## _cr1638

## Source details

**Canonical URL:** [_cr1638](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1638.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1638.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1638.pdf.json)

---

### Executive summary
- PLL arrangement approved in July 2014: SDR 3.2351 billion (or 550 percent of quota), equivalent to US$5 billion; treated as precautionary; full amount made available upon completion of the second review on July 24, 2015.
- 2015 Article IV consultation concluded on December 14, 2015; Executive Directors welcomed continued strong commitment to sound policies and reforms.
- Growth and labor market:
  - Growth in 2015 expected at 4.7 percent, compared with 2.4 percent in 2014.
  - Non-agricultural activity growth in 2015: 3.3 percent.
  - Unemployment rate Q3-2015: 10.1 percent (up from 9.6 percent year-on-year).
  - Youth unemployment Q3-2015: 21.4 percent.
- External sector and reserves:
  - Current account deficit in 2015 expected to narrow to about 1.4 percent of GDP (from 9.5 percent of GDP in 2012).
  - International reserves at end-2015: 6.9 months of imports, and 111 percent of the standard ARA metric (154 percent, adjusted for capital controls).
- Fiscal developments:
  - End-September 2015 overall deficit (including grants): 2.7 percent of GDP (indicative target under PLL: 3 percent).
  - Authorities on track for a 2015 overall deficit objective of 4.3 percent of GDP.
  - Cyclically-adjusted primary deficit (excluding grants) estimated to have decreased by about 1.5 percent of GDP relative to 2014.
- Monetary policy and inflation:
  - Bank-Al-Maghrib policy rate maintained at 2.5 percent in 2015.
  - Bank lending growth in October 2015 (y-o-y): 0.7 percent.
  - Headline inflation in October 2015 (y-o-y): 1.4 percent.
- Financial sector:
  - Banking system capital adequacy ratio end-June 2015: 13.8 percent.
  - NPL ratio in August 2015: 7.5 percent.
  - FSAP identified concentrated exposures to large corporates as a significant risk.

### Reforms and program implementation
- Program status and governance:
  - Both September 2015 quantitative indicative targets were met comfortably; Morocco continues to meet PLL qualification criteria.
  - Morocco performs strongly in three PLL qualification areas: financial sector and supervision; monetary policy; and data adequacy. It does not substantially underperform in external position and market access, and fiscal policy.
  - Authorities continue to treat the arrangement as precautionary and are assessing exit strategy and potential need for a successor arrangement.
- Key reform progress and outstanding items:
  - Organic Budget Law (OBL): adopted in 2015; most provisions enter into force in January 2016 and are reflected in the 2016 budget; remaining provisions to be implemented by 2020.
  - Fuel price liberalization: full liberalization of diesel, gasoline and kerosene prices at end-November 2015.
  - Food subsidies: to be gradually reduced in 2016; no butane subsidy reform envisaged at this point.
  - Social programs: continued expansion targeting most vulnerable groups (RAMED, TAYSSIR, support for widows noted in Appendix I).
  - Financial sector framework: steps to implement FSAP recommendations; new central bank law being adjusted and expected submission to Parliament.
  - Pension reform: civil service parametric reform adopted by the government on January 7, 2016; implementation postponed to early 2017.

### Outlook and projections (selected)
- Growth and inflation:
  - Growth expected to slow in 2016 as agricultural activity returns to normal; non-agricultural growth expected to gradually increase.
  - Inflation projected at 1.3 percent in 2016; projected to stabilize around 2 percent over the medium term.
- External accounts and reserves:
  - Current account deficit projected at 0.5 percent of GDP in 2016 and 0.9 percent of GDP in 2017.
  - Medium-term current account deficit expected to stabilize at about 1.6 percent of GDP.
  - Reserves projected to rise above 8 months of imports, or 151 percent of the standard ARA metric, by 2020.
- Fiscal consolidation targets:
  - Overall fiscal deficit expected to decline to 3.5 percent of GDP in 2016.
  - Authorities aim for a fiscal deficit of about 2 percent of GDP by 2020 and to reduce public debt to about 60 percent of GDP by 2020.

### Risks and stress scenarios
- Risk assessment:
  - Risks remain tilted to the downside but have decreased somewhat.
  - Domestic risks: potential delays in reform implementation around the 2016 general elections, notably pension, subsidy, and tax reforms.
  - External risks: weaker-than-expected euro area growth reducing exports, tourism, FDI and remittances; volatility in global financial markets increasing borrowing costs; geopolitical risks boosting oil price volatility and reducing tourism.
  - Upside factor: continued low commodity prices would further narrow fiscal and external imbalances.
- External Stress Index and scenarios:
  - Baseline scenario uses WEO baseline projections for Euro area growth and oil prices; VXEEM assumed unchanged from December 14, 2015.
  - Downside scenario examples: euro area GDP level could be 4 percent below baseline after four years; geopolitical crises could result in oil prices 25 percent above baseline.
- Exceptional access and capacity-to-repay caveats:
  - If Morocco drew the entire PLL amount, Fund obligations would represent a maximum of 13.4 percent of Morocco’s total external debt over the projection period; 18 percent of debt service; 18 percent of gross international reserves; 15 percent of exports.
  - Illustrative shock scenario requested by Morocco: reserves may be 25 percent lower and exports 6 percent lower after a shock, raising peak IMF credit ratios to 30.2 percent and 16.7 percent (instead of 22.6 percent and 15.7 percent in the referenced table).

