## _cr06413

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---

### Executive summary — key findings
- Structural reforms have enhanced overall productivity and resilience to shocks.
- Macroeconomic environment: low inflation and a comfortable reserves position; fiscal position remains a concern for the medium term.
- Short-term outlook: growth is picking up and the current account is expected to record its sixth consecutive surplus in 2006.
- Exchange rate: recent evidence suggests the dirham, pegged to a currency basket dominated by the euro, is not misaligned.
- Banking: restructuring of the two troubled state-owned banks is almost complete; many 2003 Financial Sector Stability Assessment recommendations implemented.

### Introduction — context and objectives
- Growth momentum needs to be sustained to raise living standards and reduce unemployment.
- 2006 Article IV discussions focused on three pillars:
  - achieving medium-term fiscal consolidation;
  - enhancing financial intermediation efficiency;
  - deepening integration in the global economy.
- Political stability and social reforms (National Human Development Initiative) provide a favorable reform environment.

### Recent developments — growth, prices, reserves
- Real growth projected at 7.3 percent in 2006, up from 1.7 percent in 2005, reflecting a bumper crop and strong construction and tourism sectors.
- Consumer prices expected to increase by 2.5 percent in 2006, up from 1 percent in 2005, mainly due to higher energy prices.
- External reserves: $18.4 billion as of end-July 2006; reserves exceed total stock of external debt.
- Real per-capita GDP began rising in 2000; unemployment fell below 10 percent in Q1 2006 for the first time in 35 years.

### Medium-term outlook (staff baseline and projections)
- Staff baseline: nonagricultural GDP projected to grow by 5.5 percent on average over the next five years, with annual inflation at 2 percent.
- Remittances projected at 8.6 percent of GDP on average in 2006–11.
- Selected projections (Morocco: Medium-Term Projections 2005-11):
  - Real GDP: 1.7 (2005); 7.3 (2006); 3.3 (2007); 5.1 (2008); 5.3 (2009); 5.4 (2010); 5.5 (2011)
  - Real non-agricultural GDP: 5.2 (2005); 5.1 (2006); 5.2 (2007); 5.4 (2008); 5.5 (2009); 5.7 (2010); 5.8 (2011)
  - CPI Inflation: 1.0 (2005); 2.5 (2006); 2.0 (2007); 2.0 (2008); 2.0 (2009); 2.0 (2010); 2.0 (2011)
  - Unemployment Rate 1/: 11.0 (2005); 8.2 (2006); 8.4 (2007); 7.5 (2008); 6.5 (2009); 5.5 (2010); 4.4 (2011)
  - Current Account Balance 2/: 1.8 (2005); 1.2 (2006); 0.2 (2007); 0.5 (2008); 0.5 (2009); 0.1 (2010); -0.5 (2011)
  - Private savings-investment balance: 4.7 (2005); 1.6 (2006); -0.3 (2007); -0.7 (2008); -1.5 (2009); -2.3 (2010); -3.2 (2011)
  - Public savings-investment balance: -2.9 (2005); -0.4 (2006); 0.6 (2007); 1.2 (2008); 1.9 (2009); 2.4 (2010); 2.7 (2011)
- Notes:
  - 1/ In percent of the labor force.
  - 2/ In percent of GDP.

### Fiscal consolidation and medium-term fiscal strategy
- Fiscal consolidation is the top policy priority due to dwindling privatization proceeds and still-high public debt.
- Authorities’ medium-term objective: reduce the fiscal deficit to 3 percent of GDP and bring the public-debt-to-GDP ratio below 60 percent.
- 2007 budget recommendation: deficit target of 3.5 percent of GDP appears within reach.
- Expenditure-side measures:
  - Reduce wage bill growth; successful DVR and no-new-net hiring expected to reduce the wage bill by 1.4 percent of GDP to 12.2 percent of GDP in 2006.
  - Reduce fiscal cost of energy subsidies by gradually adjusting domestic petroleum prices to international prices.
  - Gradually replace inefficient food subsidies with targeted support to vulnerable groups.
  - Switch to performance-based budgeting within a medium-term expenditure framework.
- Revenue-side measures:
  - Improve transparency and efficiency of the tax system, particularly VAT.
  - Strengthen domestic revenue mobilization to offset revenue losses from trade liberalization.
- Medium-term targets and projections:
  - Wage bill: decrease from 13.5 percent of GDP to less than 10 percent in 2011.
  - Budgetary cost of subsidies: halve to reach 1.3 percent of GDP in 2011.
  - Expected net fiscal improvement driven by primary balance gains.

### Government debt-to-GDP — trends and 2005 operations
- Debt-to-GDP ratio declined since 2000 but rose in 2005 due to one-off operations:
  - Early retirement scheme (DVR): 2.5 percent of GDP.
  - Acknowledgement of old arrears to Caisse Marocaine de Retraite (CMR): 2.4 percent of GDP.
- Debt-to-GDP expected to resume decline in 2006.
- 2005 Early Retirement Program:
  - 39,500 employees (8 percent of the civil service) left under the voluntary program; three-quarters older than fifty.
  - Program cost: DH 11. 4 billions (2.5 percent of GDP), to be recouped in less than 3 years via wage bill savings.
  - Government will transfer DH 2 billions each year to the pension fund during 2006–09 to compensate for forgone contributions.
  - Expected net total gain: DH 17 billions (3.7 percent of GDP) in net present value terms.

### Financial intermediation and banking sector
- Background:
  - Banking spreads increased during monetary easing, indicating intermediation inefficiencies.
  - Banking sector assets rose to 94 percent of GDP in 2005 (increase of almost 30 percentage points of GDP over the last decade).
  - As monetary conditions eased, interbank and deposit rates fell by over 400 basis points, but deposit-lending spreads increased between 1998 and 2005.
  - NPL portfolio reduction has strengthened bank balance sheets.
- Authorities’ measures:
  - BAM standardizing minimum data for loan applications and helping banks develop internal rating systems.
  - Merging credit-risk information into a privately managed centralized database for all credit institutions.
  - Launching a bank survey to monitor credit conditions.
  - Treasury strengthening guarantee funds to facilitate SME credit access.
- Banking indicators:
  - NPL/Gross loans (in percent): 2001 16.8; 2002 17.2; 2003 18.1; 2004 19.4; 2005 15.7
  - Credit to economy (in millions of dirhams): 2001 208,647; 2002 216,474; 2003 234,531; 2004 251,441; 2005 284,333; 2006 305,783
  - Credit to economy/GDP (in percent): 2001 54.5; 2002 54.4; 2003 55.9; 2004 56.7; 2005 62.1; 2006 60.7

### Deepening integration in the world economy — trade and services
- Trade liberalization:
  - Most EU FTA provisions implemented; full implementation by 2012.
  - Agadir agreement (with Tunisia, Egypt, Jordan) effective mid-2006; cross rules of origin vis-à-vis the EU.
  - Bilateral FTAs with Turkey and the USA entered into force on January 1, 2006.
  - Despite FTAs, trade flows have not increased much, indicating remaining trade obstacles and high multilateral tariffs.
- Preparatory policies and infrastructure:
  - Strengthening highways and ports; liberalization in electricity, transport, and telecommunications.
  - Sectoral plans: Plan Azur (tourism), Plan Emergence (industry).
  - Incentives for offshoring: tax incentives and four offshore zones.
- Services liberalization:
  - Morocco submitted a services liberalization proposal to the WTO and participated in the Euromed framework protocol.
- Authorities’ actions to maximize FTA benefits:
  - Legislation on recognition of norms, industrial property, consumer protection.
  - Lowered MFN tariffs on goods already freely traded with the EU to reduce diversion risk.
  - Action plan from Algiers conference on trade facilitation to be approved in 2006.
  - Regional conference on financial integration in the Maghreb planned for end-2006.

