 3.73 3.7 - Percent of quota: 416.6 416.6 - Gross international reserves: 26.4 36.0 35.6 31.8 32.7 25.1 33.0 25.5 - Percentage of adjusted ARA metric: 113 143 133 122 123 100 118 100 - Percentage of unadjusted ARA metric: 87 109 101 93 95 78 91 77 - Months of imports of GNFS: 6.9 7.2 5.8 5.5 5.4 4.5 5.3 4.7 1/ The note clarifies: this corresponds to a rollover rate for medium and long-term public sector debt (both bonds and loans) of about 130 and 85 percent in 2023 and 2024, respectively. ### Fund finances, credit exposure, and safeguards - Fund liquidity impact: - Proposed arrangement: FCL of SDR 3.7262 billion (about 417 percent of quota). - Impact on Forward Commitment Capacity (FCC): FCC would decline by 2.3 percent of its current level and remain at some SDR 156.8 billion. - Potential GRA credit exposure in full-draw downside scenario: - Fund credit to Morocco would represent 3.8 percent of total GRA credit outstanding as of 02/20/2023. - Would represent 16.8 percent of the Fund's current precautionary balances. - Capacity to repay would remain adequate. - Debt and reserves implications: - Morocco’s external debt would rise to 43.7 percent of GDP and public external debt would reach 29.5 percent of GDP this year and stay slightly below these levels over the medium term. - Morocco's outstanding use of GRA resources would account for 11.4 percent of total external debt, and 16.9 percent of public external debt. - Fund credit would initially account for 5 percent of GDP and 28.1 percent of Morocco’s gross international reserves. - External debt service would increase to about 4¼ percent of GDP by 2024 but gradually decline over the medium term. - Morocco's projected debt service to the Fund would peak in 2027 at about 1.5 percent of GDP. - Safeguards: - Safeguards procedures will be conducted. - BAM was subject to a safeguards assessment in connection with the 2018 PLL arrangement; implementation of the remaining recommendation to transition to International Financial Reporting Standards is in progress. - Safeguard procedures for the FCL will be conducted based on a review of the most recent external audit results and discussions with BAM’s external auditors; results will be included in the next staff report for Morocco. ### Staff appraisal and recommendation - Qualification and support: - Staff assesses that Morocco meets the qualification criteria for an arrangement under the FCL and supports the authorities’ request. - Rationale: Morocco has very strong policies, institutional policy frameworks and economic fundamentals, and has remained resilient to multiple shocks (the pandemic, recurrent droughts, spillovers from Russia’s war in Ukraine). - The authorities remain committed to maintaining such policies; the last Article IV consultation on January 17, 2023 provided a very positive assessment of the authorities’ policy response and commitment to implement structural reforms. - Appropriateness of access: - Staff considers the proposed access of about 417 percent of quota appropriate given elevated downside external risks intensified over the past three years. - Vulnerabilities: Morocco remains exposed to a worsening global economic environment, greater fallout from Russia’s war in Ukraine, higher commodity price volatility, tighter financial conditions, and recurrent droughts. - An FCL arrangement would enhance Morocco’s external buffers and provide insurance against plausible tail risks on a temporary basis. - The authorities intend to exit the FCL at the end of the 24-month period, conditional on the evolution of risks. *Source: IMF staff report excerpt for Morocco (FCL request and staff appraisal).* ### 26. Staff considers that the proposed FCL arrangement carries moderate risks to the Fund. ### 1marea2023002 - 26. Staff considers that the proposed FCL arrangement carries moderate risks to the Fund. ### Staff assessment of the proposed FCL arrangement - Staff considers that the proposed FCL arrangement carries moderate risks to the Fund. - If fully drawn, GRA credit exposure to Morocco would remain manageable. - The authorities are fully committed to maintaining prudent macro-economic policies and implement the range of structural reforms needed to make growth stronger, more resilient, and more inclusive. - They intend to treat this FCL arrangement as precautionary. ### Real sector developments (high-level findings) - Real GDP growth slowed in the first three quarters of 2022, mainly driven by lower domestic demand. - Agriculture and industry sectors were affected by the drought and the war in Ukraine. - Unemployment remains higher than pre-pandemic levels. - Manufacturing and cement sales seem to have weakened since mid-2022. - Household and business confidence weakened since mid-2022. ### External developments (high-level findings) - The trade deficit widened in 2022 as higher commodity prices and the drought boosted imports of energy, food products, and raw products. - Export growth was supported by a strong expansion in phosphate, and by automotive and textile products. - Tourism revenues returned to pre-pandemic levels in 2022. - In 2022, remittances surpassed the elevated levels of last year. - Net FDI increased in 2022, reflecting both higher inward FDI and lower Morocco’s investment abroad. ### Fiscal developments (high-level findings) - The overall fiscal deficit in 2022 was lower than last year. - Tax revenues (especially corporate income tax, VAT) significantly increased in 2022, helping offset the increase in current spending driven by subsidies and transfers. - The fiscal stimulus