### PLL qualification and institutional capacity
- Assessment of PLL criteria (summary):
  - External position and market access:
    - Current account deficit narrowed to 1.4 percent of GDP in 2015 from 5.7 percent of GDP in 2014.
    - External debt around 32 percent of GDP; expected to decline to around 30 percent of GDP over the medium term.
    - Recommendation: introduction of greater exchange rate flexibility to enhance competitiveness and shock absorption capacity.
    - International reserves: 111 percent of the standard ARA metric at end-2015 (154 percent adjusted for capital outflows controls); medium-term reserves expected to exceed 151 percent of the ARA metric (220 percent adjusted) by 2020.
  - Fiscal policy:
    - Authorities’ medium-term objective: reduce public debt to 60 percent of GDP by 2020 (against 64 percent of GDP at present).
    - Target requires bringing fiscal deficit to about 2 percent of GDP.
    - Deficit likely achieved in 2015: 4.3 percent of GDP.
    - Public wage bill projected over the medium term at 11.5 percent of GDP (versus prior 11.0 percent of GDP).
    - Staff assessment: Morocco is not performing strongly in the fiscal area despite commitments and progress.
  - Monetary policy:
    - Inflation 1.4 percent (y-o-y) at end-October 2015; inflation expectations well anchored per BAM surveys.
  - Financial sector and supervision:
    - Banks well capitalized and profitable; NPLs rising and concentration risks significant.
    - 2015 FSAP: bank supervision effective and improving; new banking law adopted in November 2014; regulations to be operationalized by end 2016.
  - Data adequacy:
    - Overall data quality adequate; Morocco subscribes to the Special Data Dissemination Standard.

### Selected fiscal, balance-of-payments, and financial statistics (highlights from Tables)
- Real GDP (annual percent change): 2012: 3.0; 2013: 4.7; 2014: 2.9; 2015: 2.4; 2016: 4.9; 2017: 4.7; 2018: 3.1; 2019: 4.2; 2020: 4.4.
- Consumer prices (end of period): 2015: 1.6; 2016: 1.6; 2017: 1.6; 2018: 1.3; 2019: 2.0; 2020: 2.0.
- Revenue (percent of GDP): 2012: 28.0; 2013: 27.7; 2014: 28.3; 2015: 28.0; 2016: 25.8.
- Expenditure (percent of GDP): 2012: 35.3; 2013: 32.9; 2014: 33.2; 2015: 33.0; 2016: 30.0.
- Budget balance (percent of GDP): 2012: -7.3; 2013: -5.2; 2014: -4.9; 2015: -4.9; 2016: -4.3.
- Total government debt (percent of GDP): 2012: 58.3; 2013: 61.5; 2014: 66.4; 2015: 63.4; 2016: 63.8.
- Gross official reserves (billions of U.S. dollars): 2012: 17.5; 2013: 19.3; 2014: 20.4; 2015: 20.5; 2016: 22.1; 2017: 23.2; 2018: 28.2; 2019: 31.4; 2020: 34.6.
- Banking sector indicators:
  - Regulatory capital to risk-weighted assets: 2014: 13.8.
  - NPLs to total loans: 2014: 6.9; June 2015: 7.2.
  - Specific provisions to NPLs: 2014: 65.0; June 2015: 66.0.
  - Return on assets (ROA) June 2015: 1.0.

### Staff appraisal and policy recommendations
- Program status: program remains on track; macroeconomic conditions improved; September 2015 indicative targets met comfortably.
- Key policy recommendations:
  - Continue fiscal consolidation: replace remaining subsidies with better targeted social safety nets and contain public wage spending.
  - Adopt the central bank law and implement FSAP recommendations to strengthen the financial sector policy framework.
  - Continue efforts to improve the business climate by simplifying bureaucratic procedures and addressing corruption.
  - Decisive progress needed to reduce high unemployment and increase women’s participation in the labor force.
- Exit strategy / successor arrangement:
  - Prospects for eventual exit from the PLL have increased; any successor arrangement would likely have reduced access levels; authorities should define and communicate a preferred strategy to manage market expectations.

*Source: _cr1638 (PDF) — IMF staff report and Appendix I written communication, January 2016.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Recent developments and performance under the program
- PLL arrangement approved in July 2014: SDR 3.2351 billion (or 550 percent of quota), equivalent to US$5 billion. The arrangement is treated as precautionary; full amount made available upon completion of the second review on July 24, 2015.
- 2015 Article IV consultation concluded on December 14, 2015; Executive Directors welcomed continued strong commitment to sound policies and reforms.
- Growth and labor market:
  - Growth in 2015 expected at 4.7 percent, compared with 2.4 percent in 2014.
  - Non-agricultural activity growth in 2015: 3.3 percent.
  - Unemployment rate Q3-2015: 10.1 percent (up from 9.6 percent year-on-year).
  - Youth unemployment Q3-2015: 21.4 percent.
- External sector and reserves:
  - Current account deficit in 2015 expected to narrow to about 1.4 percent of GDP (from 9.5 percent of GDP in 2012).
  - International reserves at end-2015: 6.9 months of imports, and 111 percent of the standard ARA metric (154 percent, adjusted for capital controls).
- Fiscal developments:
  - End-September 2015 overall deficit (including grants): 2.7 percent of GDP (indicative target under PLL: 3 percent).
  - Authorities on track for a 2015 overall deficit objective of 4.3 percent of GDP.
  - Cyclically-adjusted primary deficit (excluding grants) estimated to have decreased by about 1.5 percent of GDP relative to 2014.
- Monetary policy and inflation:
  - Bank-Al-Maghrib policy rate maintained at 2.5 percent in 2015 (after two cuts of 25 basis points each in September and December 2014).
  - Bank lending growth in October 2015 (y-o-y): 0.7 percent.
  - Headline inflation in October 2015 (y-o-y): 1.4 percent.
- Financial sector:
  - Banking system capital adequacy ratio end-June 2015: 13.8 percent.
  - NPL ratio in August 2015: 7.5 percent.
  - Bank profitability stable; provisioning levels described as high. Concentrated exposures to large corporates identified as a significant risk in the FSAP.