### Exchange rate, monetary policy, and central bank reforms
- Exchange rate arrangement: conventional peg to a currency basket representing principal trading partners.
- Staff view: existing currency-basket peg appropriate; prepare for eventual transition to a more flexible regime.
- Bank Al-Maghrib (BAM) reforms:
  - New statutes (early 2006) institutionalize independence and enshrine price stability as core mandate.
  - BAM incorporated repos, is building a portfolio of government securities, and moved to seven-day deposit auctions to mop up excess liquidity.
  - Publication of press releases after BAM board meetings has increased transparency.
  - BAM building analytical capabilities (money demand, transmission mechanism, core inflation indicator) with possible medium-term move to inflation targeting.
- Exchange rate and reserves:
  - As of August 18, 2006, SDR 1 = DH 12.87.
  - Gross reserves (US$ millions): 2001 8,359.9; 2002 10,008.9; 2003 13,716; 2004 16,298; 2005 16,080; 2006 18,768.
  - Reserves coverage (months of next year's imports): 2003 8.3; 2004 8.7; 2005 7.5; 2006 7.9.

### Public finances — key indicators (selected)
- Real GDP (market prices): 2003 5.5; 2004 4.2; 2005 1.7; 2006 7.3; 2007 3.3
- Consumer prices (period average): 2003 1.2; 2004 1.5; 2005 1.0; 2006 2.5; 2007 2.0
- Revenue (in billions of dirhams): 2003 103.3; 2004 112.6; 2005 125.0; 2006 133.2; 2007 137.7
- Revenue (percent of GDP): 2003 24.6; 2004 25.4; 2005 27.3; 2006 26.5; 2007 26.0
- Expenditures (in percent of GDP): 2003 30.1; 2004 30.5; 2005 34.2; 2006 30.7; 2007 29.8
- Food and petroleum subsidies (in billions of dirhams): 2003 4.9; 2004 7.9; 2005 11.3; 2006 13.4; 2007 11.3
- Overall balance (commitment basis, incl. Fonds Hassan II, percent of GDP): 2003 -5.4; 2004 -4.8; 2005 -6.4; 2006 -4.7; 2007 -3.9
- Total Central Government debt (end period, percent of GDP): 2003 69.2; 2004 66.3; 2005 71.6; 2006 67.7; 2007 67.2
- GDP (in billions of dirhams): 2003 419.5; 2004 443.7; 2005 457.6; 2006 503.4; 2007 530.6

### External sector — selected balance of payments indicators
- Current account (US$ millions): 2003 1,591; 2004 965; 2005 945; 2006 698; 2007 146
- Trade balance (US$ millions): 2003 -4,334; 2004 -6,485; 2005 -8,086; 2006 -9,647; 2007 -11,149
- Exports, f.o.b. (US$ millions): 2003 8,762; 2004 9,912; 2005 10,644; 2006 11,698; 2007 12,641
  - Agriculture: 2003 1,825; 2004 1,757; 2005 2,106; 2006 2,198; 2007 2,363
  - Phosphates and derived products: 2003 1,241; 2004 1,564; 2005 1,818; 2006 2,077; 2007 2,250
- Imports, f.o.b. (US$ millions): 2003 -13,095; 2004 -16,397; 2005 -18,730; 2006 -21,345; 2007 -23,790
  - Petroleum (net imports, memorandum, US$ millions): 2003 963; 2004 1,639; 2005 2,701; 2006 3,590; 2007 4,021
- Services (US$ millions): 2003 2,617; 2004 3,261; 2005 4,277; 2006 5,131; 2007 5,601
  - Tourism receipts (US$ millions): 2003 3,225; 2004 3,924; 2005 4,617; 2006 5,344; 2007 5,876
- Private transfers (net, US$ millions): 2003 4,017; 2004 4,727; 2005 5,152; 2006 5,621; 2007 6,056
- Total external debt (percent of GDP): 2003 35.1; 2004 30.8; 2005 29.0; 2006 26.1; 2007 24.6

### Debt sustainability and risks
- External debt (percent of GDP): 2001 46.9; 2002 43.5; 2003 38.4; 2004 33.2; 2005 27.8; 2006 26.4; projection 2011 18.0
- Public sector debt (percent of GDP): 2001 74.7; 2002 71.3; 2003 68.9; 2004 65.8; 2005 70.5; 2006 66.8; projection 2011 56.6
  - Foreign-currency denominated share (percent of GDP): 2001 28.9; 2002 23.3; 2003 18.8; 2004 15.9; 2005 15.1; 2006 13.1; projection 2011 8.0
- Gross financing need (percent of GDP): 2001 21.4; 2002 22.9; 2003 18.0; 2004 21.4; 2005 18.3; 2006 13.6

### Staff appraisal — outlook, risks, and policy recommendations
- Outlook: Recovery in activity is underway with no signs of overheating; main medium-term risks are policy related.
- Fiscal recommendations:
  - Continue fiscal consolidation, lock in wage bill savings, limit subsidy outlays, and maintain strong revenue performance.
  - Avoid new wage concessions that would erode DVR savings.
  - Gradually raise retail energy prices and put a ceiling on subsidy spending for sugar consumption.
  - Continue tax system reform to mobilize resources and reduce distortions.
- Monetary and exchange rate recommendations:
  - BAM should continue to monitor inflation and absorb excess liquidity; seven-day deposit auctions are appropriate.
  - Further fiscal consolidation and development of money and exchange markets needed to ensure an orderly transition to a more flexible exchange rate.
  - Consider targeted measures and TA for further capital account liberalization sequencing.
- Financial sector recommendations:
  - Enhance judiciary speed for claim recovery; harmonize tax and prudential provisioning rules.
  - Develop stock and bond markets and mobilize institutional savings to lengthen maturity of resources.
- Trade and structural policy:
  - Address remaining trade obstacles and increase trade in services; ensure sectoral incentives do not create distortions.
  - Implement action plan from Algiers conference on trade facilitation.

### Executive Board and authorities’ positions (selected)
- Directors commended sound macro policies and structural reforms; identified fiscal consolidation as top priority.
- Authorities aim to reduce deficit to 3 percent of GDP by 2009 and continue reforms:
  - Tax revenue mobilization (reduce exemptions).
  - No new net hiring; harmonize civil service statutes; merit-based promotion.
  - Reform food subsidy targeting; continue aligning domestic petroleum prices with international prices.
  - BAM strategic plan and preparation for possible inflation targeting.
  - Near completion of restructuring of two public specialized banks (expected to comply with prudential requirements by June 2007); authorities to request new FSAP in mid-2007.
- On September 2, 2006 authorities increased retail petroleum prices by about 5 percent on average and estimate subsidy threshold at $60 per barrel (up from $56).

### Technical assistance, statistics, and data developments
- Morocco subscribed to the SDDS in December 2005.
- Authorities rebasing national accounts from 1980 to 1998; new series covering 1998–2004 to be released during 2006.
- Planned inclusion of free trade zones and offshore banks expected to improve BOP statistics.
- Selected recent IMF TA missions listed (2000–2004) across STA, FAD, MFD, and MFD peripatetic support.
- Table of common indicators (as of August 7, 2006) reports data availability and frequencies for exchange rates, reserves, monetary aggregates, interest rates, CPI, and fiscal data.

*Source: _cr06413 - Executive Summary; _cr06413 - 10. The government debt-to-GDP; _cr06413 - 31. Recommendation on Article IV consultation; _cr06413 - 32. World Bank CAS; Public Information Notice No. 06/115.*

### Executive Summary ......................................................................................................

