Last Updated: October 1, 2013
Current Program Status:
24-month Precautionary and Liquidity Line (PLL) in the amount of SDR 4.117 billion (about $6.2 billion, 700 percent of quota), was approved by the Executive Board of the IMF on August 3, 2012. The first and second reviews were completed on February 1st and July 31, 2013, respectively.
Morocco’s economic performance over the past decade has been sound overall. However, regional uncertainties, the crisis in Europe, high world commodity prices, and a poor harvest slowed growth in 2012 and put pressure on the fiscal and external accounts. Real GDP growth slowed to 2.7 percent, from almost 5 percent in 2011, while inflation remained low at 1.3 percent. The fiscal deficit deteriorated to 7.6 percent of GDP in 2012 from 6.8 percent of GDP in 2011, mostly reflecting the rising cost of subsidies and a higher wage bill. The current account deficit widened on account of higher fuel and food prices and lower remittances.
In 2013, a bumper harvest is likely to push overall growth above 5 percent, although non-agriculture growth slowed in the first half of the year. Inflation remained low at 2.3 through August 2013. After widening significantly in 2012, the fiscal and current account deficits are expected to decline in 2013, even though fiscal performance is being hampered by the detrimental impact on revenue of the underlying slowdown in activity. International reserves have stabilized at about four months of imports.
Role of the IMF
Morocco continues to face external risks linked to uncertainties in the euro zone and possible oil price increases. To guard against potential exogenous shocks, Morocco asked in 2012 for a credit line from the IMF under a 24-month PLL. This arrangement supports the authorities’ policy agenda to rebuild fiscal and external buffers and to address medium-term challenges by providing insurance against external risks. The authorities intend to continue to treat the arrangement as precautionary unless a severe deterioration of the external environment leads to actual balance of payment need.
The Challenges Ahead
Sustained implementation of the authorities’ economic agenda, including the subsidies and pension reform and structural reforms to increase competitiveness, is crucial to preserving Morocco’s solid performance and to making progress toward higher and more inclusive growth. The main challenges facing the authorities are to:
- Rebuild fiscal buffers and ensure medium-term fiscal sustainability. The authorities are committed to a consolidation path consistent with achieving a deficit of 3 percent of GDP by 2017. To this aim, costly universal subsidies need to be replaced by well-targeted social programs. Early and gradual implementation and clear communication are important for the success of the reform. The recent partial indexation of the domestic prices of some subsidized petroleum products to international prices is a welcome first step toward shielding the budget from international fuel price increases.
- Rebuild external buffers and strengthen competitiveness. Structural reforms to increase export diversification and competitiveness, and continued fiscal consolidation, are needed to support external sustainability. Morocco is also encouraged to move toward greater exchange rate flexibility as a way to enhance external competitiveness and the economy’s ability to absorb shocks, in coordination with other macroeconomic and structural policies.
- Foster higher and more inclusive growth. This objective is to be supported by reforms aimed at enhancing potential growth and job creation; these include: addressing the needs of underdeveloped areas, strengthening economic governance by increasing transparency and accountability, improving the business climate, and strengthening ongoing active labor market programs. Further improving educational outcomes and reducing youth unemployment would also help boost potential growth.
- Maintain adequate monetary and financial conditions, and preserve the stability of the financial sector. This would be instrumental to ensure that appropriate credit is provided to the economy, and would provide a sound basis for higher growth.
- Sustain the delivery of difficult reforms in a context of high expectations and a volatile regional environment. Good communication and high-quality social dialogue will be essential to success.