### Reforms and program implementation
- Program status:
  - Both September 2015 quantitative indicative targets were met comfortably; Morocco continues to meet PLL qualification criteria.
  - Morocco performs strongly in three PLL qualification areas: financial sector and supervision; monetary policy; and data adequacy. It does not substantially underperform in the two remaining areas: external position and market access; and fiscal policy.
  - Authorities continue to treat the arrangement as precautionary and are assessing exit strategy and potential need for a successor arrangement.
- Key reform progress and outstanding items:
  - Organic Budget Law (OBL): adopted in 2015; most provisions enter into force in January 2016 and are reflected in the 2016 budget; remaining provisions to be implemented by 2020.
  - Fuel price liberalization: full liberalization of diesel, gasoline and kerosene prices at end-November 2015.
  - Food subsidies: to be gradually reduced in 2016; no butane subsidy reform envisaged at this point.
  - Social programs: continued expansion targeting most vulnerable groups.
  - Financial sector framework: steps to implement FSAP recommendations, including increasing resources for bank supervision; new central bank law being adjusted to incorporate FSAP recommendations.
  - Exchange rate regime: authorities agree there is a unique window to introduce exchange rate flexibility; staff to continue collaboration on transition steps.
  - Pension reform: civil service parametric reform adopted by the government on January 7, 2016 and to be submitted to Parliament; implementation postponed to early 2017.
  - Business environment and labor market: continued progress on customs procedures, property registration, business entry, and limiting payment delays in the public sector; National Strategy for Employment introduced in 2015; formulation of a national strategy to fight corruption underway.

### Outlook and projections
- Growth and activity:
  - Growth expected to slow in 2016 as agricultural activity returns to normal; non-agricultural growth expected to gradually increase.
  - Medium-term prospects: agricultural modernization, expansion into new markets and sectors (such as automobile and aeronautic), and higher capital investment expected to lift potential growth, conditional on reform implementation and improved external conditions.
- Inflation:
  - Projected at 1.3 percent in 2016.
  - Projected to stabilize around 2 percent over the medium term.
- Current account and reserves:
  - Current account deficit projected at 0.5 percent of GDP in 2016 and 0.9 percent of GDP in 2017.
  - Medium-term current account deficit expected to stabilize at about 1.6 percent of GDP.
  - Reserves projected to rise above 8 months of imports, or 151 percent of the standard ARA metric, by 2020.
- Fiscal consolidation:
  - Overall fiscal deficit expected to decline to 3.5 percent of GDP in 2016.
  - Authorities aim for a fiscal deficit of about 2 percent of GDP by 2020 and to reduce public debt to about 60 percent of GDP by 2020.

### Risks and stress scenarios
- Risk assessment:
  - Risks remain tilted to the downside but have decreased somewhat.
  - Domestic risks: potential delays in reform implementation around the 2016 general elections, notably pension, subsidy, and tax reforms.
  - External risks: weaker-than-expected euro area growth reducing exports, tourism, FDI and remittances; volatility in global financial markets increasing borrowing costs; geopolitical risks boosting oil price volatility and reducing tourism.
  - Upside factor: continued low commodity prices would further narrow fiscal and external imbalances.
- External Stress Index (summary):
  - Overall assessment: external pressures have abated in recent years, but downside scenario shows substantial external risks remain.
  - Main external risks captured in the index: (i) structurally weak growth in key advanced economies (especially the Euro area); (ii) increased volatility of energy prices; (iii) tighter or more volatile global financial conditions.
  - Baseline scenario uses WEO baseline projections for Euro area growth and oil prices; VXEEM assumed unchanged from December 14, 2015.
  - Downside scenario aligned with IMF spillover reports: e.g., a slowdown in the euro area could result in the euro area GDP level being 4 percent below baseline after four years; geopolitical crises could result in oil prices 25 percent above baseline.

### Review of qualification and institutional capacity
- General assessment:
  - Economic performance improved in 2015 with policy actions reducing macroeconomic imbalances and vulnerabilities.
  - The program is on track; end-September 2015 indicative targets on central government fiscal deficit and NIR met with comfortable margins.
  - Authorities’ written communication (W-COM) dated January 11, 2016 confirms the comprehensive medium-term strategy and commitment to reduce public debt to 60 percent of GDP by 2020, requiring a fiscal deficit of about 2 percent of GDP.
- Institutional frameworks:
  - New OBL strengthens fiscal framework and enhances budgetary procedures and practices.
  - Indicators show Morocco performs well in fiscal policy area and scores lower in the monetary policy area (the latter less relevant given the pegged exchange rate regime).
  - Morocco ranks within the 25-75 percentile range on World Bank anti-corruption and government effectiveness indicators.