injected in 2020–21 is expected to be phased out gradually over the medium term. - The public debt-to-GDP ratio is expected to fall in the medium term, together with gross financing needs. - Sovereign spreads increased in 2022 as in other EMs but have fallen since their peak in July last year. ### Monetary and financial developments (high-level findings) - Bank Al-Maghrib (BAM) increased interest rates by 100 bps since September 2022 as inflation pressures accelerated in 2022. - Credit growth in 2022 was driven by financing of working capital of non-financial private sector firms. - Banks' deposit growth has slowed since the peak of the pandemic but remains healthy. - NPLs have stabilized in 2022. - Banks’ holding of Treasury bonds have increased since the pandemic but are still lower than historical highs. ### FCL qualification criteria (indicators and observations) - Central government debt-to-GDP ratio tracked across 2017–2027 with specific percentiles shown (5–25 pct, 25–50 pct, 50–75 pct, 75–95 pct) and an Actual and Baseline series. - Net international investment liabilities (End-2021) composition of 1,277 Bil. MAD: FDI 48%, Portfolio Investments: Equity 2%, Portfolio Investments: Debt 7%, Other Investments: Others 33%, Other Investments: Loans 10%. - Treasury and SOEs bond issuances and Morocco J.P. Morgan EMBI Global Spread observed January 2015–January 2023. - Gross international reserves, end-2021, plotted versus multiple coverage measures (Short-term debt; Short-term debt plus CA deficit; GDP; Broad money). - Gross financing needs shown in percent of GDP with Actual, Baseline, and Stress scenario series for 2017–2027. - Inflation and two-year-ahead inflation expectations series reported (Percent, y-o-y). ### Reserve coverage and FCLs in an international perspective - Charts compare Morocco's GIR to GDP, GIR to Broad Money, GIR to Short-term External Debt at Remaining Maturity plus Current Account Deficit, and GIR to ARA Metric (2022) across a broad set of EMEs. - Notes: - The ARA Metric and interpretation guidance are described (see “Guidance Note on the Assessment of Reserve Adequacy and Related Considerations”, IMF, 2016). - The 100–150 percent range of the ARA metric is noted as broadly adequate for precautionary purposes. ### Selected economic indicators (Table 1 highlights, 2018–28) - Real GDP: 2018 3.1; 2019 2.9; 2020 -7.2; 2021 7.9; 2022 1.1; 2023 3.0; 2024 3.1; 2025 3.1; 2026 3.2; 2027 3.4; 2028 3.4. - Real agriculture GDP: 2018 5.6; 2019 -5.0; 2020 -8.1; 2021 17.8; 2022 -14.0; 2023 10.1; 2024 3.0; 2025 3.0; 2026 3.0; 2027 3.0; 2028 3.0. - Consumer prices (end of period): 2018 0.1; 2019 1.0; 2020 -0.9; 2021 3.2; 2022 8.3; 2023 3.7; 2024 2.5; 2025 2.4; 2026 2.0; 2027 2.0; 2028 2.0. - Unemployment rate (end of period): 2018 9.4; 2019 10.2; 2020 12.2; 2021 11.9; 2022 12.9; 2023 11.0; 2024 10.5; 2025 10.0; 2026 9.6; 2027 9.5; 2028 9.4. - Budget balance (Percent of GDP): 2018 -3.4; 2019 -3.6; 2020 -7.1; 2021 -5.9; 2022 -5.1; 2023 -4.9; 2024 -4.4; 2025 -3.8; 2026 -3.3; 2027 -3.1; 2028 -3.1. - Central government debt (Percent of GDP): 2018 60.5; 2019 60.3; 2020 72.2; 2021 68.9; 2022 68.8; 2023 68.3; 2024 68.4; 2025 68.1; 2026 67.6; 2027 66.9; 2028 66.2. - Gross reserves (in billions of U.S. dollars): 2018 24.4; 2019 26.4; 2020 36.0; 2021 35.6; 2022 31.8; 2023 32.7; 2024 33.0; 2025 35.3; 2026 37.7; 2027 39.6; 2028 41.6. - In months of next year imports of goods and services: 2018 5.4; 2019 6.9; 2020 7.2; 2021 5.8; 2022 5.5; 2023 5.4; 2024 5.3; 2025 5.4; 2026 5.5; 2027 5.5; 2028 5.4. - In percent of Fund Assessing Reserve Adequacy (ARA): 2018 83.6; 2019 86.9; 2020 109.3; 2021 100.6; 2022 92.6; 2023 94.8; 2024 91.0; 2025 92.0; 2026 93.4; 2027 93.5; 2028 93.8. - In percent of the adjusted Assessing Reserve Adequacy (ARA) metric: 2018 110; 2019 113; 2020 143; 2021 133; 2022 121; 2023 123; 2024 118; 2025 119; 2026 120; 2027 120; 2028 121. ### Balance of payments (Table 3 highlights, 2018–28, US$ billions unless otherwise indicated) - Current account: 2018 -6.2; 2019 -4.4; 2020 -1.4; 2021 -3.2; 2022 -6.0; 2023 -5.2; 2024 -5.1; 2025 -5.0; 2026 -5.1; 2027 -5.3; 2028 -5.5. - Trade balance: 2018 -20.3; 2019 -19.8; 2020 -15.5; 2021 -19.9; 2022 -27.0; 2023 -23.9; 2024 -24.4; 2025 -25.2; 2026 -26.1; 2027 -27.3; 2028 -28.6. - Exports, f.o.b.: 2018 24.6; 2019 24.7; 2020 23.6; 2021 31.7; 2022 36.0; 2023 35.6; 2024 37.5; 2025 39.2; 2026 41.4; 2027 43.7; 2028 46.0. - Imports, f.o.b.: 2018 -44.9; 2019 -44.5; 2020 -39.1; 2021 -51.5; 2022 -63.0; 2023 -59.5; 2024 -61.9; 2025 -64.4; 2026 -67.5; 2027 -71.0; 2028 -74.6. - Tourism receipts (US$ billions): 2018 7.8; 2019 8.2; 2020 3.8; 2021 3.8; 2022 7.9; 2023 7.3; 2024 7.7; 2025 8.2; 2026 8.7; 2027 9.2; 2028 9.7. - Workers' remittances (US$ billions): 2018 6.9; 2019 6.7; 2020 7.1; 2021 10.3; 2022 9.7; 2023 8.3; 2024 8.9; 2025 9.5; 2026 10.0; 2027 10.6; 2028 11.3. - Gross official reserves (US$ billions): see Selected economic indicators section above. ### Monetary survey and banking sector (selected aggregates) - Broad money (end-2022, billions of dirhams): 1,686.4. - Claims to the economy (end-2022, billions of dirhams): 1,261.7. - Credit to private sector (end-2022, billions of dirhams): 835.0. - Banking credit (excl. central government) growth (annual percent): 2022 7.6. - Broad money growth (annual percent): 2022 8.0. - Claims to economy/GDP (percent): 2018 85.6; 2019 87.1; 2020 98.3; 2021 91.6; 2022 91.1. ### Financial soundness indicators (selected, 2017–22) - Regulatory capital to risk-weighted assets (Dec-22): 15.3 (percent). - Tier 1 capital to risk