Public Information Notice No. 08/91

Public Information Notice: IMF Executive Board Concludes 2008 Article IV Consultation with Morocco

July 28, 2008

On July 23, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Morocco.¹

Background

Morocco's recent economic performance has been favorable. Nonagricultural GDP growth reached 6.6 percent in 2007, although overall real GDP slowed to 2.7 percent due to a sharp fall in cereal production. Thus far in 2008, growth has been strong, driven by a rebound in agriculture, continued strong private investment, and vibrant activity in construction and services. Sound macroeconomic policies combined with sustained structural reforms and the opportunities provided by globalization have resulted in a gradual improvement in living standards and per capita income. However, unemployment, notably among the youth, remains a challenge.

Consumer price inflation remains low, in part because administered prices have not been adjusted since the beginning of 2007. Year-on-year consumer price inflation was 2 percent in 2007, down from about 3 percent in 2006, and would have been higher if there had been full pass-through of world oil and commodity prices on administered prices. Inflation has picked up in 2008, reaching 3.7 percent in April 2008, driven mainly by sharply rising food prices.

Morocco's external position is sound. Exports have performed well, although imports have been rising even faster, with robust demand for capital and consumer goods, greater food imports to offset the drop in cereal production, and the sharp rise in the world prices of petroleum and food products. Robust tourism receipts and remittance flows have mostly offset the negative trade balance, and with strong capital flows, external reserves rose from $22 billion at end-2006 to $26.5 billion at end-May 2008, equivalent to 6.4 months of 2009 imports of goods and services.

Public finances further strengthened in 2007 due largely to robust revenue. The overall fiscal deficit improved from 2 percent of GDP in 2006 to close to balance in 2007 reflecting higher revenue, which was only partly offset by increased capital expenditure and a pick-up in outlays for the authorities' open-ended subsidy system. Total government debt was 54 percent of GDP at end 2007, down from 58 percent in 2006. Tax revenue has continued to surge during the first quarter of 2008 but the cost of subsidies is expected to rise significantly in 2008.

Monetary policy remained geared toward maintaining low and stable inflation, in the context of the exchange rate peg. The central bank has left its key policy rate unchanged at 3.25 percent since early 2007, and lowered reserve requirements from 16.5 percent to 15 percent in December 2007 because of reduced bank liquidity. Monetary aggregates continued their strong rise, with broad money up by 15 percent (y-o-y) at end-April 2008, and private credit rising by 28 percent. The current level of the dirham's exchange rate is broadly in line with economic fundamentals.

Overall, the financial sector is sound and resilient to shocks. Banks are generally well-provisioned and have little foreign exposure on either the asset or liability side, minimizing the transmission of risks from global financial markets to the real economy. Moreover, the authorities continue to improve supervision with a view to monitoring risks more closely as the economy opens up.

The authorities are deepening structural reforms to increase productivity, boost growth, and improve the economy's resilience to shocks. These include reforms in the agricultural sector and education, and boosting investment in infrastructure and energy. The authorities continue to move ahead on various regional integration initiatives and trade liberalization efforts.

The authorities intend to continue publishing all documents relating to the Article IV consultation.

Executive Board Assessment

Executive Directors welcomed Morocco's continued good economic performance, and concurred that, owing to an increasingly diversified economy, stronger public finances, and a

sound financial sector, the outlook remains favorable in spite of the more difficult global environment. Directors noted that key risks to the outlook include possible fiscal and inflation risks stemming from continued increases in world commodity prices.

Directors noted that the remarkable fiscal consolidation efforts of recent years—which brought the budget close to balance in 2007—have provided the fiscal space in the short term to absorb the impact of higher world prices for subsidized products without undermining macroeconomic stability. They welcomed the authorities' commitment to adhere to the 2008 budget target, and agreed that the measures announced in mid-2008 would help the authorities to meet this goal.

Directors considered however that Morocco's universal subsidy scheme is the most important policy issue facing the authorities. A better targeting of subsidies over the medium term will be crucial to minimize fiscal risks and ensure adequate financing of the government's policy priorities. Directors noted the regressive nature of the current subsidy system, and pointed to its high opportunity cost in terms of foregone public investment and social spending. Directors also encouraged the authorities to preserve the gains from past efforts to bring the wage bill under control. They noted that more ambitious fiscal consolidation would further strengthen macroeconomic stability, and stressed that robust public finances constitute a key prerequisite to Morocco's planned move over the medium term to a more flexible exchange rate regime.

Directors commended the progress made in strengthening the financial sector, including with respect to implementation of the key recommendations of the 2002 FSAP. They agreed that the financial sector is sound and resilient to shocks, and shared the assessment that the banking sector is stable, adequately capitalized, and profitable. Directors welcomed ongoing efforts to strengthen banking supervision, and agreed that rapid credit growth, particularly in the real estate sector, continues to warrant close attention.

Directors considered that the central bank's monetary policy stance remains appropriate. They shared the authorities' assessment of the main upside risks to inflation, including possible second-round effects from higher imported prices, the impact of adjustments to food and fuel prices, and increased demand pressures. Directors praised the central bank's determination to defend price stability.

Directors agreed that the dirham's peg to a basket of currencies has anchored macroeconomic stability, and that its level appears broadly in line with fundamentals. They encouraged the authorities to continue preparing for an eventual move to a more flexible monetary and exchange rate regime, and welcomed the steps taken by the central bank to prepare for inflation targeting. Directors saw the further deepening of the money and exchange rate markets as important next steps, and encouraged the authorities to continue to ensure that the pace of further capital account liberalization is adequately sequenced with greater exchange rate flexibility.

Directors stressed that continued structural reforms remain crucial to further lift growth and reduce its volatility, and to continue to make progress in reducing unemployment. They welcomed the authorities' efforts to boost agricultural productivity, upgrade infrastructure, and reform the education system. Directors encouraged Morocco to make further inroads in trade liberalization, in particular by lowering its general tariffs.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.