*Source: _cr1638 - EXECUTIVE SUMMARY (PDF), January 12, 2016.*

### 13.      Overall, Morocco continues to meet the qualification criteria for a PLL arrangement,

### _cr1638 - 13.      Overall, Morocco continues to meet the qualification criteria for a PLL arrangement,

### Assessment of Specific PLL Criteria (Performance by qualification area)
- General finding: Morocco meets the qualification criteria for a PLL arrangement and performs strongly in three out of five PLL qualification areas: financial sector and supervision, monetary policy, and data adequacy. It does not substantially underperform in the other two areas: external position and market access, and fiscal policy.
- External position and market access
  - Criterion 1 — Sustainable external position:
    - Current account deficit narrowed to 1.4 percent of GDP in 2015 from 5.7 percent of GDP in 2014.
    - Exports expected to rise over the medium term; import growth expected to remain moderate in a low commodity price environment.
    - Real effective exchange rate (REER) is in line with fundamentals based on the most recent external balance assessment (EBA).
    - External debt around 32 percent of GDP; expected to decline to around 30 percent of GDP over the medium term and remain sustainable and robust to standard stress tests.
    - Recommendation: introduction of greater exchange rate flexibility to enhance competitiveness and shock absorption capacity.
  - Criterion 2 — Capital account position dominated by private flows:
    - Private capital flows ≈ 82 percent of total capital flows.
    - FDI is the largest component of private flows.
    - Private external debt ≈ 2.7 percent of GDP.
    - Sovereign bond issuance and development partner loans constitute the bulk of public capital flows.
  - Criterion 3 — Track record of steady sovereign access to international capital markets at favorable terms:
    - Government raised EUR 1 billion in June 2014.
    - National Phosphate Company (OCP) issued a US$1 billion Eurobond in April 2015.
    - Sovereign spreads narrowed between 2011 and 2015.
    - Average maturity of public external debt close to 8 years and 9 months (against 7 years and 4 months in 2009).
  - Criterion 4 — Reserve position:
    - International reserves equivalent to 111 percent of the standard ARA metric at end-2015 (against 94.7 percent at end-2014).
    - Considering controls on capital outflows for residents, reserves ≈ 154 percent of the adjusted ARA metric.
    - Over the medium term, reserves expected to increase and exceed 151 percent of the ARA metric (220 percent of the adjusted metric) by 2020.
    - Note: ARA adjustment rationale: lower weight of broad money due to lower risk of capital flight.
- Fiscal policy
  - Criterion 5 — Sound public finance, including a sustainable public debt position:
    - Authorities’ medium-term objective: reduce public debt to 60 percent of GDP by 2020 (against 64 percent of GDP at present).
    - Target requires bringing fiscal deficit to about 2 percent of GDP.
    - Fiscal adjustment and reform pace increased since end-2013.
    - Deficit likely achieved in 2015: 4.3 percent of GDP (benefiting from declining subsidy spending and wage bill containment).
    - Projected deficit in 2016: 3.5 percent of GDP.
    - Public sector debt assessed as sustainable and generally resilient to shocks despite high gross financing needs, expected to decline due to lengthening average maturities; public debt expected to increase further in 2016.
    - Projection revision: public wage bill over the medium term projected at 11.5 percent of GDP versus prior 11.0 percent of GDP, due in part to revised assessment of pension reform impact.
    - Pension reform delay: authorities plan to offset its impact on the public wage bill through expenditure and revenue measures.
    - Staff assessment: Morocco is not performing strongly in the fiscal area despite commitments and progress.
- Monetary policy
  - Criterion 6 — Low and stable inflation:
    - Inflation was 1.4 percent (y-o-y) at end-October 2015.
    - Inflation expected to remain low in the medium term.
    - Inflation expectations well anchored per BAM’s surveys.
    - Authorities plan to gradually introduce greater exchange rate flexibility.
- Financial sector soundness and supervision
  - Criterion 7 — Sound financial system and absence of solvency problems:
    - Banks are well capitalized and profitable; strong interest rate margins, low operating costs, rising fee and commission income, and stable funding (mainly domestic deposits).
    - NPLs rising and concentration risks significant.
    - 2015 FSAP stress tests show banking system could withstand severe adverse shocks.
  - Criterion 8 — Effective financial sector supervision:
    - 2015 FSAP concluded bank supervision is effective and improving, with increasing resources.
    - New banking law adopted in November 2014 expands BAM’s regulatory and supervisory powers and aims to improve cross-border supervision and consolidated risk management.
    - Regulations to operationalize the law expected fully in place by end 2016.
    - Supervision of Moroccan banks in sub-Saharan Africa improving via strengthened coordination and information exchange with host-country supervisors.
- Data adequacy
  - Criterion 9 — Data transparency and integrity:
    - Overall data quality adequate for effective surveillance and program monitoring.
    - Morocco subscribes to the Special Data Dissemination Standard.
    - Authorities committed to improving data quality and access.

### Other Program Issues (Exceptional access, safeguards, and liquidity)
- Exceptional access criteria (Morocco meets the four criteria)
  - Criterion 1 — Potential balance of payments pressures:
    - Morocco does not face actual BOP pressures but could experience such pressures if risks materialize (e.g., structurally weak growth in key advanced economies, increased energy price volatility, tighter/volatile global financial conditions).
  - Criterion 2 — Public debt sustainability:
    - Rigorous analysis indicates high probability public debt will remain sustainable over the medium term, resilient to shocks, and expected to start declining in 2017.
  - Criterion 3 — Continued market access with Fund resources outstanding:
    - Staff considers Morocco could continue to access capital markets while making purchases under the arrangement.
    - PLL provides stopgap for immediate BOP needs and ex ante guidance that supports investor confidence.
  - Criterion 4 — Prospects for program success:
    - Staff considers authorities’ policy program to have reasonably strong prospects for success, including institutional and political capacity to implement reforms.
- Capacity to repay the Fund and Fund exposure
  - If Morocco drew the entire amount available under the PLL:
    - Fund obligations would represent a maximum of 13.4 percent of Morocco’s total external debt over the projection period.
    - Fund obligations would represent 18 percent of debt service.
    - Fund obligations would represent 18 percent of gross international reserves.
    - Fund obligations would represent 15 percent of exports.
    - Overall assessment: adequate capacity to repay and low credit and liquidity risks to the Fund; PLL commitment modest and reduces Fund forward commitment capacity only marginally.
  - Cautionary note: illustrative scenario used at PLL request suggests reserves may be 25 percent lower and exports 6 percent lower after a shock, raising peak IMF credit ratios to 30.2 percent and 16.7 percent instead of 22.6 percent and 15.7 percent in the referenced table; such considerations advise caution in interpreting projected ratios.
- Safeguards assessment of BAM
  - 2013 safeguards assessment updated in January 2015 found safeguards framework remains relatively strong.
  - Governance supported by strong internal audit and risk management functions; Audit Committee strengthened by appointment of third member with banking experience.
  - Amendments to BAM’s legal framework to sustain good governance and strengthen autonomy remain in progress; expected approval of a new central bank law in 2016.
  - Recommendation to implement IFRS not yet implemented; BAM contracted an audit firm for an IFRS feasibility study completed in July 2015 and decided to maintain current accounting standards while improving disclosure quality and delineating main differences with IFRS.

### Staff Appraisal (Program status, risks, and policy recommendations)
- Program status and recent performance
  - Program remains on track.
  - Macroeconomic conditions improved: external imbalances declined substantially and fiscal consolidation advanced.
  - September 2015 indicative targets met comfortably.
  - Progress includes implementation of the new OBL in the 2016 budget and ongoing improvements to financial sector regulation and supervision.
  - Authorities intend to transition to a more flexible exchange rate regime to improve competitiveness and resilience.
  - Pension reform implementation delayed.
- Key risks and required policy actions
  - Environment subject to significant downside risks; sustaining reform momentum is essential.
  - Policy recommendations:
    - Continue fiscal consolidation: replace remaining subsidies with better targeted social safety nets and contain public wage spending.
    - Adopt the central bank law and implement FSAP recommendations to strengthen the financial sector policy framework.
    - Continue efforts to improve the business climate by simplifying bureaucratic procedures and addressing corruption.
    - Decisive progress needed to reduce high unemployment and increase women’s participation in the labor force.
- Exit strategy and successor arrangements
  - Prospects for eventual exit from the PLL have increased due to strong program implementation and greater resilience to external shocks.
  - External risks (growth in key advanced economies, global financial volatility, commodity prices) must be fully considered in any orderly exit strategy.
  - Near-term expectation: any successor arrangement would likely have reduced access levels given strengthened macroeconomic policies and buffers; authorities are still considering whether to request a successor arrangement.
  - Staff advice: authorities should define and communicate a preferred strategy to manage market expectations.

