On February 2, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Morocco on a lapse of time basis.

Economic activity has recovered most of the ground lost during the severe global recession of 2020. This performance owes to continued fiscal and monetary stimulus, the rebound of exports, buoyant remittances, and the exceptional harvest following two years of drought. After shrinking by 6.3 percent in 2020, GDP is forecast to have grown by 6.3 percent in 2021, among the highest in the Middle East and North Africa region. Despite having recovered most of the jobs lost in 2020, the unemployment rate of 11.8 percent is still above pre-pandemic level, driven by a rebound of the participation rate. Moroccan banks have weathered the crisis well, thanks to the prompt and exceptional support from Bank al-Maghrib.

GDP growth is projected at around 3 percent in 2022, as agriculture output returns to average levels and non-agricultural activity continues to recover. Recent inflationary pressures have remained manageable and are expected to wane in the medium term, as cost pressures from global supply disruptions are reabsorbed. After the sharp contraction in 2020, the current account deficit is projected to return in 2021 to levels closer to before the pandemic and to stabilize around 3.5 percent of GDP over the medium term. While this outlook remains subject to uncertainty, with much of the risks depending on the evolution of the pandemic, a fast and effective implementation of structural reforms should increase growth over the medium term.

Executive Board Assessment

In concluding the Article IV consultation with Morocco, Executive Directors endorsed the staff’s appraisal as follows:

Morocco’s economy is rebounding from the 2020 recession, thanks to the exceptional harvest, the rebound of exports, accommodative monetary and fiscal policy stances, and the continued strength in remittances. After a strong compression in 2020, the current account deficit is returning to levels closer to pre-pandemic, but Morocco has emerged from the crisis with a much stronger international reserve position. Staff expects GDP to grow at around 3 percent over the next few years, as the effects from the pandemic on potential activity are gradually reabsorbed and to accelerate gradually thereafter under the positive impact of structural reforms. These projections remain subject to a high level of uncertainty, related both to the evolution of the pandemic and the pace of implementation and effectiveness of the reforms.

The faster than expected closure of the output gap and higher government debt ratio would require a tighter fiscal policy stance than currently envisaged. Staff expects the fiscal deficit to fall very slowly over the medium term and the central government debt-to-GDP ratio to stabilize at close to 80 percent. While public debt remains sustainable, a faster fiscal consolidation process that brings the debt-to-GDP ratio closer to pre-pandemic levels over the medium term would make Morocco less vulnerable to further negative shocks and free more resources for private sector investment. The fiscal policy should be anchored by a credible medium-term macro-fiscal framework and underpinned by a comprehensive reform of the tax system and systematic review of government spending, supplemented by a civil service reform to contain wage bill increase.

Lower fiscal deficits would allow monetary policy to remain accommodative for longer, assuming inflationary pressures will remain manageable. The recent rise in inflation is limited and expected to subside as the imported cost pressures from supply-side bottlenecks and higher commodity prices become less relevant over time. As long as these pressures do not contaminate domestic inflation expectations, BAM has the space for a gradual normalization of monetary policy conditions but should stand ready to tighten its stance if inflationary pressures further accelerate. The recent appreciation of the dirham to the lower end of the exchange rate band offers an opportunity to accelerate the planned transition to an inflation-targeting framework.

Staff welcomes the authorities’ commitment to a new wave of structural reforms. The generalization of the social protection system should remove existing gaps in coverage and quality of health care services and strengthen Morocco’s social safety net. Together with the full implementation of the Unified Social Registry, these reforms should improve inclusiveness and efficiency. Reforming SOEs should reduce their financial burden on the budget and remove distortions that prevent market neutrality and hinder private sector development. Finally, the New Model of Development (NMD) contains several useful recommendations for strengthening the competitiveness of Moroccan firms, improving governance, boosting human capital, and building a more inclusive society.

Careful implementation of the reforms will be critical for their success. The reforms already ongoing and those suggested in the New Model of Development report have the potential to yield a stronger, more inclusive, and sustainable growth path for Morocco. Still, given the potentially large financing needs associated with these reforms, the uncertain impact on potential output, and the narrow fiscal space, carefully designing and sequencing are needed, on the basis of an adequate financing plan and within a coherent and stable macroeconomic framework.