## _cr1466 — EXECUTIVE SUMMARY

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### Recent developments and overall assessment
- PLL arrangement: two-year precautionary and liquidity line (PLL) of SDR 4.1 billion (700 percent of quota) approved August 2012; treated as precautionary; second review completed July 31, 2013.
- Macroeconomic performance:
  - Current account deficit (excluding grants): widened to 10 percent of GDP in 2012; estimated about 8 percent of GDP in 2013.
  - Fiscal deficit (including grants): widened to 7.3 percent of GDP in 2012; estimated 5.5 percent of GDP in 2013.
  - Growth: picked up in 2013; growth in 2014 could reach about 4 percent assuming a return to normal cereal production and acceleration in nonagricultural sectors.
- Contextual points:
  - 2012 vulnerabilities driven by European recession, rise in oil prices, and transitions in Arab countries.
  - New coalition government announced October 10, 2013, reducing policy uncertainty.
  - Continued improvement contingent on sustained reform delivery amid fragile international and regional environment.

### PLL qualification, program performance, and staff appraisal
- Overall program status:
  - Program remains broadly on track; Morocco continues to meet PLL qualification criteria.
  - NIR indicative target at end-October 2013 met with a comfortable margin.
  - Fiscal deficit indicative target at end-October 2013 missed due to higher-than-programmed investment spending; authorities met end-year fiscal objective through corrective measures.
  - All standard performance criteria were met.
- PLL assessment areas:
  - Strong performance in: financial sector and supervision; monetary policy; data adequacy.
  - Not substantially underperforming in: fiscal policy; external position and market access.
- Staff recommendation:
  - Completion of the third review under the PLL is recommended.
  - Morocco continues to meet the four exceptional access criteria:
    - Criterion 1: stress scenarios could give rise to financing needs beyond normal limits.
    - Criterion 2: debt ratios remain sustainable over the medium term under standard stress shocks.
    - Criterion 3: market access reconfirmed by raising US$750 million in May 2013.
    - Criterion 4: program has reasonably strong prospect of success; new government reiterated commitment.

### Fiscal developments, reforms, and public debt
- 2013 fiscal outcomes and measures:
  - Fiscal deficit (including grants) reduced by almost 2 percent of GDP to 5.5 percent of GDP in 2013 as programmed at second PLL review.
  - Measures: limit subsidy bill, control wage expenditures, rationalize capital spending; investment overruns addressed by cancelling appropriations not committed by October 31, 2013.
- 2014 budget and measures:
  - Budget targets deficit reduction to 4.9 percent of GDP, mainly via reduced energy subsidies.
  - January 2014 measures: elimination of subsidies on super and industrial fuel; reduction in per-unit subsidy of diesel; diesel subsidy reduction to be implemented through quarterly adjustments starting February 2014.
  - 2014 budget includes reduction by 0.2 percent of GDP of food subsidies and expands social protection through dedicated programs.
  - Steps toward broad tax reform and pledges parametric reform of main public pension fund.
- Budget framework strengthening:
  - Draft organic budget law (OBL) adopted by council of ministers mid-January: multiyear budgeting, program budgeting, performance management, fiscal transparency.
  - Draft OBL would make wage expenditure appropriations binding ceilings and limit carryover of investment appropriations (provisions effective before 2016 and 2017 respectively).
  - Authorities aim adoption in spring 2014 so 2015 budget law prepared under new framework.
- Public debt and sustainability:
  - Public debt: slightly over 60 percent of GDP; projected peak at 63 percent of GDP in 2014, then progressively fall below 60 percent of GDP in the medium term as result of fiscal adjustment.
  - Moderate risks linked to gross financing needs under a real growth shock or a shock to the primary balance.

### External position, reserves, and market access
- Current account (excluding grants): improved by an estimated 2 percent of GDP in 2013 to about 8 percent of GDP.
- Exchange rate assessment: some evidence of moderate overvaluation of the dirham, though less than a year earlier.
- Reserves: broadly stable for more than a year; adequate at 88 percent of the Fund’s reserve metric for emerging markets; expected to remain stable above four months of imports over the medium term.
- Market access: Morocco raised US$750 million in May at favorable terms; not significantly affected by recent emerging markets sell-off.
- External debt: increased from 25.1 percent of GDP in 2011 to 30.9 percent of GDP in 2013; expected peak at 31.6 percent of GDP in 2015 before declining to 28.2 percent of GDP in 2018.
- Policy stance: authorities intend gradual greater exchange rate flexibility, combined with fiscal adjustment and structural reforms to support external sustainability.

### Monetary policy, financial sector, and data
- Monetary policy and inflation:
  - Bank Al-Maghrib (BAM) anchored inflation expectations under exchange rate peg; inflation averaged 1.7 percent over the past 10 years and never exceeded 4 percent.
  - Liquidity remains tight; current monetary policy stance appropriate within existing monetary and exchange rate framework.
  - Nonprimary output gap moderately negative; monetary policy should be cautious about inflationary effects of subsidy reform.
  - IMF technical assistance strengthening BAM’s policy analysis for an eventual move toward a nominal anchor.
- Financial sector soundness (as of June/November 2013):
  - Tier 1 capital ratio = 10.6 percent (June 2013).
  - Regulatory capital to risk-weighted assets = 13.1 percent (June 2013).
  - Nonperforming loans (NPLs) = 5.8 percent of total loans as of November 2013 (up from 5 percent at end-2012).
  - BAM strengthening supervision in line with Basel III; capital adequacy ratio increased June 2013; new definitions of prudential capital and short-term liquidity being incorporated.
  - Moroccan banks fund mainly through domestic deposits and have begun issuing international bonds; BAM monitoring and reinforcing coordination with host-country supervisors.
  - Financial Sector Assessment (FSAP) update planned for fall 2014.
- Data transparency:
  - Morocco subscribes to the Special Data Dissemination Standard; data adequate for surveillance and program monitoring.
  - Fiscal overruns in 2012 revealed issues in fiscal projections and monitoring being addressed; fiscal data reporting remains reliable.