*Source: IMF staff assessment as provided in the supplied content unit.*

### 22.      Morocco continues to meet the PLL qualification criteria. The IMF Executive Board’s

### _cr1638 - 22.      Morocco continues to meet the PLL qualification criteria. The IMF Executive Board’s

### PLL qualification and assessment
- Morocco continues to meet the PLL qualification criteria.
- The IMF Executive Board’s assessment in the context of the 2015 Article IV consultation was positive.
- Morocco performs strongly in three out of five PLL assessment areas: financial sector and supervision, monetary policy, and data adequacy.
- Morocco is not substantially underperforming in the other two areas: external position and market access, and fiscal policy.
- Staff recommendation: completion of the third review under the PLL arrangement.

### Real and external developments (highlights from Figure 1)
- Non-agricultural growth was sluggish in 2015; euro area recovery remains uncertain.
- Domestic demand and net exports contributed positively to growth; investment remained subdued.
- Inflation remained low despite increases in food prices.
- Exports grew faster than imports, in part due to the recent decline in oil prices, improving the trade balance and the current account.
- FDI inflows remained strong and supported reserves recently.
- Gross reserves (in billions of euros) series shown from Jan-13 to Nov-15 with levels including: 12.5, 14.5, 16.5, 18.5, 20.5, 22.5, 24.5, 26.5 (visual series).

### Fiscal and financial market developments (highlights from Figure 2)
- Fiscal consolidation continues as planned; subsidy expenditure decreased in percent of GDP.
- Revenue remained broadly resilient although it has been slightly decreasing.
- Credit growth has remained low.
- Loan-to-deposit ratio has moderately declined; spreads remain relatively low (Markit 5-yr MAR Sov. CDS Spread and MAR Sovereign Bond Spread series shown).

### Selected economic indicators, 2012–20 (Table 1 key figures)
- Real GDP (annual percent change): 2012: 3.0; 2013: 4.7; 2014: 2.9; 2015: 2.4; 2016: 4.9; 2017: 4.7; 2018: 3.1; 2019: 4.2; 2020: 4.4; later entries include 4.6 and 4.7 in projection columns.
- Real agriculture GDP (annual percent change): 2015: 15.0; 2016: 15.2.
- Consumer prices (end of period): 2015: 1.6; 2016: 1.6; 2017: 1.6; 2018: 1.3; 2019: 2.0; 2020: 2.0.
- Gross capital formation (percent of GDP): 2012: 35.0; 2013: 34.7; 2014: 34.0; 2015: 33.7; 2016: 33.4; 2017: 33.3; 2018: 34.4; 2019: 35.5; 2020: 36.5; later projections up to 37.6.
- Gross national savings (percent of GDP): 2012: 25.5; 2013: 26.8; 2014: 28.1; 2015: 28.0; 2016: 30.6; 2017: 31.9; 2018: 33.9; 2019: 34.6; 2020: 35.1; projection 35.4 and 36.0.
- Revenue (percent of GDP): 2012: 28.0; 2013: 27.7; 2014: 28.3; 2015: 28.0; 2016: 25.8; 2017: 25.6; 2018: 26.4; 2019: 26.6; 2020: 27.1; subsequent: 27.6, 28.0.
- Expenditure (percent of GDP): 2012: 35.3; 2013: 32.9; 2014: 33.2; 2015: 33.0; 2016: 30.0; 2017: 29.8; 2018: 29.9; 2019: 29.7; 2020: 29.9; later: 30.1, 30.1.
- Budget balance (percent of GDP): 2012: -7.3; 2013: -5.2; 2014: -4.9; 2015: -4.9; 2016: -4.3; 2017: -4.3; 2018: -3.5; 2019: -3.0; 2020: -2.8; projections: -2.5, -2.1.
- Total government debt (percent of GDP): 2012: 58.3; 2013: 61.5; 2014: 66.4; 2015: 63.4; 2016: 63.8; 2017: 63.6; 2018: 64.4; 2019: 64.0; 2020: 63.2; projections: 61.9, 60.0.
- Current account excluding official transfers (percent of GDP): 2012: -9.8; 2013: -8.6; 2014: -7.5; 2015: -7.4; 2016: -4.2; 2017: -2.3; 2018: -1.8; 2019: -1.8; 2020: -1.6; projections: -1.8, -1.7.
- Gross reserves (in billions of U.S. dollars): 2012: 17.5; 2013: 19.3; 2014: 20.4; 2015: 20.5; 2016: 22.1; 2017: 23.2; 2018: 28.2; 2019: 31.4; 2020: 34.6; projections: 37.2, 40.1.
- In months of next year imports of goods and services: 2012: 4.3; 2013: 4.7; 2014: 5.3; 2015: 6.2; 2016: 6.0; 2017: 6.9; 2018: 7.7; 2019: 8.0; 2020: 8.1; projection: 8.1.
- Nominal GDP (in billions of U.S. dollars): 2012: 98.3; 2013: 107.2; 2014: 109.2; 2015: 110.0; 2016: 103.3; 2017: 103.2; 2018: 105.6; 2019: 111.6; 2020: 118.0; projections: 125.8, 134.6.
- Net imports of energy products (in billions of U.S. dollars): 2012: -12.4; 2013: -12.2; 2014: -11.1; 2015: -11.0; 2016: -7.2; 2017: -6.5; 2018: -6.2; 2019: -7.0; 2020: -7.5; projections: -8.1, -8.4.