weighted assets (Dec-22): 11.8 (percent). - Nonperforming Loans (NPLs) to total loans (Dec-22): 8.5 (percent). - Specific provisions to NPLs (Dec-22): 66.7 (percent). - Return on assets (ROA) (Dec-22): 1.0 (percent). - Liquid assets to total assets (Dec-22): 16.8 (percent). - Deposits to loans (Dec-22): 105.0 (percent). ### FCL Arrangement — Impact on GRA finances (Table 6) - Current Forward Commitment Capacity (FCC) 1/: 160,555 (SDR millions). - FCC on approval 2/: 156,829 (SDR millions). - Change in percent: -2.3. - Prudential measures, assuming full FCL drawing: - Fund credit to Morocco: In percent of total GRA credit outstanding 3/: 3.8. - Fund credit to Morocco: In percent of current precautionary balances: 16.8. - Fund credit outstanding to five largest debtors: In percent of total GRA credit outstanding, before approval: 68.3. - Fund credit outstanding to five largest debtors: In percent of total GRA credit outstanding including Morocco's assumed full drawing 3/: 65.8. - Memorandum items: - Current precautionary balances (January 31st, 2023): 22,184 (SDR millions). - Total FCL commitments, including proposed FCL arrangement: 64,490 (SDR millions). - Quota of FTP members with actual and proposed FCLs, in percent of total quota of FTP members: 3.1. - Notes: - 1/ The FCC is defined as the Fund's stock of usable resources less undrawn balances under existing arrangements, plus projected repurchases during the coming 12 months, less repayments of borrowing due one year forward, less a prudential balance. The FCC does not include resources from currently unactivated lines of credit, including the New Arrangements to Borrow or bilateral commitments from members to boost IMF resources. - 2/ Current FCC minus access under the proposed arrangement. - 3/ Based on current Fund credit outstanding plus full drawings under the proposed FCL arrangement. - As of 2/20/23. Source: Finance Department. *International Monetary Fund — Morocco chapter excerpt.* ### Annex I. External Debt Sustainability Analysis ### Annex I. External Debt Sustainability Analysis ### Key findings and projections - External debt rose to 54.1 percent of GDP in 2020, fell to 45.4 percent in 2021, and is expected to stabilize at about 43 percent going forward. - Scenario outcomes: - A 30 percent exchange rate depreciation (one-time real depreciation in 2023) would decrease the external debt-to-GDP ratio to 40 percent. - A shock to the current account would increase the external debt-to-GDP ratio to 47 percent. ### Baseline time series and dynamics (selected series from Table 1) - Baseline: External debt (percent of GDP) — 2017: 44.2; 2018: 40.5; 2019: 42.5; 2020: 54.1; 2021: 45.4; 2022: 40.7; 2023: 42.5; 2024: 42.3; 2025: 42.8; 2026: 42.9; 2027: 42.9. - Change in external debt — 2017: 12.2; 2018: -3.7; 2019: 2.0; 2020: 11.6; 2021: -8.7; 2022: -4.7; 2023: 1.8; 2024: -0.3; 2025: 0.5; 2026: 0.1; 2027: 0.1. - Identified external debt-creating flows — 2017: -2.0; 2018: -1.8; 2019: 4.0; 2020: 3.2; 2021: -3.4; 2022: 3.3; 2023: -0.8; 2024: 0.4; 2025: -0.4; 2026: -0.3; 2027: -0.2. - Current account deficit, excluding interest payments — 2017: 4.2; 2018: 5.8; 2019: 4.4; 2020: 2.2; 2021: 3.1; 2022: 5.2; 2023: 4.7; 2024: 4.6; 2025: 4.4; 2026: 4.4; 2027: 4.3. - Net non-debt creating capital inflows — 2017: -2.7; 2018: -5.2; 2019: -3.0; 2020: -1.0; 2021: -1.1; 2022: -0.6; 2023: -3.3; 2024: -1.8; 2025: -2.4; 2026: -2.0; 2027: -1.8. - Automatic debt dynamics (contribution) — 2017: -3.5; 2018: -2.5; 2019: 2.7; 2020: 2.0; 2021: -5.5; 2022: -1.4; 2023: -2.2; 2024: -2.4; 2025: -2.5; 2026: -2.6; 2027: -2.6. - Residual, including change in gross foreign assets — 2017: 14.2; 2018: -1.9; 2019: -2.0; 2020: 8.5; 2021: -5.3; 2022: -8.0; 2023: 2.6; 2024: -0.7; 2025: 0.9; 2026: 0.4; 2027: 0.2. ### External financing needs and indicators - Gross external financing need (in billions of US dollars) — 2017: 15.0; 2018: 15.7; 2019: 14.0; 2020: 13.8; 2021: 15.2; 2022: 19.0; 2023: 14.5; 2024: 16.5; 2025: 16.0; 2026: 17.3; 2027: 18.6. - Gross external financing need (percent of GDP) — 2017: 12.6; 2018: 12.3; 2019: 10.9; 2020: 11.4; 2021: 10.6; 2022: (data formatted in source: "10-Year10-Year13.7..." — preserved numerical series are reported above in dollar terms). ### Macroeconomic assumptions (selected) - Nominal GDP (US dollars) — 2017: 118.5; 2018: 127.3; 2019: 128.9; 2020: 121.3; 2021: 142.9; 2022: 120.2; 2023: 10.7; 2024: 138.1; 2025: 138.9; 2026: 147.2; 2027: 155.5; (note: series preserved exactly as they appear in the source). - Real GDP growth (percent) — 2017: 5.1; 2018: 3.1; 2019: 2.9; 2020: -7.2; 2021: 7.9; 2022: 2.7; 2023: 4.0; 2024: 1.1; 2025: 3.0; 2026: 3.1; 2027: 3.1; 2028: 3.2; 2029: 3.4 (series preserved as in source). - Nominal external interest rate (percent) — 2017: -2.6; 2018: -2.3; 2019: -2.4; 2020: -2.4; 2021: -1.9; 2022: -2.5; 2023: 0.3; 2024: -1.8; 2025: -2.4; 2026: -2.9; 2027: -3.1; 2028: -3.1; 2029: -3.1. ### Stress tests and bound tests - Individual shocks applied include permanent one-half standard deviation shocks and one-time real depreciation of 30 percent in 2023. - Figures illustrate that interest-rate, current-account, growth, and combined shocks increase the external debt ratio relative to baseline paths shown for 2018–2026. *Source: IMF country desk data; IMF staff estimates.