### Subsidies, social protection, and safety nets
- Subsidy outcomes and targets:
  - Subsidy bill: 4.7 percent of GDP in 2013, down from 6.6 percent in 2012.
  - Authorities’ measures expected to bring subsidy bill to budgeted level of 3.7 percent of GDP in 2014.
  - Medium-term objective: untargeted subsidies down to 3 percent of GDP by 2016.
- 2013 actions:
  - Partial indexation mechanism introduced in September 2013 for gasoline, diesel, and industrial fuel; accompanying diesel hedging system.
  - Gasoline and industrial fuel subsidies eliminated; ministerial order published January 16, 2014 establishing timetable for adjusting diesel prices.
- Social protection:
  - 2014 finance law expands TAYSSIR education program coverage and RAMED health insurance; increased resources for social cohesion fund to assist widows and handicapped persons; measures to support public transport to ease impact of fuel price hikes.

### Structural reforms, competitiveness, and labor
- Exchange rate and nominal anchor:
  - Fixed exchange rate of dirham against euro/dollar basket provided nominal anchor.
  - Authorities exploring increased exchange rate flexibility coordinated with macro policies and structural reforms; BAM building analytical capacity; IMF TA appreciated.
- Structural agenda highlights:
  - Revision of public procurement law; strengthening independence of Competition Council; broaden mandate of Economic, Social and Environmental Council.
  - Full assessment and in-depth reform of the Judiciary.
  - Initiatives to expand sector-specific policies, promote self-entrepreneurship, reduce informality, and operationalize national SME strategy.
  - Measures in 2014 budget to improve business environment; Doing Business ranking improved by 27 places between 2011 and 2014.
- Labor and inclusion:
  - Major education reform under implementation.
  - Roadmap for justice reform approved and implementation started.
  - Introduction in 2014 of limited unemployment benefit financed by businesses and employees.
  - Reinforcement of active labor market policies and training initiatives focused on youth and SMEs.

### Program monitoring, targets, and capacity to repay
- PLL treatment and repayment capacity:
  - Authorities intend to continue treating PLL as precautionary.
  - Should Morocco draw entire amount, it would have adequate capacity to repay the Fund; Fund credit would represent modest share of Morocco’s low external debt and reserve coverage would be comfortable.
  - External debt service would increase moderately over the medium term but remain manageable under staff’s medium-term macro projections.
  - Debt Sustainability Analysis (DSA) shows external debt would remain low and sustainable even under extreme shocks.
- Fund exposure:
  - Impact of PLL on Fund’s liquidity and potential exposure moderate; commitment to Morocco modest; PLL reduces Fund’s forward commitment capacity only marginally.
- Program monitoring outcomes (key indicative targets, end-October 2013):
  - Net international reserves (BAM, end-of-period stock, US$ millions): Target 17,100; Adjusted 16,255; Actual (Prel.) 17,500.
  - Fiscal deficit (cumulative since beginning of fiscal year, end-of-period in millions of dirham): Target -41,000; Adjusted -44,195; Actual (Prel.) -46,793.
  - Memorandum adjustors: NIR adjustor (US$ millions): 2,412 -845 1,567. Fiscal deficit adjustor (MAD millions): 5,474 -3,195 2,279.
  - Program exchange rate used: end-April 2012 8.429 MAD/US$.

### Selected fiscal and macro projections (reported figures)
- Budget balance (percent of GDP): -5.5 (2013); projected -4.9 (2014), -4.3 (2015), -3.6 (2016), -3.0 (2017), -3.0 (2018).
- Primary balance (excluding grants, percent of GDP): -4.0 (2013); projected -3.6 (2014), -2.8 (2015), -2.7 (2016), -1.9 (2017), -1.4 (2018), -0.6 (2018 projection in table sequence).
- Total government debt (percent of GDP): 61.8 (2013); projected 61.7 (2014), 62.5 (2015), 62.4 (2016), 61.5 (2017), 60.1 (2018).
- Gross reserves (US$ billions): 18.7 (2013); projected 19.3 (2014), 20.0 (2015), 21.1 (2016), 22.4 (2017), 23.7 (2018), 25.1 (later projection).
- Current account (percent of GDP): -7.6 (2013); projected -7.8 (2014), -7.4 (2015), -7.1 (2016), -6.6 (2017), -6.2 (2018), -7.2 (alternate line).
- Net lending / borrowing (overall balance, billions of dirhams): -48.9 (2013); projected -48.3 (2014), -46.5 (2015), -43.3 (2016), -39.2 (2017), -35.5 (2018), -38.5 (another projection line).
- Nominal GDP (US$ billions): 104.8 (2013); projected 105.5 (2014), 115.1 (2015), 125.1 (2016), 136.0 (2017), 146.7 (2018), 158.4 (further projection).