### Budgetary central government finance (Tables 2–3 key figures)
- Revenue (billions of dirhams): 2012: 237.7; 2013: 250.0; 2014: 259.3; 2015: 259.3; 2016: 257.5; 2017: 256.4; 2018: 276.7; 2019: 294.0; 2020: 316.7; projection: 342.2; 369.2.
- Taxes (billions of dirhams): 2012: 202.7; 2013: 200.7; 2014: 203.8; 2015: 203.8; 2016: 206.7; 2017: 205.9; 2018: 222.5; 2019: 243.8; 2020: 268.9; projection: 291.0; 314.9.
- Grants (billions of dirhams): 2012: 0.5; 2013: 6.1; 2014: 13.8; 2015: 13.8; 2016: 14.6; 2017: 9.6; 2018: 14.3; 2019: 10.0; 2020: 2.2; projections: 2.2.
- Expense (billions of dirhams): 2012: 253.2; 2013: 250.8; 2014: 254.5; 2015: 255.4; 2016: 254.9; 2017: 252.7; 2018: 260.4; 2019: 267.8; 2020: 280.7; projection: 296.2; 313.0.
- Compensation of employees (billions of dirhams): 2012: 108.9; 2013: 112.8; 2014: 117.3; 2015: 117.3; 2016: 123.1; 2017: 121.0; 2018: 125.8; 2019: 131.0; 2020: 139.0; projection: 146.2; 151.9.
- Subsidies (billions of dirhams): 2012: 54.9; 2013: 41.6; 2014: 32.6; 2015: 32.6; 2016: 18.7; 2017: 16.9; 2018: 15.6; 2019: 9.8; 2020: 9.2; projection: 9.7; 10.3.
- Net acquisition of nonfinancial assets (billions of dirhams): 2012: 46.1; 2013: 45.7; 2014: 49.7; 2015: 49.7; 2016: 45.1; 2017: 46.8; 2018: 53.0; 2019: 59.6; 2020: 68.9; projection: 76.9; 84.4.
- Net lending / borrowing (overall balance, billions of dirhams): 2012: -61.5; 2013: -46.5; 2014: -44.9; 2015: -45.7; 2016: -42.5; 2017: -43.0; 2018: -36.7; 2019: -33.5; 2020: -32.9; projections: -30.9; -28.2.

### Balance of payments (Table 4 key figures)
- Current account (billions of U.S. dollars): 2012: -9.3; 2013: -8.5; 2014: -6.4; 2015: -6.2; 2016: -2.9; 2017: -1.5; 2018: -0.5; 2019: -1.0; 2020: -1.7; projections: -2.0; -2.1.
- Trade balance (billions of U.S. dollars): 2012: -21.9; 2013: -21.9; 2014: -19.2; 2015: -20.6; 2016: -15.0; 2017: -13.8; 2018: -14.0; 2019: -15.1; 2020: -15.8; projections: -17.2; -18.5.
- Exports, f.o.b. (billions of U.S. dollars): 2012: 17.0; 2013: 18.3; 2014: 23.4; 2015: 20.0; 2016: 18.5; 2017: 18.3; 2018: 19.4; 2019: 21.3; 2020: 23.4; projections: 25.5; 28.1.
- Imports, f.o.b. (billions of U.S. dollars): 2012: -38.9; 2013: -40.2; 2014: -42.6; 2015: -40.6; 2016: -33.5; 2017: -32.1; 2018: -33.4; 2019: -36.3; 2020: -39.2; projections: -42.7; -46.6.
- Services (net, billions of U.S. dollars): 2012: 7.1; 2013: 6.4; 2014: 5.7; 2015: 7.0; 2016: 5.7; 2017: 6.0; 2018: 6.5; 2019: 7.1; 2020: 7.7; projections: 8.4; 9.1.
- Tourism receipts (billions of U.S. dollars): 2012: 6.7; 2013: 6.9; 2014: 6.9; 2015: 7.1; 2016: 5.8; 2017: 6.0; 2018: 6.1; 2019: 6.5; 2020: 6.9; projections: 7.4; 7.9.
- Transfers (billions of U.S. dollars): 2012: 7.7; 2013: 8.7; 2014: 9.6; 2015: 10.0; 2016: 9.0; 2017: 8.2; 2018: 8.8; 2019: 9.0; 2020: 8.7; projection: 9.3; 10.2.
- Financial account (billions of U.S. dollars): 2012: 6.2; 2013: 9.4; 2014: 9.3; 2015: 8.7; 2016: 5.9; 2017: 5.9; 2018: 5.7; 2019: 4.1; 2020: 4.8; projections: 4.6; 5.0.
- Gross official reserves (billions of U.S. dollars): 2012: 17.5; 2013: 19.3; 2014: 20.4; 2015: 20.5; 2016: 22.1; 2017: 23.2; 2018: 28.2; 2019: 31.4; 2020: 34.6; projections: 37.2; 40.1.
- In months of prospective imports of GNFS: 2012: 4.3; 2013: 4.7; 2014: 5.3; 2015: 6.2; 2016: 6.0; 2017: 6.9; 2018: 7.7; 2019: 8.0; 2020: 8.1; projection: 8.1.

### Monetary and financial sector (Tables 5–6 key figures)
- Broad money (billions of dirhams): 2011: 949.3; 2012: 992.2; 2013: 1,022.8; 2014: 1,072.3; 2015: 1,086.2; 2015 (later column): 1,149.2; 1,146.0.
- Credit to the economy (billions of dirhams): 2011: 696.2; 2012: 729.6; 2013: 757.2; 2014: 791.7; 2015: 776.4; later: 809.1; 805.3.
- Credit to the private sector (annual percent change): 2012: 4.8; 2013: 3.8; 2014: 4.6; 2015: 2.5; 2016: 4.2; 2017: 3.7 (Table notes: includes credit to public enterprises).
- Broad money (annual percent change): 2012: 4.5; 2013: 3.1; 2014: 4.8; 2015: 6.2; 2016: 5.8; 2017: 5.5.
- Banking credit (annual percent change) and related velocity/memo items shown (Velocity (GDP/M3): 2011: 0.86; 2012: 0.85; 2013: 0.88; 2014: 0.86; 2015: 0.85; later entries: 0.87, 0.88).