### _cr06413 - Executive Summary

### Executive summary — key findings
- Structural reforms have enhanced overall productivity and resilience to shocks.
- Macroeconomic environment: low inflation and a comfortable reserves position; fiscal position remains a concern for the medium term.
- Short-term outlook: growth is picking up and the current account is expected to record its sixth consecutive surplus in 2006.
- Exchange rate: recent evidence suggests the dirham, pegged to a currency basket dominated by the euro, is not misaligned.
- Banking: restructuring of the two troubled state-owned banks is almost complete; many 2003 Financial Sector Stability Assessment recommendations implemented.

### Introduction — context and objectives
- Growth momentum needs to be sustained to raise living standards and reduce unemployment.
- 2006 Article IV discussions focused on three pillars of the growth strategy:
  - achieving medium-term fiscal consolidation;
  - enhancing financial intermediation efficiency;
  - deepening integration in the global economy.
- Political stability and ongoing social reforms (National Human Development Initiative) provide a favorable reform environment.

### Achievements and key challenges
- Achievements:
  - Successful privatization and liberalization of telecommunications, energy, and transportation.
  - Significant trade liberalization and financial sector strengthening.
  - Nonagricultural GDP grew by more than 5 percent in 2005 despite three adverse shocks (drought, ATC dismantling, upsurge in energy costs).
  - Real per-capita GDP began rising in 2000; unemployment fell below 10 percent in Q1 2006 for the first time in 35 years.
- Key challenge:
  - Capitalize on reforms to accelerate growth to levels compatible with substantial poverty reduction and lower unemployment.

### Economic and financial backdrop — recent developments
- Growth and demand:
  - Real growth projected at 7.3 percent in 2006, up from 1.7 percent in 2005, reflecting a bumper crop and strong construction and tourism sectors.
  - Private investment recovery indicated by available indicators.
- External position:
  - Current account expected to record sixth consecutive surplus in 2006.
  - External reserves: $18.4 billion as of end-July 2006; reserves exceed total stock of external debt.
  - Standard debt sustainability analysis indicates limited external vulnerabilities.
- Exchange rate and prices:
  - Favorable inflation differential with the EU has prevented real effective appreciation despite euro strength.
  - Consumer prices expected to increase by 2.5 percent in 2006, up from 1 percent in 2005, mainly due to higher energy prices.
- Monetary policy and central bank reforms:
  - New statutes of Bank Al-Maghrib (BAM) promulgated in early 2006 institutionalize independence and enshrine price stability as core mandate.
  - BAM incorporated repos, is building a portfolio of government securities, and moved to seven-day deposit auctions to mop up excess liquidity.
  - Publication of press releases after BAM board meetings has increased transparency.
- Fiscal and public debt:
  - Fiscal deficit likely to be close to the budget target of 4.1 percent of GDP in 2006 (down from 5.9 percent in 2005), despite buoyant revenues, because of continued expenditure pressures.
  - Expenditure pressures include: high oil and food subsidies, restructuring of two public banks, transfers to the civil servants’ pension fund, and new wage concessions in education and health.
  - Fiscal deficit on a commitment basis excludes expenditures from Fonds Hassan II, projected to reach 0.7 percentage points of GDP in 2006.
  - Standard fiscal sustainability analysis indicates public debt is mostly sensitive to output shocks.
- Financial sector:
  - Banking law of 2006 broadens BAM’s supervisory authority to nonbank financial institutions.
  - Write-offs of nonperforming loans have strengthened banking sector balance sheets.
  - Capital-adequacy ratios of the troubled state-owned banks are expected to improve in 2006 and satisfy minimum requirement by 2007.

### Medium-term outlook (selected projection highlights)
- Staff baseline scenario: nonagricultural GDP projected to grow by 5.5 percent on average over the next five years, with annual inflation at 2 percent.
- Remittances: strong remittances flows projected at 8.6 percent of GDP on average in 2006–11.
- Savings and current account projections (selected entries from Morocco: Medium-Term Projections 2005-11):
  - Real GDP: 1.7 (2005); 7.3 (2006); 3.3 (2007); 5.1 (2008); 5.3 (2009); 5.4 (2010); 5.5 (2011)
  - Real non-agricultural GDP: 5.2 (2005); 5.1 (2006); 5.2 (2007); 5.4 (2008); 5.5 (2009); 5.7 (2010); 5.8 (2011)
  - CPI Inflation: 1.0 (2005); 2.5 (2006); 2.0 (2007); 2.0 (2008); 2.0 (2009); 2.0 (2010); 2.0 (2011)
  - Unemployment Rate 1/: 11.0 (2005); 8.2 (2006); 8.4 (2007); 7.5 (2008); 6.5 (2009); 5.5 (2010); 4.4 (2011)
  - Current Account Balance 2/: 1.8 (2005); 1.2 (2006); 0.2 (2007); 0.5 (2008); 0.5 (2009); 0.1 (2010); -0.5 (2011)
  - Exports: 20.6 (2005); 20.5 (2006); 20.6 (2007); 20.7 (2008); 20.7 (2009); 20.8 (2010); 20.9 (2011)
  - Imports: -36.3 (2005); -37.3 (2006); -38.7 (2007); -38.7 (2008); -38.9 (2009); -39.3 (2010); -39.8 (2011)
  - Non-factor Services Balance 2/: 8.3 (2005); 9.0 (2006); 9.1 (2007); 9.3 (2008); 9.5 (2009); 9.6 (2010); 9.7 (2011)
  - Income and Transfers Balance 2/: 9.2 (2005); 9.1 (2006); 9.3 (2007); 9.3 (2008); 9.2 (2009); 9.0 (2010); 8.7 (2011)
  - Private savings-investment balance: 4.7 (2005); 1.6 (2006); -0.3 (2007); -0.7 (2008); -1.5 (2009); -2.3 (2010); -3.2 (2011)
  - Public savings-investment balance: -2.9 (2005); -0.4 (2006); 0.6 (2007); 1.2 (2008); 1.9 (2009); 2.4 (2010); 2.7 (2011)
- Notes:
  - 1/ In percent of the labor force.
  - 2/ In percent of GDP.

### Three key issues for growth — policy discussions and recommendations
- Overall focus: sustain job-creating growth through fiscal consolidation, improved financial intermediation, and deeper integration in the world economy.

A. Fiscal consolidation and medium-term fiscal strategy
- Fiscal consolidation is the top policy priority due to dwindling privatization proceeds and still-high public debt.
- Authorities’ medium-term fiscal strategy mixes expenditure and revenue measures.
- Expenditure-side measures include:
  - Reducing wage bill growth.
  - Reducing the fiscal cost of energy subsidies by gradually adjusting domestic petroleum prices to international prices.
  - Gradually replacing inefficient food subsidies with targeted support to vulnerable groups.
  - Switching to performance-based budgeting within a medium-term expenditure framework.
- Revenue-side measures include:
  - Improving transparency and efficiency of the tax system, particularly of the VAT.
  - Strengthening domestic revenue mobilization to offset revenue losses from continued trade liberalization.
- 2007 budget recommendation:
  - The 2007 budget should send a strong signal on commitment to fiscal consolidation.
  - A deficit target of 3.5 percent of GDP appears within reach.

B. Enhancing financial intermediation
- Inefficiencies in financial intermediation persist.
- Central bank measures to improve financial information availability, accuracy, and transparency are helpful.
- Further development of alternative financing instruments (stock and bond markets) and improved mobilization of institutional savings could enhance intermediation.

C. Deepening integration in the world economy
- Morocco has made considerable progress in trade liberalization; next steps include addressing remaining trade obstacles and increasing trade in services.
- Sectoral reforms are producing results but sectoral incentives must not create distortions.
- Exchange rate regime and monetary framework:
  - Staff supports authorities’ intention to prepare for eventual transition to a more flexible exchange rate regime.
  - BAM has started strengthening the monetary policy framework, possibly with a view to adopting inflation targeting in the medium term.
  - Further fiscal consolidation and development of monetary and exchange markets would help ensure an orderly transition from the current currency-basket peg of the dirham.