*Source: IMF staff report — EXECUTIVE SUMMARY and related staff documents (January 24–31, 2014).*

### EXECUTIVE SUMMARY

### _cr1466 - EXECUTIVE SUMMARY

### Recent developments and overall assessment
- The Executive Board approved in August 2012 a two-year precautionary and liquidity line (PLL) arrangement in the amount of SDR 4.1 billion (700 percent of quota). The PLL provides insurance against external risks while supporting the authorities’ program. The authorities have treated the PLL as precautionary. The second review was completed on July 31, 2013.
- Macroeconomic performance improved in 2013 after a difficult 2012:
  - Current account deficit (excluding grants) widened to 10 percent of GDP in 2012 and was estimated at about 8 percent of GDP in 2013.
  - Fiscal deficit widened to 7.3 percent of GDP in 2012 and was estimated at 5.5 percent of GDP in 2013 (including grants).
  - Growth picked up in 2013, boosted by a strong rebound in the primary sector; growth in 2014 could reach about 4 percent, assuming a return to normal cereal production and acceleration in nonagricultural sectors.
- Key contextual points:
  - Vulnerabilities in 2012 were driven by exogenous shocks: the European recession, a rise in oil prices, and transitions in Arab countries.
  - A new coalition government was announced on October 10, 2013, ending a period of policy uncertainty and potentially facilitating consensus on difficult reforms (e.g., subsidies, pensions).
  - Continued improvement is contingent on sustained reform delivery amid a fragile international and regional environment.

### PLL qualification and program performance
- Overall program status:
  - The program remains broadly on track; Morocco continues to meet the PLL qualification criteria.
  - The NIR indicative target at end-October 2013 was met with a comfortable margin.
  - The fiscal deficit indicative target at end-October 2013 was missed, mainly due to higher-than-programmed investment spending; the authorities met their end-year fiscal objective through corrective measures.
  - All standard performance criteria were met.
- Areas of PLL assessment:
  - Strong performance in: financial sector and supervision; monetary policy; data adequacy.
  - Not substantially underperforming in: fiscal policy; external position and market access.
- Fiscal developments and reforms:
  - The authorities achieved their fiscal deficit objective in 2013: the deficit, including grants, was reduced by almost 2 percent of GDP to 5.5 percent of GDP as programmed at the time of the second PLL review.
  - Measures to reduce fiscal risks and strengthen PFM included limiting the subsidy bill, controlling wage expenditures, and rationalizing capital spending; investment overruns were addressed by canceling appropriations not committed by October 31, 2013.
  - The 2014 budget targets a deficit reduction to 4.9 percent of GDP, mainly through continued reduction in the cost of energy subsidies.
    - January 2014 measures: elimination of subsidies on super and industrial fuel and reduction in the per-unit subsidy of diesel; reduction in the diesel subsidy to be implemented through quarterly adjustments starting February 2014.
    - The 2014 budget also includes a reduction by 0.2 percent of GDP of food subsidies and expands social protection through dedicated programs.
    - The 2014 budget introduces steps toward a broad tax reform and pledges a parametric reform of the main public pension fund.
  - Budget framework strengthening:
    - A new draft organic budget law (OBL) adopted by the council of ministers in mid-January includes multiyear budgeting, program budgeting, performance management, and fiscal transparency.
    - The draft OBL would make wage expenditure appropriations binding ceilings and limit the carryover of investment appropriations (provisions effective before 2016 and 2017 respectively).
    - Authorities aim to have the OBL adopted as early as possible in the spring of 2014 so the 2015 budget law can be prepared under the new framework.
  - Public debt and sustainability:
    - Public debt is slightly over 60 percent of GDP and is projected to peak at 63 percent of GDP in 2014, then progressively fall below 60 percent in the medium term as a result of fiscal adjustment.
    - There are moderate risks linked to gross financing needs under a real growth shock or a shock to the primary balance.
- External position and market access:
  - Current account (excluding grants) improved by an estimated 2 percent of GDP in 2013 to about 8 percent of GDP.
  - Exchange rate assessment shows some evidence of moderate overvaluation of the dirham, though less than a year earlier.
  - Reserves have been broadly stable for more than a year and are adequate at 88 percent of the Fund’s reserve metric for emerging markets; reserves expected to remain stable above four months of imports over the medium term.
  - Morocco raised US$750 million in May at favorable terms; market access was reconfirmed and the country was not significantly affected by the recent emerging markets sell-off.
  - External debt increased from 25.1 percent of GDP in 2011 to 30.9 percent of GDP in 2013, expected to peak at 31.6 percent of GDP in 2015 before declining to 28.2 percent of GDP in 2018.
  - Authorities intend to gradually allow more exchange rate flexibility, combined with fiscal adjustment and structural reforms to support external sustainability.

### Monetary policy, financial sector, and data
- Monetary policy and inflation:
  - Bank-al-Maghrib (BAM) has anchored inflation expectations under the exchange rate peg; inflation averaged 1.7 percent over the past 10 years and never exceeded 4 percent.
  - Liquidity remains tight; the current monetary policy stance is considered appropriate within the existing monetary and exchange rate framework.
  - Nonprimary output gap is moderately negative and risks to growth are tilted to the downside; monetary policy should be cautious about inflationary effects of subsidy reform.
  - IMF technical assistance is strengthening BAM’s policy analysis in preparation for an eventual move toward a nominal anchor for monetary policy; the monetary framework will need to evolve with greater exchange rate flexibility.
- Financial sector soundness:
  - As of June 2013: Tier 1 capital ratio = 10.6 percent; regulatory capital to risk-weighted assets = 13.1 percent (up from 10.2 percent and 12.3 percent respectively in December 2012).
  - Nonperforming loans (NPLs) increased to 5.8 percent of total loans as of November 2013.
  - BAM is strengthening supervision in line with Basel III standards; capital adequacy ratio was increased in June 2013 and new definitions of prudential capital and short-term liquidity are being incorporated.
  - Moroccan banks fund mainly through domestic deposits and have begun issuing international bonds; BAM is monitoring these activities and reinforcing coordination with host-country supervisors.
  - A Financial Sector Assessment (FSAP) update is planned for fall 2014.
- Data transparency:
  - Morocco subscribes to the Special Data Dissemination Standard; data are adequate for surveillance and program monitoring.
  - Fiscal overruns in 2012 revealed issues in fiscal projections and monitoring that are being addressed; fiscal data reporting remains reliable.