* --- ### Annex II. Sovereign Risk and Debt Sustainability Assessment ### Debt coverage and recent evolution - This SRDSF covers central government debt (Treasury, both domestic and external). - Consolidation under a general government perimeter (including Treasury, extrabudgetary central government, local entities, pension funds, and social welfare organizations) would reduce the debt-to-GDP ratio by about 6½ percent of GDP in 2021 (to about 62 percent). - Central government debt-to-GDP ratio — 2020: 72.2 percent; 2021: 68.9 percent. - The decline in public debt in 2021 was driven by rebound in GDP growth (7.9 percent in 2021 vs. -7.2 percent in 2020) and a reduction in the primary deficit by 0.8 percentage points of GDP. - Gross financing needs for the central government decreased to 11.8 percent of GDP in 2021 (4.7 percentage points of GDP lower than in 2020). ### Baseline projections and financing - Under staff baseline scenario: - Central government debt-to-GDP is expected to remain below 70 percent in the medium term, relatively stable over 2022-2025, with a modest decline thereafter. - At the general government level, public debt would hover around 62 percent of GDP until 2025, before falling to 60.4 percent in 2027. - Gross financing needs: - Projected to increase to 16.4 percent in 2023 (from 13.8 percent in 2022), and to gradually decrease to 11.3 percent by 2027. - Drivers mitigating debt-service pressures: - Long average maturities for domestic and external borrowing. - Continued active debt management (swapping old debt with new at longer maturities and lower interest rates). - Significant share of external borrowing on a concessional basis. - Projected privatization receipts of about 1½ percent of GDP in 2022-25. ### Risk assessment and vulnerabilities - Overall assessment: - Morocco’s central government debt remains sustainable; overall risk of sovereign stress is assessed as moderate. - Medium-term risk is assessed as moderate based on mechanical signals, GFN, and fan chart tools. - Debt is assessed as sustainable with high probability; the projected debt path decreases in the medium term and GFNs remain manageable conditional on fiscal adjustment measures deemed feasible. - Debt profile characteristics limiting vulnerabilities: - Weighted average maturity of about 6 years. - Relatively low share denominated in FX: about 25 percent. - Investment base mainly local institutional, long-term investors. - Quantified vulnerabilities and contingent liabilities: - Guarantees to commercial SOEs’ external debt: about 8 percent of GDP. - Subsidized credit schemes under the Covid-19 crisis: about 5 percent of GDP (with partial mitigation via transfer of first-loss layer to a financial institution under BAM supervision). - Central government debt includes Treasury bonds held by the social security administration (about 10 percentage points of GDP). - Debt fan chart index: 1.7 (assessed as moderate). - Risks that could worsen the assessment: droughts, a global economic downturn, new terms-of-trade shocks, and contingent liabilities from unfunded public pension schemes. ### Policy recommendations and reform priorities - Continue and accelerate fiscal consolidation to reduce the debt-to-GDP ratio below 70 percent over the medium term. - Strengthen budgetary framework reforms: - Reinforce the Medium-Term Fiscal Framework (MTFF). - Enhance analysis of budget risks. - Implement a fiscal rule anchored on public debt. - Advance pension reform: - Authorities working on a comprehensive overhaul of the pension system to make it financially sustainable. - Implement structural reforms to reduce climate-related vulnerabilities: - Broad reforms in the water and energy sectors. - Maintain active debt management and utilize privatization receipts (projected at about 1½ percent of GDP in 2022-25) to reduce financing needs. *Source: IMF staff; IMF country desk data and staff estimates.* ### 5. Debt consolidation across sectors: ### 1marea2023002 - 5. Debt consolidation across sectors ### Debt perimeter, consolidation, and contingent liabilities - Authorities have started to produce general government data, with technical assistance from the Fund. Under this accounting, the perimeter of public debt would include the Treasury, extrabudgetary central government (e.g., public non-profit enterprises), local entities, pension funds, and social welfare organizations. - Consolidation under the general government perimeter would reduce the debt-to-GDP ratio by about 6½ percent of GDP in 2021 (to about 62 percent). - Contingent liabilities that could represent additional vulnerabilities: - Subnational governments: debt level estimated at about 2 percent of GDP in 2021. - Guarantees to commercial SOEs' external debt: about 8 percent of GDP. - Unconsolidated social security funds: unspecified amount, noted as additional vulnerability. ### Debt profile characteristics - Key features limiting vulnerabilities: - Relatively long maturity: about 6 years (residual maturity: 6. years). - Relatively low share denominated in FX. - Investment base mostly local investors, many long-term investors. ### Baseline fiscal and debt projections (selected series, percent of GDP unless indicated) - Public debt (Actual and projections): - 2021: 68.9 - 2022: 68.8 - 2023: 68.3 - 2024: 68.4 - 2025: 68.1 - 2026: 67.6 - 2027: 66.9 - 2028: 66.2 - 2029: 65.4 - 2030: 64.5 - 2031: 63.5 - Change in public debt: -3.3, -0.2, -0.5, 0.1, -0.2, -0.5, -0.8, -0.7, -0.8, -0.9, -1.0 (2021–2031) - Contribution of identified flows: -3.7, -0.9, -0.2, 0.2, -0.2, -0.5, -0.7, -0.7, -0.8, -0.9, -1.0 (2021–2031) - Primary deficit: 3.8, 3.0, 2.6, 2.0, 1.5, 1.0, 0.8, 0.9, 0.8, 0.8, 0.7 (2021–2031) - Noninterest revenues: 25.1, 25.9, 26.9, 26.7, 26.5, 26.5, 26.6, 26.5, 25.1, 23.8, 22.6 (2021–2031) - Noninterest expenditures: 28.9, 29.0, 29.5, 28.8, 28.0, 27.5, 27.4, 27.4, 26.0, 24.6, 23.4 (2021–2031) - Automatic debt dynamics: -5.9, -2.4, -2.3, -1.5, -1.3, -1.1, -1.2, -1.3, -1.3, -1.4, -1.5 (2021–2031) - Real interest rate and relative inflation: 0.1, -1.6, -0.3, 0.6, 0.8, 1.0, 1.0, 0.9, 0.8, 0.7, 0.7 (2021–2031) - Real growth rate entries (partial in table): -5.3, -0.8, -2.0, -2.1, -2.1, -2.1, -2.2, a.