### Staff appraisal — summary view
- Macroeconomic conditions are strengthening with no major short-term policy concerns.
- Continued implementation of fiscal consolidation, financial sector reforms, and trade/economic integration measures are essential to sustain the recent improvement in growth and further reduce vulnerabilities.

*Source: _cr06413 - Executive Summary (IMF Country Report Executive Summary).*

### 10.      The government debt-to-GDP

### The government debt-to-GDP

### Debt trends and 2005 developments
- The government debt-to-GDP ratio has declined steadily since the turn of the century.
- The downward trend halted in 2005 following the financing of one-off operations linked to the early retirement scheme for government employees (Départs Volontaires à la Retraite, DVR, 2.5 percent of GDP), and the acknowledgement of old arrears to the public pension fund (Caisse Marocaine de Retraite, CMR, 2.4 percent of GDP).
- The debt-to-GDP ratio is expected to resume its decline in 2006.

### Authorities’ views and policy intentions on fiscal consolidation
- The authorities believe that sustainable expenditure savings are only possible if the overall efficiency of public spending improves, and have adopted a gradual approach to fiscal consolidation.
- Civil service reform:
  - A broad civil service reform will help to gradually curb wage bill growth.
  - Successful implementation of the DVR and a continued no-new-net hiring policy should reduce the wage bill by 1.4 percent of GDP to 12.2 percent of GDP in 2006.
  - Going forward, adoption of merit-based promotions and remunerations and harmonization of civil service statutes would prevent ad hoc wage adjustments.
- Subsidy and upstream sectoral reforms:
  - Authorities consider the current subsidy system inefficient and have initiated discussions on a comprehensive reform of the energy sector, with World Bank support, to reduce the fiscal cost of energy subsidies (1.6 percent of GDP in 2005).
  - Authorities plan to continue to gradually align consumer prices with international prices to allow for eventual liberalization; they noted that, following three increases (totaling 22 percent on average) since 2005, domestic prices for petroleum products are high by international standards.
  - They are designing a strategy to reduce the cost of food subsidies (0.8 percent of GDP in 2005) by better targeting them to the most vulnerable groups and stress the need to build consensus given the importance of subsidies for social cohesion.
- Tax system reform:
  - Ongoing reform of the tax system aims to establish a level-playing field, reduce distortions, and durably improve revenue collection.
  - Measures begun include presenting the first report on tax expenditures with the 2006 budget, publishing a tax procedure, and a tax assessment and collection manual.
  - A medium-term plan to reduce the number of VAT rates and efforts to broaden the VAT base started with the 2006 budget.

### The 2005 Early Retirement Program
- Objectives: Reduce the size of the civil service and curb wage bill growth.
- 39,500 employees (8 percent of the civil service) left under the voluntary program; three-quarters of those leaving the civil service were older than fifty.
- Program cost: DH 11. 4 billions (2.5 percent of GDP), to be recouped in less than 3 years in the form of wage bill savings. The government will also transfer DH 2 billions each year to the pension fund during 2006–09 to compensate for forgone contributions.
- Expected net total gain: DH 17 billions (3.7 percent of GDP) in net present value terms.

### Medium-term fiscal objectives and projections
- Authorities’ medium-term objective: reduce the fiscal deficit to 3 percent of GDP and bring the public-debt-to-GDP ratio below 60 percent.
- The 2007 budget law will seek a deficit reduction of about ½ a percentage point of GDP.
- In the medium-term:
  - The wage bill should decrease from 13.5 percent of GDP to less than 10 percent in 2011.
  - The budgetary cost of subsidies would be halved, reaching 1.3 percent of GDP in 2011.
  - The resulting reduction in current spending would create room for substantially higher capital spending.
  - Increased efficiency of domestic tax collection should help offset the revenue shortfall from trade liberalization, leaving tax revenue intake broadly unchanged.
- The resulting improvement in the primary balance would be the main driving force behind the reduction of the public debt-to-GDP ratio.

### Enhancing financial intermediation — background and measures
- Background findings:
  - Increase in banking spreads during a period of monetary easing points to inefficiencies in financial intermediation.
  - Banking sector assets rose by almost 30 percentage points of GDP over the last decade to reach 94 percent of GDP in 2005.
  - As monetary conditions eased, interbank and deposit rates fell by over 400 basis points, but the spread between banks’ deposit and lending rates increased between 1998 and 2005.
  - A sizeable portfolio of nonperforming loans weighed heavily on the cost of credit in the past; recent cleaning up of banks’ balance sheets has helped alleviate this problem.
  - The steady decline of bank financing of the Treasury, coupled with fiscal consolidation efforts, has prompted banks to expand lending to the private sector.
- Authorities’ actions and policy intentions:
  - Bank Al-Maghrib (BAM) has sought to improve the availability, accuracy, and transparency of financial information by:
    - Standardizing minimum data required to process loan applications.
    - Helping banks develop internal rating systems.
    - Merging existing information on credit risk into a privately managed centralized database accessible to all credit institutions.
    - Launching a bank survey to improve monitoring of changes in credit conditions.
  - The Treasury is strengthening the performance of existing guarantee funds to facilitate access to credit, particularly for small and medium enterprises.

### Deepening integration in the world economy — background and policies
- Trade liberalization progress:
  - Most provisions of the free trade agreement with the European Union have been implemented; the agreement will be fully implemented by 2012.
  - New regional and bilateral free-trade agreements: the Agadir agreement with Tunisia, Egypt, and Jordan (came into effect mid-2006) allows for cross rules of origin among the four partners vis-à-vis the EU.
  - Bilateral free-trade agreements with Turkey and the USA entered into force on January 1, 2006.
  - Despite these agreements, trade flows have not increased very much, indicating persistent trade obstacles and high multilateral tariffs.
- Preparations for globalization:
  - Strengthening infrastructure—particularly highways and ports—and liberalization in electricity, transport and telecommunications are expected to generate substantial productivity gains and enhance attractiveness to investors.
  - Sectoral reforms include Plan Azur for tourism expansion, and Plan Emergence (finalized end-2005) to modernize existing industrial sectors (e.g., textile) and facilitate expansion of new industrial sectors and services.
  - Incentives for offshoring: tax incentives and outfitting of four offshore zones.
  - Authorities indicated intention to prepare for a possible exit from the currency-basket peg of the dirham.
- Authorities’ policy intentions to maximize benefits of FTAs:
  - Adopted legislation on recognition of norms, industrial property, and consumer protection to align market conditions with EU requirements.
  - Lowered MFN tariffs on goods already freely traded with the EU to reduce risk of trade diversion.
  - Following the November 2005 Algiers conference on trade facilitation in the Maghreb, an action plan to facilitate payment arrangements, combat smuggling, and harmonize trade regulations and rules of origin on a region-wide scale should be approved in 2006.
  - A regional conference on financial integration in the Maghreb, to be held in Rabat at end-2006, will complement these efforts.
- Services liberalization:
  - Morocco has submitted a proposal for the liberalization of services to the World Trade Organization.
  - Morocco participated in launching the framework protocol for liberalization of services within the Euromed following the March 2006 Marrakesh meeting.
- Exchange rate stance:
  - The existing currency-basket peg of the dirham has served Morocco well and remains appropriate.
  - A gradual move toward a flexible exchange rate could help ensure successful integration; authorities have taken preparatory steps:
    - Ministry of Finance and BAM are exploring exchange rate regime issues, deepening exchange and financial markets, and foreign exchange regulations.
    - BAM is strengthening the monetary policy framework, possibly with a view to adopting inflation targeting in the medium term, and has engaged in analytical research to enhance understanding of money demand, the monetary policy transmission mechanism, and to fine tune inflation projections, including development of a core inflation indicator.
    - Authorities expressed interest to organize a regional conference on inflation targeting in 2007, in cooperation with the Fund.