### Other program issues and capacity to repay
- PLL drawdown and repayment capacity:
  - The authorities intend to continue treating the PLL as precautionary. Should Morocco draw on the entire amount available, it would have adequate capacity to repay the Fund.
  - Were the entire amount withdrawn, Fund credit would represent a modest share of Morocco’s low external debt and reserve coverage would be comfortable.
  - External debt service would increase moderately over the medium term but would be manageable under staff’s medium-term macroeconomic projections.
  - Under extreme shocks, the Debt Sustainability Analysis (DSA) shows external debt would remain low and sustainable, reflecting Morocco’s capacity to repay the Fund even under an adverse scenario.
- Fund exposure and commitments:
  - The impact of the PLL arrangement on the Fund’s liquidity and potential exposure continues to be moderate; the commitment to Morocco is modest and the PLL reduces the Fund’s forward commitment capacity only marginally.

*Source: IMF staff report — EXECUTIVE SUMMARY (January 24, 2014).*

### 13.      Morocco continues to meet the four exceptional access criteria. First, staff is of the view

### _cr1466 - 13.      Morocco continues to meet the four exceptional access criteria. First, staff is of the view

### Exceptional access criteria — staff findings
- Criterion 1: Staff views that a stress scenario related to risks of increases in oil prices and to the crisis in Europe could give rise to financing needs beyond normal access limits.
- Criterion 2: Debt ratios would remain sustainable over the medium term with a high probability under the standard stress shocks.
- Criterion 3: Morocco reconfirmed market access by raising US$750 million at very favorable terms in May 2013; such access is expected to continue within the timeframe when Fund resources would be outstanding if purchases under the arrangement were made.
- Criterion 4: Staff considers the authorities’ program has a reasonably strong prospect of success, including institutional and political capacity to deliver. The new government reiterated commitment to the program; adequate communication on reforms and measures to protect the most vulnerable are expected to help contain social-pressure risks to implementation.

### Safeguards assessment of Bank Al-Maghrib (BAM)
- A safeguards assessment completed in February 2013 found a robust safeguards framework with strong control mechanisms.
- BAM has made good progress implementing safeguards recommendations, including publication of audited annual financial statements.
- Existing good governance practices and key safeguards need formal enshrinement in the central bank law.
- Authorities are drafting amendments to the central bank law to address these aspects and strengthen central bank autonomy.
- The preparation of a new central bank law is an opportunity to incorporate current best international practices and assure independence.

### Staff appraisal — program implementation and policy priorities
- Program status: The program remains broadly on track.
  - The fiscal deficit indicative target at end-October was missed, but the authorities’ end-year objective was met.
  - The NIR indicative target at end-October was met with a comfortable margin.
- Trends: Both the fiscal and external deficits have been reduced from their 2012 highs.
- Fiscal policy actions: Authorities implemented significant measures to strengthen the fiscal policy framework, including measures to reduce the costs and fiscal risks associated with the subsidy system.
- 2014 program priorities and recommendations:
  - Continue reducing external and fiscal vulnerabilities.
  - Budget targets a further reduction in the deficit, backed by continued reduction in subsidies with increased protections for the most vulnerable.
  - Ensure the new organic budget law comes into effect in time to govern preparation of the 2015 budget.
  - Staff underscores the need to strengthen the draft organic budget law to address fiscal discipline, coverage, and expenditure control, and to make key provisions effective upon approval.
  - Continue preparations toward introducing a more flexible exchange rate regime while implementing structural measures to improve competitiveness and the business environment.

### PLL qualification and review recommendation
- Morocco continues to meet the PLL qualification criteria.
  - Performs strongly in three of five PLL assessment areas: financial sector and supervision, monetary policy, and data adequacy.
  - Does not substantially underperform in the two other areas: fiscal policy, and external position and market access.
- Staff recommendation: Completion of the third review under the PLL is recommended.

### Selected fiscal and debt indicators (as reported)
- Budget balance (percent of GDP): -5.5 (2013); projected -4.9 (2014), -4.3 (2015), -3.6 (2016), -3.0 (2017), -3.0 (2018).
- Primary balance (excluding grants, percent of GDP): -4.0 (2013); projected -3.6 (2014), -2.8 (2015), -2.7 (2016), -1.9 (2017), -1.4 (2018), -0.6 (2018 projection in table sequence).
- Total government debt (percent of GDP): 61.8 (2013); projected 61.7 (2014), 62.5 (2015), 62.4 (2016), 61.5 (2017), 60.1 (2018).
- Gross reserves (in billions of U.S. dollars): 18.7 (2013); projected 19.3 (2014), 20.0 (2015), 21.1 (2016), 22.4 (2017), 23.7 (2018), 25.1 (later projection).
- Current account (percent of GDP): -7.6 (2013); projected -7.8 (2014), -7.4 (2015), -7.1 (2016), -6.6 (2017), -6.2 (2018), -7.2 (alternate line).
- Net lending / borrowing (overall balance, billions of dirhams): -48.9 (2013); projected -48.3 (2014), -46.5 (2015), -43.3 (2016), -39.2 (2017), -35.5 (2018), -38.5 (another line of projection).
- Nominal GDP (in billions of U.S. dollars): 104.8 (2013); projected 105.5 (2014), 115.1 (2015), 125.1 (2016), 136.0 (2017), 146.7 (2018), 158.4 (further projection).