-2.2, -2.2, -2.1, -2.1 (presentation in source is fragmented) - Other identified flows / Other transactions: -1.6, -1.5, -0.4, -0.4, -0.4, -0.3, -0.3, -0.3, -0.3, -0.3, -0.3 (2021–2031) - Contribution of residual: 0.4, 0.7, -0.3, -0.1, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0 (2021–2031) - Contingent liabilities: 0.0 for all years listed (2021–2031) - Gross financing needs: 13.6, 13.8, 16.4, 13.9, 13.3, 11.8, 11.3, 11.6, 10.7, 10.0, 9.0 (2021–2031) - of which: debt service: 9.7, 10.8, 13.8, 11.8, 11.9, 10.8, 10.6, 10.8, 9.9, 9.2, 8.3 (2021–2031) - Local currency GN: 8.6, 8.7, 12.8, 10.1, 10.9, 9.5, 9.1, 9.4, 8.5, 8.0, 7.1 (2021–2031) - Foreign currency GN: 1.1, 2.0, 1.0, 1.7, 1.0, 1.4, 1.5, 1.4, 1.3, 1.3, 1.2 (2021–2031) - Memo: - Real GDP growth (percent): 7.9, 1.1, 3.0, 3.1, 3.1, 3.2, 3.4, 3.4, 3.4, 3.4 (years correspond to series in table) - Inflation (GDP deflator; percent): 3.2, 6.7, 4.6, 2.8, 2.4, 2.0, 2.0, 2.0, 2.0, 2.0 - Nominal GDP growth (percent): 11.4, 7.9, 7.8, 6.0, 5.6, 5.3, 5.5, 5.5, 4.5, 4.5, 5.4 (presentation in source aligns with rows) - Effective interest rate (percent): 3.5, 3.2, 3.6, 3.6, 3.5, 3.6, 3.6, 3.4, 3.3, 3.2, 3.1 - Commentary summary: Public debt will stabilize before starting to decline in 2026, reflecting expectations of a narrowing of primary deficits and stable economic conditions. The real GDP growth and primary deficit are the two main contributors to the change in public debt. ### Realism and adjustment analysis - Projected 3-year adjustment in the cyclically-adjusted primary balance is relatively high and cited as in the 73.1 percentile range. - Commentary: The economic recovery from COVID-19 and reduced deficits are stabilizing the debt-to-GDP ratio. Realism analysis does not point to any other major concerns. ### Medium-term risk analysis and indices (selected) - Fanchart width: 44.90.7 (as presented) - Probability of debt not stabilizing (pct): 15.30.1 (as presented) - Terminal debt level x institutions index: 41.80.9 (as presented) - Debt fanchart index: ...1.7 (as presented) - Average GFN in baseline: 13.44.6 (as presented) - Bank claims on government (pct bank assets): 18.25.9 (as presented) - Change in claims on govt. in stress (pct bank assets): 2.50.8 (as presented) - GFN financeability index: ...11.3 (as presented) - Prob. of missed crisis, 2022-2027 (if stress not predicted): 18.2 pct. - Prob. of false alarm, 2022-2027 (if stress predicted): 30.7 pct. - Overall assessment: Both the Debt Fanchart Module and the GFN Financeability Module suggest a moderate level of risk. The medium-term index is above the low risk threshold. - Policy and reform expectations noted: reinforcement of the MTFF, analysis of budget risks, and implementation of a fiscal rule anchored on the public debt. ### Climate mitigation scenarios (summary) - Charts compare GFN-to-GDP ratio and total public debt-to-GDP ratio under: - Custom scenario - With climate mitigation (standardized scenario) - With climate mitigation (customized scenario) - Visuals indicate impacts on GFN and total public debt but numeric series are not fully tabulated in the provided excerpt. ### Authorities' assessment and policy intentions (from written communication, Rabat, 16 March, 2023) - Macroeconomic context: - 2021 rebound: 7.9 percent real GDP growth. - 2022 expected growth: nearly 1.5 percent (text). - Average inflation rate in 2022: 6.6 percent compared to 1.4 percent in 2021. - Bank Al-Maghrib policy rate increased by a total of 100 basis points in September and December 2022, bringing it to 2.5 percent. - Current account deficit: around 4.3 percent of GDP in 2022 after 2.3 percent in 2021. - Foreign exchange reserves: nearly 5.5 months of imports and exceeding 120 percent of the adjusted ARA metric. - Fiscal consolidation: - Overall fiscal deficit: 5.1 percent of GDP in 2022; 5.9 percent in 2021; 7.1 percent in 2020. - Central government debt to GDP: from 72.2 percent in 2020 to about 69½ percent in 2022. - Government published a three-year medium-term fiscal framework as part of the 2023 Budget. - Government intends to continue gradual consolidation of the fiscal deficit to 4.9 percent of GDP in 2023, with a view to returning to pre-crisis levels in the medium term and stabilizing or reducing debt by 2025. - Plan to introduce a new, debt-anchored, fiscal rule with IMF assistance. - Structural and governance reforms: SOE sector reform (National Agency for the Strategic Management of State Participations), overhaul of national guarantee system, operationalization of the Mohammed VI Fund for the investment, new Investment Charter, unified social register (RSU), subsidy reform, health and education reforms, electricity sector liberalization, anti-corruption and competition framework strengthening. - Request for IMF Flexible Credit Line (FCL): - Arrangement requested: 3.7262 billion SDRs (about 417 percent of quota or about 5 billion USD) for a period of 2 years. - The arrangement is intended to be precautionary and drawn on only in the event of severe exogenous shocks. ### Key policy implications and recommendations (as presented or implied) - Continue fiscal consolidation to narrow primary deficits and stabilize public debt, consistent with the published MTFF. - Strengthen budgetary framework and fiscal governance: reinforce MTFF, analyze budget risks, implement a debt-anchored fiscal rule. - Manage contingent liabilities (subnational debt, SOE guarantees, social security funds) through consolidation, transparency, and risk analysis. - Maintain macro-financial prudential measures and continue BAM’s work on supervisory frameworks, stress testing, and climate-related financial risk assessment. - Use precautionary external liquidity instruments (FCL) to mitigate tail risks arising from global shocks. *Source: 1marea2023002 - 5. Debt consolidation across sectors (IMF PDF chapter).