### Staff appraisal — achievements and challenges
- Achievements:
  - Per capita income has been rising steadily since the beginning of the century, nonagricultural growth is taking off, and macroeconomic conditions remain stable.
- Challenges:
  - Need to sustain and improve economic performance to raise living standards, absorb increasing labor supply, and lower poverty, which remains unacceptably high.
  - Authorities should use the favorable environment to step up reforms to transform Morocco into a vibrant emerging-market economy by tackling remaining impediments to growth.

### Staff appraisal — outlook, risks, and policy recommendations
- Outlook and risks:
  - Recovery in economic activity seems well underway with no signs of overheating.
  - Main medium-term risks are largely policy related: productivity gains necessary to lift nonagricultural growth may not materialize unless structural reform momentum is sustained; unaddressed fiscal vulnerabilities could harm policy credibility and investor attractiveness.
- Fiscal consolidation advice:
  - Recent fiscal developments are encouraging but highlight the need to bring spending under tighter control; higher-than-envisaged outlays on wage increases and energy and food subsidies have fully absorbed gains from strong revenue performance.
  - Success and credibility of fiscal consolidation depend on avoiding new wage concessions that would erode savings from the early retirement program.
  - Energy and food subsidies constitute a heavy budgetary burden; staff welcomes intention to overhaul the subsidy system within broader reforms but recommends immediate action to curb subsidy costs given prospects for international oil and sugar prices.
  - Authorities should continue to gradually raise retail energy prices and put a ceiling on subsidy spending for sugar consumption.
  - Strong revenue performance reflects improvements in tax administration but should not slow tax reform; reforming the tax system remains a priority to mobilize resources, limit distortions from a complex tax system, and improve the business environment.
- 2007 budget recommendation:
  - The 2007 budget should lock in wage bill savings, limit outlays for subsidies, and maintain strong revenue performance.
  - A deficit target of 3.5 percent of GDP appears within reach and consistent with the medium-term objective of bringing government debt-to-GDP below 60 percent.
- Monetary policy:
  - BAM has succeeded in preventing protracted excess liquidity from generating inflationary pressures but must continue to monitor inflation as recovery takes hold.
  - Recent use of seven-day deposit auctions to mop up liquidity is appropriate to halt decline in interbank interest rates.
  - Staff welcomes BAM’s increased independence and efforts to enhance analytical capabilities for a possible inflation targeting framework.
- Exchange rate:
  - Staff supports authorities’ intention to prepare for a possible transition to a more flexible exchange rate regime.
  - To ensure an orderly transition, authorities should achieve further fiscal consolidation and continue to develop monetary and exchange markets; absorb existing liquidity overhang; consider targeted measures toward further capital account liberalization to develop the foreign exchange market.
  - Fund technical assistance could be provided to design a detailed strategy for further liberalizing capital flows, including supporting reforms and sequencing.
- Financial intermediation:
  - Financial sector reforms have achieved significant results and vulnerabilities have abated.
  - Further enhancing the judiciary to expedite recovery of claims and harmonizing tax and prudential provisioning rules could buttress the banking system.
  - Development of alternative financing instruments (stock and bond markets) could encourage banks to work more with small and medium enterprises and enhance intermediation efficiency.
  - Enhancing mobilization of institutional savings could help lengthen maturity of resources to finance the economy.
  - The planned regional conference on financial integration in the Maghreb will be a venue to exchange best practices.
- Plan Emergence:
  - Measures to adapt the Moroccan economy to globalization have borne fruits, notably for offshoring activities.
  - It is important that sectoral incentives do not further complicate the tax system and create distortions.
- Trade liberalization:
  - Progress toward multilateral liberalization needs to complement bilateral and regional efforts to minimize trade and investment diversion.
  - The Agadir agreement coming into effect should allow Morocco to exploit cross rules of origin vis-à-vis the EU.
  - Staff welcomes authorities’ intention to implement the action plan agreed at the Algiers conference on trade facilitation in the Maghreb to reduce remaining obstacles to trade.

*Source: _cr06413 - 10.      The government debt-to-GDP*

### 31.      It is recommended that the next Article IV consultation take place on the standard

### _cr06413 - 31.      It is recommended that the next Article IV consultation take place on the standard

### Recommendation on Article IV consultation
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.
- Morocco is on the 12-month cycle. The last discussions of the Article IV consultation were held in Rabat during April 25-May 10, 2005, and were concluded by the Executive Board on August 29, 2005.

### Key macroeconomic outcomes and projections (Table 1: Selected Economic Indicators, 2003-07)
- Real GDP (market prices): 2003 5.5; 2004 4.2; 2005 1.7; 2006 7.3; 2007 3.3
- Nonagricultural Real GDP (market price): 2003 3.5; 2004 4.7; 2005 5.2; 2006 5.1; 2007 5.2
- Consumer prices (end of period): 2003 1.8; 2004 0.5; 2005 2.1; 2006 2.5; 2007 2.0
- Consumer prices (period average): 2003 1.2; 2004 1.5; 2005 1.0; 2006 2.5; 2007 2.0
- Gross capital formation (in percent of GDP): 2003 24.1; 2004 25.0; 2005 25.9; 2006 25.6; 2007 25.7
- Gross national savings (in percent of GDP): 2003 27.7; 2004 27.0; 2005 27.8; 2006 26.8; 2007 25.9
- Budget balance (commitment basis) 1/: 2003 -5.4; 2004 -4.8; 2005 -6.4; 2006 -4.7; 2007 -3.9
- Budget balance (commitment basis) 2/: 2003 -5.0; 2004 -4.6; 2005 -5.9; 2006 -4.1; 2007 -3.6
- Total government debt 3/: 2003 68.9; 2004 65.8; 2005 70.5; 2006 66.8; 2007 66.5
- Credit to the private sector (annual percent change): 2003 8.3; 2004 7.2; 2005 13.1; 2006 7.5; 2007 9.3
- Gross reserves (in millions of U.S. dollars): 2003 13,716; 2004 16,298; 2005 16,080; 2006 18,768; 2007 20,044
- Nominal GDP (in US$ billions): 2003 43.8; 2004 50.0; 2005 51.6; 2006 57.2; 2007 61.4
- Unemployment rate (in percent): 2003 11.4; 2004 10.8; 2005 11.0; 2006 7.8; 2007 8.0
- Poverty rate: 15 percent; 2004
- Main exports: textiles, phosphates; 2005
- Population: 30.1 million; 2005
- Per capita GDP: US$1,712; 2005

### External sector and balance of payments (Table 2, 2003-11 highlights)
- Current account (in millions of U.S. dollars): 2003 1,591; 2004 965; 2005 945; 2006 698; 2007 146
- Trade balance (in millions of U.S. dollars): 2003 -4,334; 2004 -6,485; 2005 -8,086; 2006 -9,647; 2007 -11,149
- Exports, f.o.b. (in millions of U.S. dollars): 2003 8,762; 2004 9,912; 2005 10,644; 2006 11,698; 2007 12,641
  - Agriculture: 2003 1,825; 2004 1,757; 2005 2,106; 2006 2,198; 2007 2,363
  - Phosphates and derived products: 2003 1,241; 2004 1,564; 2005 1,818; 2006 2,077; 2007 2,250
- Imports, f.o.b. (in millions of U.S. dollars): 2003 -13,095; 2004 -16,397; 2005 -18,730; 2006 -21,345; 2007 -23,790
  - Petroleum (net imports of petroleum products, memorandum): 2003 963; 2004 1,639; 2005 2,701; 2006 3,590; 2007 4,021
- Services: 2003 2,617; 2004 3,261; 2005 4,277; 2006 5,131; 2007 5,601
  - Tourism receipts: 2003 3,225; 2004 3,924; 2005 4,617; 2006 5,344; 2007 5,876
- Private transfers (net): 2003 4,017; 2004 4,727; 2005 5,152; 2006 5,621; 2007 6,056
- Gross official reserves (in millions of U.S. dollars): 2003 13,716; 2004 16,298; 2005 16,080; 2006 18,768; 2007 20,044
  - In months of next year's imports: 2003 8.3; 2004 8.7; 2005 7.5; 2006 7.9; 2007 7.8
- Total external debt (in percent of GDP): 2003 35.1; 2004 30.8; 2005 29.0; 2006 26.1; 2007 24.6