*Source: IMF staff report excerpts for Morocco (CR/13/302 macro framework and related tables).*

### 1.      In a persistently unfavorable and uncertain international environment, the Moroccan

### In a persistently unfavorable and uncertain international environment, the Moroccan economy performed creditably in 2013, after a difficult year in 2012.

### Macroeconomic performance and outlook
- 2013 growth: expected to reach about 4.8 percent, driven by a bumper cereal harvest.
- Current account: should improve by more than two percentage points of GDP, to settle at about 7.5 percent of GDP in 2013.
- Reserves: stabilized above four months of imports throughout 2013.
- 2014 outlook: assuming an average cereal harvest in 2014, overall growth should remain robust at about 4 percent; inflation expected to remain low at about 2.5 percent.
- External environment: persistently unfavorable and uncertain, likely to continue exerting pressure on external accounts.
- PLL (precautionary): the PLL continues to serve country needs well; no immediate balance of payments need requiring use of PLL resources, which will continue to be treated as precautionary.

### Fiscal policy, revenues, and expenditure
- Fiscal deficit: narrowed to 5.4 percent of GDP in 2013, down from 7.3 percent of GDP in 2012; medium-term target of 3 percent of GDP.
- 2014 finance law target: narrow fiscal deficit further to 4.9 percent of GDP.
- Revenues: stagnation of tax revenue (linked to slowdown of some nonagricultural activities) offset by upturn in nontax revenue.
- Expenditure containment: wages, subsidies, other goods and services, and transfers well contained; capital expenditures maintained at 2012 level.
- 2014 tax measures: initiation of recommendations from the 2013 National Tax Conference, including gradual taxation of the agricultural sector and VAT reform to simplify regime, avoid accumulation of credits, and reduce distortions.
- Wage bill measures: 2014 finance law significantly reduces net creation of new posts compared with previous years; increased mobility of civil servants to help control wage bill; decisions related to revision of civil servant statutes postponed to 2015 except what was programmed in the finance law; budgeted positions that became vacant during the year no longer allowed for new recruitments.

### Subsidies, social protection, and safety nets
- Subsidy reforms in 2013: mechanism for partial indexation of gasoline, diesel, and industrial fuel prices introduced in September; accompanied by a hedging system for diesel.
- Annual subsidy bill: cut by almost 2 percent of GDP in 2013 (from 6.6 percent of GDP to 4.7 percent of GDP).
- 2014 budget target: reduce untargeted subsidies to 3 percent of GDP by 2016; 2014 budget seeks to reduce subsidy envelope to 3.7 percent of GDP through full-year impact of indexation and new measures.
- Specific actions: gasoline and industrial fuel subsidies eliminated; ministerial order published on January 16, 2014 establishing timetable for adjusting diesel prices to reduce per-unit subsidy to level provided in 2014 budget law.
- Social safety net strengthening: expansion of coverage of TAYSSIR education program and RAMED health insurance program under 2014 finance law; increased resources for social cohesion fund to finance assistance for widows in precarious situations and handicapped persons; measures in support of public transport to ease impact of fuel price hikes.

### Public financial management and pensions
- Budget management reforms: measures to limit carryover of appropriations related to capital spending and control wage bill have reduced vulnerabilities related to spending in 2013; measures to be carried forward until entry into force of the new organic budget law (OBL).
- OBL status: draft OBL approved by the Council of Ministers on January 20, 2014; to be submitted to Parliament for adoption and implementation from the 2015 finance law onwards; four ministries experimenting with principles of new organic law in 2014.
- Pension reform: parametric reform of the Caisse marocaine des retraites to be launched in 2014 and enter into force in 2015; will involve retirement age, contribution rates, and calculation of accrued benefits to lengthen system viability and balance contributions and accrued benefits from the effective start date of the reform; second stage to change institutional structure toward a two-pillar system (private/public sector).

### Monetary policy and financial sector stability
- Bank Al-Maghrib (BAM) policy: strongly committed to preserving price stability; will continue to provide banking sector with liquidity necessary for adequate financing of the economy; priority on facilitating financing of very small, small, and medium-sized enterprises; controls for management of potential risks associated with refinancing operations backed by claims on these enterprises.
- Banking sector soundness: sector remains sound overall.
- Basel III and prudential measures: central bank strengthening supervision through gradual introduction of Basel III standards; capital adequacy ratio raised in June 2013; regulations adopted concerning new definitions of prudential capital and short-term liquidity in macroprudential framework; gradual implementation by banks being ensured.
- Nonperforming loans: increased slightly to 5.8 percent as of November 2013 (compared with 5 percent at end-2012); BAM vigilant to ensure adequate provisioning.
- Cross-border banking risks: increased presence of Moroccan banks in sub-Saharan Africa monitored in cooperation with host-country regulators, including through joint supervision missions.
- Financial Sector Assessment Program: updated program planned for fall 2014.

### Exchange rate policy and structural reforms
- Exchange rate regime: fixed exchange rate of the dirham against a euro/dollar basket has provided an important nominal anchor.
- Future direction: authorities believe increased exchange rate flexibility, coordinated with other macroeconomic policies and structural reforms, would help deal with external shocks, strengthen competitiveness, promote trade diversification, and facilitate integration into the world economy.
- Ongoing actions: options for introducing greater exchange rate flexibility are being examined while defining a new nominal monetary policy anchor; BAM building analytical capacity for inflation forecasting; IMF technical assistance in this area appreciated.
- Structural reform agenda: ambitious reforms to improve competitiveness and potential growth, including revision of the law on public procurement, strengthening independence of the Competition Council, broadening mandate of the Economic, Social and Environmental Council, full assessment and in-depth reform of the Judiciary, initiatives to expand sector-specific policies and enhance synergy, promote self-entrepreneurship, reduce informality, and operationalize the national strategy for small- and medium-size enterprises.