* ### 2. Peak Fund Exposure and Debt Service Ratios for Recent Exceptional Access Cases_ 11 ### 2. Peak Fund Exposure and Debt Service Ratios for Recent Exceptional Access Cases ### Proposed FCL Arrangement—Basic Facts - Proposed two-year FCL arrangement amount: SDR 3.7262 billion (416.6 percent of quota). - Authorities intend to treat the arrangement as precautionary; staff’s baseline projection envisages no purchase. - If full amount is not drawn in the first year, subsequent purchases are subject to the mid-term review of Morocco’s continued qualification. - This would be Morocco’s first FCL arrangement. ### Background and Rationale - Morocco had four successive PLL arrangements since 2012; the most recent PLL approved in December 2018 was for SDR 2.15 billion (240 percent of quota). - Morocco drew available PLL resources in 2020 (about 3 percent of GDP); as of January 31, 2023, SDR 1.4998 billion (167.7 percent of quota) remain outstanding from prior PLL purchases. - Purpose of FCL request: bolster precautionary buffers amid challenging external and domestic environment and elevated downside risks, while rebuilding policy space used in responses to recent shocks and continuing structural reforms. ### Baseline Scenario Findings - Under staff’s baseline scenario: no balance-of-payments financing needs; external debt sustainable. - External debt dynamics: - External debt-to-GDP peaked at 54.1 percent in 2020. - Declined to 40.7 percent of GDP by 2022. - Projected to increase to 42.5 percent of GDP in 2023 and hover in the range of 42¼‒43 percent from 2024 onwards. - External public debt: expected to remain broadly constant at around 27-28 percent of GDP in the medium term. - Morocco’s central government debt assessed to be sustainable with a high probability under the standard Sovereign Risk and Debt Sustainability Framework. ### Adverse Scenario (Downside) — Assumptions and Impact - Adverse scenario includes shocks to global economic conditions and a new drought in 2024 (as described in Box 2 of the staff report). - Projected impacts relative to baseline: - GDP growth much lower in 2023 and 2024: 2.6 percentage points lower each year than baseline. - Current account deficit widens from about 4¼ percent of GDP in 2022 to about 8½ percent of GDP in 2023 and 2024. - Lower net capital inflows, reduced FDI, and reduced public sector external borrowing. - Under the adverse scenario a full drawing of the proposed FCL is assumed. ### Capacity to Repay and Debt Service Under Adverse Scenario - If full amount purchased in downside scenario, Morocco’s capacity to repay remains adequate: - Total external debt would reach 43.7 percent of GDP in 2023 and public external debt would rise to 29.5 percent of GDP in 2023. - Peak outstanding GRA credit at peak (2023) would amount to: - 5 percent of GDP, - 28.1 percent of gross international reserves, - 11.4 percent of total external debt. - Projected GRA credit and charges (Adverse Scenario, in SDR millions): - GRA credit to Morocco: 2023: 5,226.0; 2024: 4,263.9; 2025: 3,726.2; 2026: 2,794.7; 2027: 931.6; 2028: 0.0. - Charges due on GRA credit: 2023: 186.2; 2024: 278.0; 2025: 216.8; 2026: 208.0; 2027: 108.3; 2028: 15.9. - Debt service due on GRA credit: 2023: 186.2; 2024: 1,240.1; 2025: 754.5; 2026: 1,139.6; 2027: 1,971.4; 2028: 947.4. - Debt service dynamics: - Morocco’s projected debt service to the Fund would peak in 2027 at about SDR 2 billion, or 1.5 percent of GDP and 4.3 percent of exports of goods and services, then decline quickly by 2028. - Debt service due on GRA credit as percent of GDP by year (Adverse Scenario): 2023: 0.2; 2024: 1.2; 2025: 0.7; 2026: 0.9; 2027: 1.5; 2028: 0.7. - Debt service due on GRA credit as percent of exports of goods and services by year: 2023: 0.5; 2024: 3.3; 2025: 1.9; 2026: 2.7; 2027: 4.3; 2028: 2.0. - Ratios (Adverse Scenario, selected): - Total external debt (percent of GDP): 2023: 43.7; 2024: 42.0; 2025: 42.5; 2026: 42.7; 2027: 42.8; 2028: 42.8. - Public external debt (percent of GDP): 2023: 29.5; 2024: 28.2; 2025: 28.4; 2026: 28.4; 2027: 28.1; 2028: 27.7. - GRA credit to Morocco (percent of GDP): 2023: 5.0; 2024: 4.0; 2025: 3.3; 2026: 2.3; 2027: 0.7; 2028: 0.0. - GRA credit to Morocco (percent of Gross International Reserves): 2023: 28.1; 2024: 22.6; 2025: 18.1; 2026: 12.4; 2027: 3.9; 2028: 0.0. - GRA credit to Morocco (percent of Total External Debt): 2023: 11.4; 2024: 9.4; 2025: 7.7; 2026: 5.4; 2027: 1.7; 2028: 0.0. - GRA credit to Morocco (percent of Public External Debt): 2023: 16.9; 2024: 14.0; 2025: 11.5; 2026: 8.2; 2027: 2.6; 2028: 0.0. ### Peak Fund Exposure and Comparative Positioning - At its peak in 2023, outstanding GRA credit to Morocco would be 5.0 percent of GDP and 28.1 percent of gross international reserves. - Peak Fund exposure relative to GDP and gross international reserves would be below the median of recent exceptional access cases and FCL arrangements. - Peak