### Central government finances (Tables 3 and 4, 2003-11 highlights)
- Revenue (in billions of dirhams): 2003 103.3; 2004 112.6; 2005 125.0; 2006 133.2; 2007 137.7
- Revenue (in percent of GDP): 2003 24.6; 2004 25.4; 2005 27.3; 2006 26.5; 2007 26.0
- Expenditures and net lending (excl. Fonds Hassan II, in billions of dirhams): 2003 126.3; 2004 135.1; 2005 156.4; 2006 154.5; 2007 158.2
- Expenditures (in percent of GDP): 2003 30.1; 2004 30.5; 2005 34.2; 2006 30.7; 2007 29.8
- Wages (in billions of dirhams): 2003 53.2; 2004 56.6; 2005 62.0; 2006 61.0; 2007 62.0
- Food and petroleum subsidies (in billions of dirhams): 2003 4.9; 2004 7.9; 2005 11.3; 2006 13.4; 2007 11.3
- Interest (in billions of dirhams): 2003 17.4; 2004 17.6; 2005 17.3; 2006 18.8; 2007 19.7
- Overall balance (commitment basis, incl. Fonds Hassan II, in percent of GDP): 2003 -5.4; 2004 -4.8; 2005 -6.4; 2006 -4.7; 2007 -3.9
- Overall balance (cash basis, incl. Fonds Hassan II, grant & privatization, in percent of GDP): 2003 -2.7; 2004 -1.7; 2005 -4.8; 2006 -2.7; 2007 -3.1
- Total Central Government debt (end period, in billions of dirhams): 2003 290.4; 2004 294.3; 2005 327.5; 2006 340.7; 2007 356.7
- Total Central Government debt (end period, in percent of GDP): 2003 69.2; 2004 66.3; 2005 71.6; 2006 67.7; 2007 67.2
- GDP in billions of dirhams: 2003 419.5; 2004 443.7; 2005 457.6; 2006 503.4; 2007 530.6

### Monetary sector and banking indicators (Table 5 highlights, 2001-06)
- Net foreign assets (in millions of dirhams): 2001 101,678; 2002 110,460; 2003 127,083; 2004 144,309; 2005 165,509; 2006 180,506
  - Gross reserves: 2001 96,640; 2002 101,760; 2003 120,012; 2004 133,934; 2005 148,730; 2006 163,726
- Domestic credit (in millions of dirhams): 2001 294,257; 2002 305,944; 2003 323,629; 2004 334,509; 2005 368,513; 2006 391,011
  - Credit to the economy: 2001 208,647; 2002 216,474; 2003 234,531; 2004 251,441; 2005 284,333; 2006 305,783
- Money and quasi money (in millions of dirhams): 2001 327,411; 2002 348,200; 2003 378,144; 2004 407,081; 2005 464,186; 2006 502,345
  - Money: 2001 243,117; 2002 264,863; 2003 290,784; 2004 319,340; 2005 364,137; 2006 394,071
  - Quasi money: 2001 84,294; 2002 83,337; 2003 87,360; 2004 87,741; 2005 100,049; 2006 108,274
- Velocity (GDP/M3): 2001 1.17; 2002 1.14; 2003 1.11; 2004 1.09; 2005 0.99; 2006 1.00
- Credit to economy/GDP (in percent): 2001 54.5; 2002 54.4; 2003 55.9; 2004 56.7; 2005 62.1; 2006 60.7
- NPL/Gross loans (in percent): 2001 16.8; 2002 17.2; 2003 18.1; 2004 19.4; 2005 15.7
- DHs per US$, period end: 2001 11.56; 2002 10.17; 2003 8.75; 2004 8.22; 2005 9.25

### Debt sustainability (Tables 6 and 7: external and public sector frameworks)
- External debt (in percent of GDP): 2001 46.9; 2002 43.5; 2003 38.4; 2004 33.2; 2005 27.8; 2006 26.4; projection 2011 18.0
- Change in external debt (annual): 2001 -7.1; 2002 -3.4; 2003 -5.1; 2004 -5.1; 2005 -5.4; 2006 -1.4
- Current account deficit, excluding interest payments (in percent of GDP): 2001 -7.3; 2002 -6.1; 2003 -5.1; 2004 -3.1; 2005 -2.9; 2006 -2.3
- External debt-to-exports ratio (in percent): 2001 142.4; 2002 128.7; 2003 118.1; 2004 100.1; 2005 76.5; 2006 71.5
- Public sector debt (in percent of GDP): 2001 74.7; 2002 71.3; 2003 68.9; 2004 65.8; 2005 70.5; 2006 66.8; projection 2011 56.6
  - Foreign-currency denominated share (in percent of GDP): 2001 28.9; 2002 23.3; 2003 18.8; 2004 15.9; 2005 15.1; 2006 13.1; projection 2011 8.0
- Change in public sector debt (annual): 2001 -6.1; 2002 -3.3; 2003 -2.4; 2004 -3.1; 2005 4.6; 2006 -3.7
- Primary deficit (in percent of GDP): 2001 1.1; 2002 -0.1; 2003 0.7; 2004 0.3; 2005 1.7; 2006 0.0
- Gross financing need (in percent of GDP): 2001 21.4; 2002 22.9; 2003 18.0; 2004 21.4; 2005 18.3; 2006 13.6

### Exchange rate arrangement and Fund/World Bank relations
- Exchange rate arrangement: Morocco has a conventional peg arrangement; the central exchange rate of the Moroccan dirham is pegged to a basket of currencies representing Morocco’s principal trading partners.
- As of August 18, 2006, the SDR/dirham exchange rate was SDR 1 = DH 12.87.
- Fund relations: Morocco has no outstanding purchases or loans. The latest financial arrangement—a Stand-By facility—expired on March 31, 1993.
- Relations with the World Bank Group: As of August 2006, the World Bank’s portfolio in Morocco consists of 13 operations with a total net commitment of $823.7 million and an undisbursed balance of $549.3 million.

### Technical assistance and statistical developments
- Selected recent technical assistance missions:
  - February 16–29, 2000: STA—following up on government finance statistics improvement
  - November 7–22, 2000: FAD—advising on improving the design of the tax system and its administration
  - January 16-30, 2002: STA—ROSC Data Module Mission
  - February 9–20, 2004: MFD—Monetary Framework
  - May 17–24, 2004: FAD—Modernizing the tax system and its administration
  - June 28–July 7, 2004: FAD—ROSC Fiscal Module
  - 2004: MFD—Peripatetic visits—internal credit rating system
- Statistical issues:
  - Morocco subscribed to the Special Data Dissemination Standard in December 2005.
  - Authorities are rebasing national accounts from 1980 to 1998; new series covering 1998–2004 should be released during 2006.
  - Planned inclusion of free trade zones and offshore banks is expected to improve balance-of-payment statistics.