### Program monitoring and targets
- PLL indicative targets at end-October 2013: net international reserves were well above target; central government deficit target was slightly exceeded mainly because of acceleration of capital spending during last days of the month.
- Commitment to standards: authorities will continue to observe standard criteria related to trade and exchange restrictions, bilateral payments arrangements, multiple exchange rates, and nonaccumulation of external debt payment arrears, in accordance with PLL requirements.

*Source: IMF staff summary of Moroccan authorities' letter and program documents as provided in the content unit.*

### 18.      We are committed to preserving macroeconomic stability and to reconstituting buffers for

### _cr1466 - 18.      We are committed to preserving macroeconomic stability and to reconstituting buffers for

### Commitment and program context
- The authorities reaffirm commitment to preserving macroeconomic stability and to reconstituting buffers for dealing with potential exogenous shocks.
- Policies referenced: communications of July 27, 2012; January 17, 2013; July 15, 2013 — implemented under the PLL-supported program supporting the request for completion of the third review.
- Signatories: Mohamed Boussaïd (Minister of Economy and Finance) and Abdellatif Jouahri (Governor of Bank Al-Maghrib).

### PLL arrangement and IMF Executive Board conclusion (Press Release No. 14/37, January 31, 2014)
- PLL arrangement approved on August 3, 2012 in an amount equivalent to SDR 4.12 billion (about US$6.2 billion or 700 percent of Morocco’s quota).
- Arrangement duration: 24-month Precautionary and Liquidity Line (PLL); authorities treating arrangement as precautionary.
- Executive Board concluded the third review and the 2013 Article IV consultation on January 31, 2014.
- Board statement highlights:
  - Morocco’s macroeconomic performance improved in 2013 despite unfavorable external environment.
  - Reduction in energy subsidies in 2013 combined with increased social assistance strengthened fiscal accounts and reduced underlying fiscal vulnerabilities.
  - Continued strengthening of public finances requires reorientation of revenue and spending, and passage of a new organic budget law incorporating best practices on fiscal discipline, coverage, and expenditure control.
  - Structural reforms to support external competitiveness are a priority; more exchange rate flexibility would help resilience to external shocks.
  - Further reforms needed to strengthen business climate, transparency, judiciary, labor market functioning, and financial inclusion (including greater access to credit for SMEs).

### Executive Directors’ assessment and recommendations
- Commendations:
  - Economy’s resilience to external shocks and challenging domestic conditions.
  - Measures that reduced fiscal and external vulnerabilities.
- Advised policy priorities:
  - Sustain reforms to rebuild policy buffers and promote higher and more inclusive growth.
  - Strengthen public finances and support fiscal and external sustainability.
  - Broaden the tax base, review tax incentives and exemptions, reform the VAT system, moderate the public wage bill, and reform the pension system.
  - Strengthen the draft Organic Budget Law (OBL) with provisions on fiscal discipline, coverage, and expenditure control; timely approval ahead of 2015 finance law.
  - Improve external competitiveness via structural reforms and move toward more flexible exchange rate regime in coordination with macroeconomic policies.
  - Strengthen banking supervision and regulatory arrangements, including gradual adherence to Basel III norms and closer monitoring of banking sector international expansion.
  - Promote financial deepening and increased access to credit for small and medium-sized enterprises.

### Key quantitative indicative targets (as presented)
- Net international reserves (NIR) of Bank Al-Maghrib (BAM) (end-of-period stock, in millions of U.S. dollars (US$)):
  - Target: 17,100
  - Adjusted: 16,255
  - Actual (Prel.): 17,500
- Fiscal deficit (cumulative since beginning of fiscal year, end-of-period in millions of dirham):
  - Target: -41,000
  - Adjusted: -44,195
  - Actual (Prel.): -46,793
- Memorandum item:
  - Adjustor on NIR (in millions of U.S. dollars): 2,412 -845 1,567
  - Adjustor on the fiscal deficit (in millions of dirham): 5,474 -3,195 2,279
- Note: Evaluated at the program exchange rate (end-April 2012 8.429 MAD/US$). Adjustors specified in the Technical Appendix.