Fund exposure relative to total external debt would be about at the median. - Projected outstanding Fund credit in percent of quota around the peak would be close to the median of recent exceptional access cases and FCL arrangements in the event of full drawdown. - If fully drawn in 2023, credit to Morocco would represent about 3.8 percent of total GRA credit outstanding as of February 20, 2023, making Morocco the sixth largest GRA borrower among current arrangements. - Morocco’s payments of GRA charges as percent of quota would be: 2024: 31.1 percent of quota; 2025: 24.2 percent of quota; 2026: 23.3 percent of quota; 2027: 12.1 percent of quota. - Repurchase profile (assuming purchase of 416.6 percent of quota in May 2023): repurchases would reach about 104 percent and about 208 percent of quota in 2026 and 2027, respectively, then fall to about 104 percent in 2028 and 0 in 2029. ### Impact on Fund Finances and Liquidity - Forward Commitment Capacity (FCC) impact: - Current FCC: 160,555 (SDR millions). - FCC on approval (after proposed FCL): 156,829 (SDR millions). - Change in percent: -2.3. - Prudential measures, assuming full FCL drawing: - Fund credit to Morocco in percent of total GRA credit outstanding: 3.8. - Fund credit to Morocco in percent of current precautionary balances: 16.8. - Fund credit outstanding to five largest debtors in percent of total GRA credit outstanding, before approval: 68.3. - Fund credit outstanding to five largest debtors including Morocco’s assumed full drawing: 65.8. - Memorandum items: - Current precautionary balances (January 31st, 2023): 22,184 (SDR millions). - Total FCL commitments, including proposed FCL arrangement: 64,490 (SDR millions). - Quota of FTP members with actual and proposed FCLs, in percent of total quota of FTP members: 3.1. - Assessment date for FCC and related calculations: As of 2/20/23. ### Concentration Effects - Regional concentration: - Western Hemisphere currently accounts for about 68 percent of GRA credit and undrawn balances. - With the proposed FCL for Morocco, this share would edge down to about 66 percent. - Instrument concentration: - Commitments under FCL arrangements stood at around SDR 60.8 billion as of February 20, 2023, or about 55 percent of total GRA commitments. - With the proposed FCL for Morocco, the share of commitments from FCL arrangements in total would rise to about 57 percent. ### Assessment and Policy Implications - Approval of the proposed FCL arrangement would have a manageable impact on the Fund’s liquidity position, reducing FCC by 2.3 percent. - Fund exposure and income risk would remain moderate and manageable: - Projected annual GRA charges and surcharges on Morocco during 2023‒28 would amount to about 14 percent of the Fund’s residual burden-sharing capacity of SDR 1,175 million as of end-February 2023. - Close monitoring of Fund liquidity is warranted given elevated global risks and potential for higher demand for Fund resources in the event of spillovers from the war in Ukraine. *Source: IMF staff report on Morocco—proposed two-year FCL arrangement (March 16, 2023).* ### 14. Staff considers that the proposed FCL arrangement carries moderate credit risks to the ### 1marea2023002 - 14. Staff considers that the proposed FCL arrangement carries moderate credit risks to the ### Credit risks and mitigation - If fully drawn, the arrangement would account for 3.8 percent of total GRA credit outstanding. - Morocco would become the sixth largest GRA borrower among current arrangements if fully drawn. - This credit exposure would account for 16.8 percent of the existing level of precautionary balances. - Mitigating factors: - Morocco intends to treat the FCL arrangement as precautionary. - Even if Morocco drew all resources under the proposed FCL arrangement, in an adverse scenario its capacity to repay the Fund would remain adequate (Table 3). - Morocco has very strong policy frameworks and a sustained track record of implementing very strong policies, including during the pandemic and the food and energy price crisis upon the onset of Russia’s war on Ukraine. - Authorities remain committed to maintaining such policies and closely cooperate with the Fund; they plan additional reforms to further strengthen policy frameworks. - A review to confirm continued qualification for the FCL instrument will be conducted 12 months after the approval of the arrangement. ### FCL request and treatment - Morocco is requesting an arrangement under the FCL for an amount equivalent to 417 percent of the quota for a period of 2 years. - Morocco intends to treat the FCL arrangement as precautionary and draw only in the event of severe exogenous shocks. ### Macroeconomic and financial context (recent outcomes and policy responses) - Inflation: - CPI headline inflation accelerated to 10.1 percent (y/y) in February (from 8.9 percent in January). - Food prices jumped by 20.1 percent and contributed to about 80 percent of the rise in overall CPI. - Nonfood inflation decelerated to 3.6 percent (y/y) in February (from 3.9 percent in January) and on a 3-month basis was negative in February. - Core inflation reached 8.5 percent in February (from 8.2 percent in the previous month). - Staff projected headline inflation of 4.6 percent on average for 2023 but notes upside risks. - BAM (Bank Al-Maghrib) revised forecasts: 5.5 percent for 2023 (vs 3.9 before) and 3.9 percent for 2024 (vs 4.2 before). - Staff expects average inflation of 2.8 percent in 2024; BAM’s 3.9 percent average for 2024 is higher than staff’s. - Bringing inflation back