*Source: Moroccan authorities and Fund staff estimates and projections as presented in the report.*

### 32.      The Country Assistance Strategy (CAS) was approved by the World Bank Board on

### _cr06413 - 32.      The Country Assistance Strategy (CAS) was approved by the World Bank Board on

### World Bank Country Assistance Strategy (CAS) — objectives and scope
- CAS approved on May 19, 2005.
- CAS aims to contribute to accelerating sustainable employment-generating growth and reducing poverty and marginalization.
- Four CAS objectives:
  - (a) improve competitiveness and the investment climate;
  - (b) increase access to basic services by the poor and marginalized groups;
  - (c) improve the efficiency of the education system;
  - (d) improve water management and access to water services and sanitation.

### World Bank portfolio and recent lending
- Current portfolio: 13 operations, total net commitment of US$823.7 million, undisbursed balance of US$549.3 million.
- Bank lending instruments: investment loans, SWAPs, and development policy loans (DPL).
- Recent loans:
  - Housing Sector DPL (US$150 million);
  - Financial Sector DPL (US$200 million);
  - Rural Water Supply and Sanitation (US$60 million);
  - Public Administration Development Policy Loan (US$120 million);
  - Rural Roads II (US$60 million).

### Disbursements, portfolio quality, and implementation capacity
- FY06 disbursements:
  - DPLs: US$214.2 million;
  - Investment projects: US$60.2 million.
- Disbursement ratio for investment projects: 14.5%.
- Portfolio quality: generally satisfactory; no risky projects.
- Implementation challenges: institutional capacity for project implementation still needs strengthening.
- Planned action: participatory Country Portfolio Performance Review (CPPR) planned for end-2006 to accelerate disbursement and reassess progress on key actions to improve project and portfolio management.

### Country Economic Memorandum (CEM) and analytical collaboration
- New CEM finalized in March 2006 (prepared in collaboration with Fund staff) and largely discussed with the Government; dissemination ongoing with private sector, academia, and civil society participation.
- Purpose: identify major constraints to growth and devise a growth and competitiveness enhancing agenda; aligns with CAS to support reforms for a private environment conducive to faster growth and increased employment creation.

### Prospects for lending and projects under preparation
- Lending prospects improving; specific requests received for budget support and investment projects.
- Projects under preparation:
  - Energy Sector DPL (US$100 million);
  - Water DPL (US$100 million);
  - National Human Development Initiative (US$200 million);
  - Oum Er Rbia Water Resource Conservation (US$60 million);
  - Meknes Local Development (US$30 million);
  - Public Administration Reform III DPL.
- Discussion underway on a possible follow-up operation to address growth constraints identified by the CEM.

### Other analytical and advisory work
- Recent studies: Housing, Competitiveness and ICT, Water Sector, Trade and Transport, Wheat, Flour Compensation Reform.
- Investment Climate Assessment disseminated in March 2006; follow-up work on land tenure as a constraint to private sector development and investment.
- Current studies: Employment and Skills Development, Housing PSIA, Urban Transport, Doing Business and ICT, Land Markets and Growth, Decentralization and EU Neighborhood.
- Programmatic Economic and Sector Work (PESW) support: Tertiary Education, Public Administration Reform, Poverty, and Water with participatory approaches.

### Statistical issues (Annex III) — overall assessment
- Available economic and financial data provided regularly; most data published or publicly available; data provision adequate for surveillance.
- Data ROSC mission (January 2002) reviewed macroeconomic statistics and identified areas to strengthen to meet SDDS; follow-up mission (April–May 2005) noted authorities meet most SDDS requirements in coverage, periodicity, and timeliness.
- Morocco subscribed to the SDDS in December 2005 following an action plan to address remaining issues.

### Real sector statistics
- Statistical Office rebasing national accounts from 1980 to 1998 and aligning with System of National Accounts 1993.
- First series of accounts for 1998–2000 finalized.
- New series covering 1998–2004 to be released during 2006 once work on 2001–04 completed.
- Revision of the consumer price index planned to be completed during 2006 with updated weights from the 2001 household budget survey.
- Producer price index: consistent monthly time series available (weights from 1997 annual survey).

### Government finance statistics
- Central government finance data generally available with a few months lag.
- GFS Yearbook data not timely (most recent relate to 2005) and coverage limited to budgetary central government, the Moroccan pension fund, and the National Social Security Fund.
- Reporting of central government data for IFS is irregular.
- STA technical assistance in February 1999 and February 2000 advised improvements in compilation of central and local government statistics and consolidation procedures for general government data.
- Progress by the Accounting Office in compiling local government data and consolidation with central government budgetary data; further clarification of responsibilities may be required for general government compilation.
- Data ROSC recommendations on the monthly Treasury’s Expenditure and Revenue Table included reclassifications (e.g., transfers and privatization), maintaining the Fonds Hassan II within the table, complementing the table with financing details, and improving dissemination format.
- SDDS mission prepared an action plan for production of consolidated general government operations data.

### Monetary and financial statistics
- Bank Al-Maghrib disseminates monetary and financial statistics primarily through its website (www.bkam.ma) including web-based weekly, monthly, quarterly, and annual publications.
- Degree of detail in breakdown of financial assets and liabilities by resident institutional sector could be more extensive, affecting precision in some monetary aggregates, including credit indicators.

### Balance of payments (BOP) and external statistics
- ROSC found BOP data generally in line with BPM5 concepts and definitions but recommended further work on scope, classification, and recording basis.
- Recommendations and planned actions:
  - Continue measures to exclude exchange rate effects from valuation of transactions in reserve assets.
  - Exclude transactions in foreign currency assets and liabilities of intermediary banks at correspondent banks from transactions in reserve assets.
  - Treat operators in free trade zones as residents; consider offshore banks located in Morocco as residents.
  - Office des Changes (OC) currently lacks a firm legal basis for compiling and disseminating BOP statistics; relies on customs and exchange control data which may become less available with liberalization.
  - OC initiated legislative measures to access statistical data directly from economic operators to record private foreign debt and international investment position.
  - Introduce quarterly surveys of enterprises and other agencies to improve scope, classification, and valuation of BOP transactions (goods for processing, transportation services, financial transactions).
- Since May 1998 OC has published monthly statistics on trade, tourism, private transfers, and incoming FDI in accordance with BPM5.
- Latest BOP and IIP information published in IFS: quarterly BOP data for 2004 and annual IIP data for 2004.
- Morocco reports international liquidity data to STA regularly for publication in the IFS.
- Quality of BOP statistics expected to improve with planned inclusion of free trade zones and offshore banks located in Morocco or its economic territory.

### Table of common indicators (as of August 7, 2006) — data availability and quality notes (selected)
- Exchange Rates:
  - Date of latest observation: 07/31/06
  - Date received: 08/04/06
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of publication: D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities:
  - Date of latest observation: 06/30/06
  - Date received: 07/28/06
  - Frequency: W (data, reporting, publication all W)
- Reserve/Base Money; Broad Money; Central Bank Balance Sheet; Consolidated Balance Sheet of the Banking System:
  - Date of latest observation: 05/30/06
  - Date received: 7/15/06
  - Frequency: M (data, reporting, publication all M)
- Interest Rates:
  - Date of latest observation: 06/30/06
  - Date received: 7/15/06
  - Frequency: D (data, reporting, publication all D)
- Consumer Price Index:
  - Date of latest observation: 06/30/06
  - Date received: 07/28/06
  - Frequency: M (data, reporting, publication all M)
- Revenue, Expenditure, Balance and Composition of Financing — General Government:
  - Date of latest observation: 03/31/05
  - Date received: 05/31/05
  - Frequency: ... (reporting/publication not specified)
- Revenue, Expenditure, Balance and Composition of Financing — Central Government:
  - Date of latest observation: 03/31/05
  - Date received: 05/31/05
  - Frequency: M (data, reporting, publication all M)
- Stocks of Central Government and Central Government-Guaranteed Debt:
  - Date of latest observation: 03/31/05
  - Date received: 05/31/05
  - Frequency: A (data, reporting, publication all A)
- External Current Account Balance; Exports and Imports of Goods and Services:
  - Date of latest observation: 03/31/05
  - Date received: 05/31/05
  - Frequency: M (data, reporting, publication all M)
- GDP/GNP:
  - Date of latest observation: 03/31/06
  - Date received: 05/31/06
  - Frequency: Q (data, reporting, publication all Q)
- Gross External Debt:
  - Date of latest observation: 03/31/05
  - Date received: 05/31/05
  - Frequency: Q (data, reporting, publication all Q)
- Data quality assessments reference the data ROSC (mission January 16–30, 2002) and the SDDS subscription process (December 2005).