### Selected economic outcomes and projections (high-level figures from "Morocco: Selected Economic Indicators, 2012–17")
- Real GDP (annual percentage change):
  - 2012: 2.7
  - 2013 (Rev.2/): 5.1
  - 2013 (Proj.): 4.5
  - 2014: 3.9
  - 2015: 4.9
  - 2016: 5.2
  - 2017: 5.4
- Real primary GDP (annual percentage change):
  - 2012: -7.2
  - 2013 (Rev.2/): 13.6
  - 2013 (Proj.): 17.0
  - 2014: -1.0
  - 2015: 4.5
  - 2016: 4.5
  - 2017: 5.0
- Real non-primary GDP (annual percentage change):
  - 2012: 4.6
  - 2013 (Rev.2/): 3.7
  - 2013 (Proj.): 2.4
  - 2014: 4.8
  - 2015: 5.0
  - 2016: 5.3
  - 2017: 5.5
- Consumer prices (end of period):
  - 2012: 2.6
  - 2013 (Rev.2/): 2.3
  - 2013 (Proj.): 0.4
  - 2014–2017: 2.5 (each year)
- Investment and saving (in percent of GDP):
  - Gross capital formation: 2012: 35.3; 2013: 34.3; 2014: 34.7; 2015: 35.3; 2016: 35.3; 2017: 35.4; 2017: 35.5
  - Gross national savings: 2012: 25.6; 2013: 27.1; 2014: 27.2; 2015: 28.8; 2016: 29.7; 2017: 30.6; 2017: 31.3
- Public finances (in percent of GDP):
  - Revenue: 2012: 28.7; 2013: 27.5; 2014: 27.9; 2015: 27.4; 2016: 28.1; 2017: 28.1; 2017: 28.2
  - Expenditure: 2012: 36.1; 2013: 33.0; 2014: 33.4; 2015: 32.4; 2016: 32.4; 2017: 31.7; 2017: 31.2
  - Budget balance: 2012: -7.3; 2013: -5.5; 2014: -5.4; 2015: -4.9; 2016: -4.3; 2017: -3.6; 2017: -3.0
  - Primary balance (excluding grants): 2012: -5.0; 2013: -4.0; 2014: -3.6; 2015: -2.8; 2016: -2.7; 2017: -1.9; 2017: -1.4
  - Total government debt: 2012: 60.2; 2013: 61.8; 2014: 61.7; 2015: 62.5; 2016: 62.4; 2017: 61.5; 2017: 60.1
- External sector highlights:
  - Exports of goods (in U.S. dollars, percentage change): 2012: -0.8; 2013: 3.3; 2014: 1.8; 2015: 9.1; 2016: 7.3; 2017: 7.0; 2017: 6.3
  - Imports of goods (in U.S. dollars, percentage change): 2012: 1.6; 2013: 0.7; 2014: 0.7; 2015: 6.8; 2016: 5.2; 2017: 5.1; 2017: 5.2
  - Current account including official transfers (in percent of GDP): 2012: -9.7; 2013: -7.2; 2014: -7.4; 2015: -6.5; 2016: -5.7; 2017: -4.8; 2017: -4.2
  - Gross reserves (in billions of U.S. dollars): 2012: 17.5; 2013: 18.7; 2014: 19.3; 2015: 20.0; 2016: 21.1; 2017: 22.4; 2017: 23.7
  - In months of next year imports of goods and services: 2012: 4.2; 2013: 4.3; 2014: 4.3; 2015: 4.3; 2016: 4.3; 2017: 4.3; 2017: 4.3
- Memorandum items:
  - Nominal GDP (in billions of U.S. dollars): 2012: 96.1; 2013: 104.8; 2014: 105.5; 2015: 115.1; 2016: 125.1; 2017: 136.0; 2017: 146.7
  - Unemployment rate (in percent): 2012: 9.0; 2013: 8.9; 2014: 8.9
  - Population (millions): 2012: 32.5; 2013: 32.9; 2014: 32.9; 2015: 33.2; 2016: 33.5; 2017: 33.8; 2017: 34.2
  - Net imports of energy products (in billions of U.S. dollars): 2012: -12.4; 2013: -11.6; 2014: -12.2; 2015: -13.0; 2016: -12.9; 2017: -12.9; 2017: -12.9

### Morocco authorities’ reported recent developments and outlook (Statement by Mohammed Daïri, January 31, 2014)
- 2013 outcomes reported:
  - Growth: estimated at 4.8 percent (noting impact of good weather on agricultural production and slowdown in non-agricultural GDP).
  - Inflation: remained low at less than 2 percent.
  - Current account deficit: declined from 9.7 percent of GDP (2012) to 7.4 percent (2013).
  - Reserve position: strengthened further to 4.3 months of imports.
  - Fiscal deficit target: met 2013 target of 5.5 percent of GDP (most recent outcome 5.4 percent).
- Fiscal policy actions in 2013:
  - Reduction in subsidy bill and strong expenditure control (wages, goods and services, investment spending).
  - April 2013: decision to reduce capital budget by 15 billion DH (25 percent of total new appropriations) to protect the deficit target.
  - Cancellation of investment appropriations uncommitted by end-October to achieve end-year deficit target.
  - Total capital spending in 2013 was 1 percent of GDP higher than projected under the PLL-supported program and declined only marginally compared to 2012.
- 2014 budget and measures:
  - Authorities committed to reducing fiscal deficit to 4.9 percent of GDP in 2014.
  - 2014 budget measures include: broadening the tax base by gradually lifting tax exemptions of large agriculture enterprises and bringing informal sector into the tax net; addressing VAT tax credits; gradually moving toward a two-rate VAT; strengthening resources for social protection and cohesion.
  - Continued control of current spending to allow increased appropriations for priority social sectors (which account for 53 percent of the budget) and investment.
  - Introduction of an adjuster to the capital budget to account for the size of carry-overs.
- Organic Budget Law (OBL):
  - Draft OBL approved by the Council of Ministers on January 20, 2014; submission to Parliament planned.
  - Implementation expected to be rolled over a 5-year period.
  - Authorities intend to incorporate staff comments and align OBL with best international practices, considering constitutional and other constraints.
- Subsidy reform strategy:
  - No consensus on universal subsidy replacement by cash transfers; instead adopted a strategy combining:
    - Partial indexation of some petroleum products;
    - Elimination of subsidies on the least socially sensitive products and gradual reduction for others;
    - Appropriate safety net to protect the poor;
    - Extension of existing conditional social support programs focused on education and basic health.