- Financial Soundness Indicators (selected, Table 6):
  - Regulatory capital to risk-weighted assets: 2008: 11.2; 2009: 11.7; 2010: 12.3; 2011: 11.7; 2012: 12.3; 2013: 13.3; 2014: 13.8.
  - Tier 1 capital to risk-weighted assets: 2008: 9.6; 2009: 9.2; 2010: 9.7; 2011: 9.6; 2012: 10.2; 2013: 11.1; 2014: 11.6.
  - Nonperforming Loans (NPLs) to total loans: 2008: 6.0; 2009: 5.5; 2010: 4.8; 2011: 4.8; 2012: 5.0; 2013: 5.9; 2014: 6.9; June 2015: 7.2.
  - Specific provisions to NPLs: 2008: 75.3; 2009: 74.1; 2010: 70.1; 2011: 68.7; 2012: 67.8; 2013: 64.0; 2014: 65.0; June 2015: 66.0.
  - Return on assets (ROA): generally around 1.0–1.2 (e.g., 2008: 1.2; 2014: 0.9; June 2015: 1.0).
  - Deposits to loans: 2008: 113.0; 2009: 108.0; 2010: 104.0; 2011: 99.0; 2012: 96.1; 2013: 96.2; 2014: 100.8; June 2015: 102.5.
  - Liquid assets to total assets: 2008: 24.4; 2009: 17.3; 2010: 12.0; 2011: 11.4; 2012: 10.5; 2013: 12.5; 2014: 13.3; June 2015: 14.4.

### Capacity to repay (Table 7 key figures)
- GRA credit to Morocco (SDR million): 2015: 3,235.1; 2016: 3,235.1; 2017: 3,235.1; 2018: 3,235.1; 2019: 2,021.9; 2020: 404.4.
- GRA credit (in percent of quota): 2015: 550.0; 2016: 550.0; 2017: 550.0; 2018: 550.0; 2019: 343.8; 2020: 68.8.
- Charges due on GRA credit (SDR million): 2015: 0.0; 2016: 64.5; 2017: 63.4; 2018: 63.4; 2019: 61.3; 2020: 9.1; later: 6.4? (table shows varying small charge figures).
- Principal due on GRA credit: 2019: 1,213.2; 2020: 1,617.6.
- Debt and debt service ratios (selected):
  - Total external debt (percent of GDP): 2015: 37.3; 2016: 35.5; 2017: 35.4; 2018: 34.4; 2019: 31.5; 2020: 29.5.
  - Public external debt (percent of GDP): 2015: 34.2; 2016: 33.0; 2017: 33.2; 2018: 32.4; 2019: 29.8; 2020: 28.0.
  - Total external debt service (percent of GDP): 2015: 2.8; 2016: 2.6; 2017: 2.5; 2018: (table shows entries around 3.0–3.5).
- Memorandum items:
  - Nominal GDP (in billions of U.S. dollars): 2015: 103.2; 2016: 105.6; 2017: 111.6; 2018: 118.0; 2019: 125.8; 2020: 134.6.
  - Gross international reserves (in billions of U.S. dollars): 2015: 23.2; 2016: 28.2; 2017: 31.4; 2018: 34.6; 2019: 37.2; 2020: 40.1.
  - Exports of goods and services (in billions of U.S. dollars): 2015: 31.7; 2016: 33.1; 2017: 35.9; 2018: 38.9; 2019: 42.2; 2020: 46.0.
- Note: Upon approval of the second review of the PLL arrangement Morocco can draw up to 550 percent of quota. The Moroccan authorities have expressed their intention to treat the arrangement as precautionary.

*Sources: Moroccan authorities; and IMF staff estimates.*

### Appendix I. Written Communication

### Appendix I. Written Communication

### Economic performance and outlook
- Economic growth picked up in 2015 and should be close to 5 percent, supported by a very good grain harvest.
- Inflation would remain low at an average of 1.6 percent in 2015.
- The current account deficit should shrink further below 2 percent of GDP in 2015, driven by falling energy and food costs, surging exports from emerging sectors, and strong inflows of remittances from Moroccans resident abroad.
- International reserves increased substantially in 2015 and are equivalent to almost 7 months of goods and services imports.
- As projected during the second review, growth in 2015 is estimated at around 4¾ percent, and inflation at 1½ percent (staff projection).
- The current account deficit is estimated at about 1½ percent of GDP for 2015 (staff projection).
- Official reserves are projected to reach close to 8 months of imports in 2016, equivalent to 129 percent of the standard ARA metric or 180 percent of the adjusted metric (staff projection).
- The near-to medium-term outlook: growth projected to be lower in 2016 than in 2015 with agricultural output returning to trend, then accelerate thereafter to close to 5 percent over the medium-term.

### Precautionary and Liquidity Line (PLL) stance
- Morocco treats the PLL arrangement as precautionary and does not foresee drawing upon it, except in the event of unexpected external shocks or substantial worsening of the international environment.
- Both indicative targets under the PLL arrangement for the end of September 2015 were met with comfortable margins.
- The authorities request completion of the third review under the PLL arrangement.
- The authorities will assess in the coming months whether further recourse to an insurance-type mechanism will be needed at the expiration of this facility in July and the level of related access.

### Fiscal developments and policy
- Fiscal consolidation is continuing.
- The fiscal deficit at the end of September stood at MAD 26.9 billion, well below the indicative target of MAD 38.8 billion.
- A drop in current revenue of 0.7 percent of GDP was observed at end-September due to weaker activity in non-agricultural sectors and lower grant revenues than expected.
- Tax revenue collection was stepped up so as to keep the fiscal deficit for 2015 at 4.3 percent of GDP, as stipulated in the budget.
- The 2016 Budget calls for a reduction of the fiscal deficit to 3.5 percent of GDP.
- The government debt ratio is intended to be lowered progressively to 60 percent of GDP.
- Medium-term objective for the wage bill (including social contributions): reduce to 11.5 percent of GDP.
- Social spending increases under RAMED and TAYSSIR programs and support programs for widows are reflected in the 2016 budget.
- Excluding grants, fiscal adjustment in 2015 amounted to 1.7 percent of GDP, higher than the 1.1 percent envisaged under the program (staff assessment).
- Fiscal targets: a deficit target of 3 percent of GDP in 2017 and a public debt-to-GDP target of 60 percent by 2020 (staff projection).