### IMF Staff Representative statement (October 11, 2006) — recent macro developments
- Real GDP at end-June: 8.5 percent year-on-year growth (boosted by a good harvest and robust non-agricultural growth).
- International reserves: $19.8 billion at end-August, up from $16 billion at end 2005.
- Tourism receipts: preliminary data point to higher-than-anticipated tourism receipts contributing to reserves surge.
- Trade balance: remains in line with staff projections; textiles exports recovering from 2005 decline following end of the Agreement on Textiles and Clothing.
- Fiscal revenue performance: recent strengthening may lead to a more favorable fiscal outcome for the year.
- Investment and domestic demand: picking up, reflecting increased private sector confidence.
- Unemployment rate: overall unemployment dropped to 7.7 percent in the second quarter of 2006, its lowest level in more than two decades.
- Inflation: average inflation reached 2.4 percent year-on-year at end-August.

*Source: _cr06413*

### 3.      On September 2, 2006, the authorities increased the retail price of petroleum

### _cr06413 - 3.      On September 2, 2006, the authorities increased the retail price of petroleum

### Petroleum price adjustment and fuel subsidy threshold
- On September 2, 2006, the authorities increased the retail price of petroleum products by about 5 percent on average.
- The authorities estimate the international price level at which domestic retail prices would no longer be subsidized at $60 per barrel, up from $56 before this latest increase.

### Macroeconomic outlook and recent performance
- Macroeconomic conditions continue to strengthen and the 2006 outlook is favorable, with increased private sector confidence.
- A bumper crop and strong activity in services and construction are ushering in a recovery after a 2005 slowdown.
- The external current account is expected to record its sixth consecutive surplus.
- External reserves are more than US$18 billion and continue to exceed the total stock of public external debt.
- Price pressures remain subdued; recent evidence suggests that the dirham is not misaligned.
- GDP growth estimates and components cited:
  - Real GDP growth: 7.3 (2006, prelim.)
  - Nonagricultural Real GDP growth: 5.1 (2006, prelim.)
- Consumer prices (period average) reported across years include: 0.6, 2.8, 1.2, 1.5, 1.0, 2.5 (as shown in table).

### Fiscal position and consolidation strategy
- Fiscal deficit likely to be close to the 2006 budget target of 4.1 percent of GDP (down from 5.9 percent in 2005).
- Oil and food subsidies represented 1.6 percent and 0.8 percent of GDP in 2005, respectively.
- Authorities’ medium-term fiscal consolidation strategy aims to reduce the fiscal deficit to 3 percent of GDP and bring the public-debt-to-GDP ratio below 60 percent.
- The 2005 voluntary early retirement scheme is expected to help curb wage bill growth.
- Authorities plan to continue gradually aligning domestic petroleum product prices with international prices and are designing a strategy to reduce the fiscal cost of food subsidies by better targeting them to the most vulnerable groups.
- Selected public finance indicators (from table, in percent of GDP unless indicated):
  - Revenue (including grants): 25.1, 25.1, 24.8, 25.7, 27.7, 26.8
  - Expenditure: 34.4, 30.1, 30.5, 30.7, 34.7, 31.4
  - Budget balance (commitment basis, excl. privatization): -6.2, -4.7, -5.0, -4.6, -5.9, -4.1
  - Total government debt: 74.7, 71.3, 68.9, 65.8, 70.5, 66.8

### Monetary policy, reserves, and exchange rate
- Monetary policy has adequately managed excess liquidity; the central bank is strengthening the operational framework and transparency.
- Gross reserves by year (in US$ millions): 8,359.9; 10,008.9; 13,716; 16,298; 16,080; 18,768.
- Reserves coverage: reported as 7.5, 7.5, 8.3, 8.7, 7.5, 7.9 months of next year imports of goods and services.
- Directors welcomed increased central bank independence and efforts to strengthen the monetary policy framework, with a view to possibly adopting inflation targeting in the medium term.
- Directors supported preparing for a possible transition to a more flexible exchange rate regime, conditional on further fiscal consolidation and development of money and exchange markets.

### Banking sector and financial intermediation
- Banking sector conditions improved following significant write-offs of nonperforming loans and near completion of restructuring of two state-owned banks.
- Authorities have taken steps to improve availability, accuracy, and transparency of financial information.
- Directors encouraged development of alternative financing instruments such as stock and bond markets.
- A draft anti-money laundering law was submitted to parliament.
- Authorities requested a new FSAP in mid-2007 to assess progress and outline future reforms.

### External sector and trade liberalization
- Morocco has made considerable progress in trade liberalization; next steps include tackling remaining obstacles to trade and increasing trade in services.
- Main exports cited: textiles, phosphates and derivatives (2005).
- Net imports of petroleum products (in US$ millions, table): 1,282; 1,167; 963; 1,639; 2,701; 3,590.

### Executive Board views and policy recommendations
- Directors commended sound macroeconomic policies and structural reforms that supported non-agricultural growth, low inflation, and comfortable reserves.
- Fiscal consolidation identified as the top policy priority; directors agreed the strategy to reduce the deficit to 3 percent of GDP over the medium term is appropriate.
- Recommendations and priorities emphasized by Directors and staff include:
  - Continue fiscal consolidation and strengthen credibility by curbing wage bill growth and reducing oil and food subsidy costs.
  - Advance tax reform: simplify the tax system, strengthen administration, broaden the tax base.
  - Continue strengthening the monetary policy framework and develop money and exchange markets.
  - Improve efficiency of financial intermediation and develop alternative financing instruments (stock and bond markets).
  - Tackle remaining trade obstacles and increase trade in services.
  - Use the 2007 budget to signal commitment to fiscal consolidation.

### Moroccan authorities’ statement and policies
- Authorities concur with staff analysis and are committed to medium-term fiscal consolidation aiming to reduce the deficit to 3 percent of GDP by 2009.
- Key elements of the authorities’ fiscal strategy:
  - Continued tax revenue mobilization through tax policy and administration reform, including reduction in exemptions.
  - Reduce the wage bill via no new hiring on a net basis, harmonization of civil service statutes, and merit-based promotion.
  - Reform the food subsidy system to reduce cost and improve targeting.
  - Strengthen budget transparency, monitoring, and prioritization, including performance-based budgeting and expanding fiscal account coverage to local government.
- Monetary policy: Bank Al-Maghrib (BAM) implementing strategic plan after new central bank Charter, including modernization and preparation for possible move to formal inflation targeting.
- Financial sector: write-offs of non-performing loans, near completion of restructuring of two public specialized banks (expected to comply fully with prudential requirements by June 2007), and plans to request a new FSAP in mid-2007.
- Structural reforms and growth strategies: improving business climate, major infrastructure projects (e.g., Tanger-Med and tourism development zones expected to be completed by 2008), sectoral plans (Plan Azur for tourism, Plan Emergence for industry), and emphasis on human development and poverty reduction initiatives.

*Source: Public Information Notice (PIN) No. 06/115 — IMF Executive Board Concludes 2006 Article IV Consultation with Morocco (October 13, 2006).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06413.pdf_