*Source: IMF staff estimates and Press Release No. 14/37, January 31, 2014.*

### 4.7 percent  of  GDP  in  2013,  down  from  6.6 percent  in  2012,  was  not  exclusively  nor  even

### _cr1466 - 4.7 percent  of  GDP  in  2013,  down  from  6.6 percent  in  2012,  was  not  exclusively  nor  even

### Fiscal subsidies and energy
- Subsidy outcome: "4.7 percent of GDP in 2013, down from 6.6 percent in 2012" was driven most notably by domestic price hikes in 2012-13, the price indexation mechanism, moderated consumption, and improved availability of hydroelectric and other non-fuel energy.
- Energy diversification measures:
  - Ongoing investments in solar and wind energy and re-adaptation of thermal power plants to coal expected to help reduce oil dependency.
- Fiscal policy stance and targets:
  - Authorities’ measures (including those taken this January and those publicly announced for 2014) will bring the subsidy bill to the budgeted level of "3.7 percent of GDP this year."
  - Medium-term objective: bring untargeted subsidies down to "3 percent of GDP."

### Other structural fiscal reforms
- Tax reform:
  - Implementation started of key recommendations from the national conference on taxation (Assises Fiscales) to simplify the system, broaden the tax base, and enhance equity and competitiveness.
  - Gradual introduction of agriculture into the tax net begins this year; short-term revenue implications likely to be modest.
- Pensions and wage bill:
  - Parametric reforms of the main public pension system identified; implementation to start under the next budget, to be followed by a comprehensive reform.
  - Authorities’ objective to bring the wage bill down to "11 percent of GDP in the medium term" is on track; planned civil service reform with World Bank assistance to support this objective and improve efficiency, governance, and service delivery.

### Monetary and financial policies
- Monetary regime and exchange rate:
  - Bank Al-Maghrib (BAM) has maintained low inflation over the past three decades; current monetary regime under the exchange rate peg judged appropriate.
  - Staff-calculated small overvaluation of the dirham has been reduced and should not guide policy given high uncertainty.
  - Authorities are considering greater exchange rate flexibility and adapting the monetary policy framework; upcoming TA mission to discuss options and modalities.
  - BAM has strengthened analytical and forecasting capabilities and enhanced transparency in preparation for a potential move to a different monetary policy framework.
- Liquidity and credit:
  - In 2013, BAM focused on filling the liquidity shortage created by the 2012 decline in foreign assets and extended refinancing facilities to encourage credit to very small, small, and medium-sized enterprises.
  - BAM considers tighter credit conditions are not the main factor for lower credit growth; slowdown mainly due to subdued demand and a wait-and-see attitude from Europe-related uncertainties and the government transition.
- Financial sector soundness:
  - Improved bank capitalization and profitability; reduced high loan exposures and connected lending.
  - Moderate increase in NPLs reflects slowing activity and is expected to be reversed soon.
  - BAM is implementing Basel III requirements and is closely monitoring Moroccan banks’ expansion in other African countries in cooperation with host supervisors.

### Promoting high and more inclusive growth
- Business climate and reforms:
  - Authorities’ efforts translated into a gain of "27 places" in Morocco’s Doing Business ranking between 2011 and 2014.
  - Measures included in the 2014 budget to further improve the business environment.
- Human capital, justice, and labor:
  - Major education reform prepared and implementation under way to rationalize the system and upgrade skills.
  - Roadmap for comprehensive justice reform approved and implementation started.
  - Introduction in 2014 of a limited unemployment benefit financed by businesses and employees, with an initial limited budget contribution, aimed at facilitating consensus on greater labor market flexibility.
  - Reinforcement of active labor market policies and training initiatives to improve employability and reduce unemployment, especially among the young, with focus on supporting SMEs.
  - Initiatives launched to better integrate the informal sector into the modern economy.
- Informal sector metrics and discrepancies:
  - Staff indication in Figure 3 that the informal sector in 2008 was "the highest among selected 18 advanced and emerging market countries, reaching some 45 percent" was noted by the authorities.
  - Independent Planning Commission survey estimated the informal sector at "14.3 percent in 2007, down from 16.3 percent in 1999."

### Social inclusion and equity
- Poverty and MDG progress:
  - Absolute poverty reduced from "21 percent in 1985 to 8.9 percent in 2007."
  - Primary education enrollment doubled to almost "100 percent."
  - Significant reductions in illiteracy and improvements in women and child health.
- Social programs and coverage:
  - RAMED (basic health services for the underprivileged) coverage reached "5.5 million people," representing "2/3 of the targeted population."
  - TAYSSIR program provides financial assistance to "almost half a million poor families" to keep their young children at school.
  - National Initiative for Human Development benefits "2½ million people" by improving access to infrastructure and social services and promoting income-generating activities.
  - Fonds de Cohesion Sociale established to mobilize resources and coordinate assistance programs; coverage extended under the 2014 budget to vulnerable widows and physically challenged persons.

### PLL Review and program assessment
- Program implementation and targets:
  - Policy implementation under the PLL-supported program since the second review significantly strengthened; authorities met program targets for 2013.
  - Indicative target for NIR for end-October was largely exceeded.
  - Indicative target for the fiscal deficit was exceeded by "0.3 percent of GDP" due to an unexpected acceleration of payment orders tied to announcement of upcoming cancellation of unused capital appropriations.
- Role and benefits of the PLL:
  - PLL provided valuable insurance against external shocks during international turbulence, anchoring the authorities’ program during a government coalition change, helping identify and address vulnerabilities, and signaling policy strength.
  - PLL helped access international financial markets at favorable terms and catalyzed other foreign assistance despite being treated as precautionary.
- Authorities’ position and request:
  - Authorities believe Morocco continues to meet the PLL qualification and the four exceptional access criteria.
  - They requested Board approval for completion of the third and last review under the PLL and confirmation of continued qualification, and commit to fully implement their program and treat the PLL as precautionary.
  - Authorities view the PLL as useful for countries with sound fundamentals facing vulnerabilities such as uncertainty about the recovery in Europe and future oil, food and commodity prices, and possible renewed financial turbulence.

*IMF staff summary drawn from the provided chapter text.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1466.pdf_