### Revenue-side reforms
- Continued implementation of tax reform initiated in 2014 to make the system simpler, more equitable and more supportive of competitiveness.
- The 2016 budget calls for further simplification of the VAT and revised tax brackets for corporate income tax.
- The budget includes measures that are part of ongoing efforts to reduce tax exemptions.

### Expenditure-side reforms and budget framework
- Continued efforts to control pay increases and limit the creation of new civil service jobs; new jobs to be prioritized for security, health and education.
- Government investment level to be maintained with emphasis on making it more efficient.
- Implementation decree for the new Organic Budget Law adopted in July 2015; most provisions entered into force on January 1, 2016, except for those under Article 69 to be implemented in stages up until 2020.
- Measures taken since 2013 to limit risks related to carryover of investment appropriations and to the wage bill are being rolled over until relevant provisions of the new Organic Budget Law enter into force.

### Pension and labor reforms
- Civil service pension reform bill on the Moroccan Pension Fund (CMR) adopted by the government on January 7, 2016 and to be submitted to Parliament; expected to enter into force on January 1, 2017.
- Reform features: gradual increase in the statutory retirement age, higher employer and employee contribution rates, and new rules for calculating pension benefits.
- Next pension reform steps include switching to a two-pillar system, with a private-sector fund and a public-sector fund.
- A draft law approved by the cabinet extends coverage of the pension system to the self-employed and other non wage earners.
- National Strategy for Employment aims to reduce the unemployment rate to 8 percent by 2020, focus on youth unemployment, and raise labor force participation rate of women.
- Discussions with social partners to reform the labor code and improve the social security system for workers.

### Monetary policy and financial sector
- Bank Al-Maghrib (BAM) has maintained an accommodative policy while closely monitoring inflation and international reserves.
- Bank liquidity has improved recently, in particular due to increased international reserves.
- BAM will continue to promote appropriate financing terms for the economy to support growth and maintain price stability.
- The recent Financial Sector Assessment Program mission found Moroccan banks are adequately capitalized and profitable, with stable funding sources, and that banking supervision is effective.
- Non-performing loans have increased since 2012 but remain at a moderate level and are well provisioned.
- BAM will continue to ensure proper management of banks’ risks, particularly credit concentration and liquidity risks.
- In 2015, BAM continued implementing Basel III standards and preparing a specific framework for systemically important banks.
- Banking law adopted in 2014 has been implemented and most regulations pertaining to this law are about to be adopted; regulations dealing with financial conglomerates and recovery plans for systemically important institutions are planned for 2016.
- A draft central bank law aims to increase BAM’s independence and broaden its remit to include contributing to financial stability; the government will submit the bill to Parliament at the earliest.

### Exchange rate policy
- Preparations for a potential move towards a more flexible exchange rate regime have progressed substantially with IMF technical assistance.
- On April 13, 2015, authorities revised the currency basket for the dirham: euro weight lowered from 80 percent to 60 percent and dollar weight raised from 20 percent to 40 percent.
- Authorities consider Morocco’s macroeconomic and structural situation favorable enough to start a gradual transition towards a more flexible exchange rate regime.

### Structural reforms and business climate
- Government implementing an ambitious reform program to enhance competitiveness and growth potential.
- Progress reported on streamlining procedures for businesses and individuals.
- A national strategy to fight corruption was adopted by the government in December 2015.
- Efforts to improve effectiveness of government spending on education to facilitate youth labor market entry.
- Progress on improving access to finance, particularly for SMEs.

### Quantitative indicative targets (selected figures as reported)
- Net international reserves (NIR) of Bank Al-Maghrib (end-of-period stock, in millions of U.S. dollars):
  - PLL Adjusted (3/31/15): 21,071
  - Actual (3/31/15): 20,085
  - PLL Adjusted (9/30/15): 22,105
  - Actual (9/30/15): 23,316
  - PLL Adjusted (end target): 22,200
  - Actual (end reported): 24,875
- Fiscal deficit (cumulative since beginning of fiscal year, end-of-period in millions of dirham):
  - PLL Adjusted (3/31/15): 15,600
  - Actual (3/31/15): 18,783
  - PLL Adjusted (9/30/15): 8,581
  - Actual (9/30/15): 30,200
  - PLL Adjusted (end target): 38,772
  - Actual (end reported): 26,861
- Memorandum items:
  - Adjustor on NIR (in millions of U.S. dollars): 1,970; -986; 985; 2,738; -1,117; 1,621 (as listed).
  - Adjustor on the fiscal deficit (in millions of dirham): 3,660; -3,183; 477; 10,700; -8,572; 2,128 (as listed).
- Program exchange rates used for evaluation:
  - 8.1496 MAD/US$ for the end-March 2015 target.
  - 8.5287 MAD/US$ for the end-September 2015 target (reflecting the change in the dirham basket on April 13, 2015).

### Assessment of qualification and risks
- Authorities consider Morocco continues to meet PLL eligibility criteria and performs strongly in monetary policy, financial sector soundness and supervision, and data adequacy.
- Authorities dispute staff’s assessment that external position and market access do not qualify as “strong,” citing:
  - Current account deficit decline from 9.5 percent of GDP in 2012 to 5.7 percent in 2014 and estimated 1.4 percent in 2015.
  - Increase in exports other than phosphates and agricultural products from 8.2 percent of GDP to 10 percent.
  - External debt remains low and sustainable.
  - Reserves estimated at 111 percent of the standard ARA metric and 154 percent of the metric adjusted for capital controls (authorities’ figures).
- Downside risks: exogenous shocks, lower growth in the euro area, increase in oil prices, and monetary policy normalization in the US; comfortable external buffers and PLL resources should mitigate these risks.

*Source: Appendix I. Written Communication (Rabat, Morocco, January 11, 2016) and accompanying statements in the document.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1638.pdf_