to around 2 percent by end 2024 likely warrants a more rapid increase in interest rates than in the staff baseline. - Monetary policy: - BAM increased its policy rate by 50 bps on March 21, 2023, to 3.0 percent, after two 50 bps increases in September and December 2022 (total increase of 150 bps since September 2022). - Measures of inflation expectations: 2-year-ahead expectations ticked down by 0.2 percentage point to 4.6 percent; 3-year-ahead expectations rose to 3.0 percent (from 2.6 percent in December). - External sector and reserves: - Current account deficit was 3.9 percent in 2022. - Trade deficit in goods increased to about 20 percent of GDP in 2022 (from around 14 percent in 2021). - Robust net FDI inflows; about 45 percent of FDI inflows were channeled to the manufacturing sector (against an average of 25 percent between 2014 and 2019). - Future FDI flows projected to hover around 3 percent of GDP. - International reserves at 124 percent of adjusted ARA metric in February 2023. - Banking sector and financial stability: - Banks’ adequacy ratio stood above 15 percent in 2022. - Nonperforming loans trended down to 8.2 percent at end-2022 with provisioning at 68.2 percent. - BAM lifted exceptional easing measures from the pandemic and continues stress tests and climate risk consideration. - Fiscal policy and public debt: - Overall deficit declined from 5.9 percent of GDP in 2021 to 5.1 percent in 2022 (against 5.9 percent projected in the 2022 Budget). - Budget deficit projected to decline to 4.9 percent in 2023 and 4.4 percent in 2024. - Central government debt-to-GDP ratio fell from 72.2 percent in 2020 to about 69 percent in 2022; expected to stabilize at this level in 2023 and 2024 and decline starting from 2025. - Morocco’s public debt is assessed by staff to be sustainable with high probability. ### Historical IMF arrangements and outstanding balances - Morocco had four consecutive Precautionary and Liquidity Line (PLL) arrangements since 2012, all treated as precautionary at inception; one was drawn in 2020. - 3-Aug-2012: PLL SDR 4.1174 billion (700 percent of quota) approved. - 28-Jul-2014: PLL SDR 3.2351 billion (550 percent of quota) approved. - 22-Jul-2016: PLL SDR 2.504 billion (280 percent of quota) approved. - 17-Dec-2018: PLL SDR 2.1508 billion (240 percent of quota) approved. - On April 7, 2020, Moroccan authorities purchased all resources available under the fourth PLL arrangement. - Out of this purchased amount, SDR 1.4998 billion is still outstanding as of January 31, 2023. - Prior history: series of Stand-by Arrangements (SBAs) from the late 1950s to mid-1970s; an EFF in 1980 and enhanced EFF in 1981; several SBAs through mid-1990s; last purchases under an SBA approved in 1992 and fully settled remaining obligations in 1997. No Fund arrangements between 1997 and 2012 PLL. ### Reform agenda and policy priorities - Authorities plan reforms to strengthen policy frameworks, including: - Reform of the exchange rate regime and development of an inflation targeting framework (transition dependent on easing inflationary pressures). - Strengthening prudential regulatory and supervisory frameworks; continued stress testing and consideration of climate risks. - Improvements in financial transparency (BAM Transparency Code mission, December 2022) and exit from the FATF gray list for AML-CFT. - Publication of a three-year medium-term fiscal framework as part of the 2023 Budget. - Plans to introduce a new, debt-anchored, fiscal rule with IMF assistance. - Restoration of fiscal space via optimization of public expenditure, implementation of the framework law on tax reform, and use of innovative financing mechanisms (non-debt generating, involving private sector). - SOE reform including creation of National Agency for the Strategic Management of State Participations, overhaul of national guarantee system, operationalization of the Mohammed VI Fund for investment, implementation of new Investment Charter. - Social reforms including generalization of social protection, reform of the subsidy system, implementation of the unified social register (RSU), overhaul of national health system, education reform roadmap, and water scarcity measures. - Liberalization of the electricity sector and acceleration of the transition to renewable energies. - Gender equality: adoption of phase III 2023-26 of the strategic framework for gender equality (phase III aims: i) economically empower women and reinforce leadership; ii) prevent and protect women against all forms of violence; iii) strengthen values against stereotypes, promote women rights, and fight discrimination). ### Key scenarios, projections, and assessments - Staff baseline: projected headline inflation of 4.6 percent on average for 2023; projected average inflation of 2.8 percent for 2024; bringing inflation to around 2 percent by end-2024 is possible but may require faster interest rate increases. - BAM projections: inflation 5.5 percent for 2023 and 3.9 percent for 2024. - Fiscal trajectory: overall deficit 5.1 percent in 2022; projected 4.9 percent in 2023 and 4.4 percent in 2024; debt-to-GDP expected to stabilize around 69 percent in 2023–24 and decline from 2025. - External financing: current account deficit 3.9 percent in 2022; international reserves comfortable at 124 percent of adjusted ARA metric (February 2023). *Source: 1marea2023002 - 14. Staff considers that the proposed FCL arrangement carries moderate credit risks to the Fund (IMF staff report, March 28, 2023).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1marea2023002.pdf_