Macroeconomic performance

Output weakened significantly in the first quarter of 2014, on the back of contracting agricultural production and weaker non-agricultural output. After registering an expansion of 4.4 per cent in 2013, annual growth slowed to just 1.7 per cent in the first quarter of 2014. Agricultural output shrank by 1.6 per cent, compared to growth of 20 per cent in 2013. At the same time, non-agricultural output grew modestly by 2.1 per cent, due to sluggish industrial activity and stagnation in the construction sector. Continued weakness in these sectors pushed unemployment to 9.8 per cent in the first half of 2014 from 9.2 per cent in 2013. Meanwhile, inflation remained low (the lowest in the southern and eastern Mediterranean region), averaging 1.9 per cent in 2013 and declining to 0 per cent year-on-year in August 2014.

External balance dynamics have improved. The current account deficit narrowed to 7.6 per cent in 2013 from 10 per cent in 2012, owing to lower fuel and food imports. The strategies implemented by the government to target the development of high value-added exports contributed to strong export growth in motor vehicles (21 per cent), aerospace (13 per cent) and electronics (12 per cent) in 2013. The impressive performance of these sectors continued through the first half of 2014, with exports of motor vehicles and electronics accelerating on average by 40 per cent year-on-year and 17 per cent year-on-year, respectively. Meanwhile, net foreign direct investment jumped 27 per cent (after a modest rise of 3.6 per cent in 2012) and inched up again in the first quarter of 2014, while international reserves stabilised above four months of import cover.

The fiscal position has improved significantly. The fiscal deficit declined from 7.3 per cent of GDP in 2012 to 5.4 per cent of GDP in 2013, driven by a reduction in subsidies and wage bills. The trend of year-on-year improvement continued into the first quarter of 2014, partly due to the removal and reduction of a number of energy subsidies in January. On the financing front, Morocco sold €1 billion (US$ 1.35 billion) worth of 10-year bonds to international investors. The country also successfully completed the last review under the IMF’s Precautionary and Liquidity Line in January 2014, and secured a new PLL for US$ 5 billion in July 2014.

Liquidity conditions are improving thanks to a number of interventions by the central bank. These interventions include injecting liquidity primarily through seven-day advances and introducing a programme that provides banks with liquidity using loans made to SMEs as collateral. In addition, the required reserve ratio has been reduced from 4 per cent to 2 per cent in March 2014. As a result, liquidity conditions are improving, and interventions by the central bank have receded. In fact, seven-day advances have declined by 25 per cent (quarter-over-quarter) in the quarter ending June 2014.

Slow-down in agricultural output has been seen to limit growth in 2014. The EBRD expects a moderation of growth to 4.2 per cent in 2014 (from 5.5 per cent in 2013), predominantly due to a slow-down in agricultural growth following a strong recovery in the sector in 2013. The performance of the non-agricultural sector will be closely linked to eurozone stability. As such, the outlook is subject to downside risks associated with a deterioration in eurozone conditions that would adversely affect Morocco via trade, tourism and remittance linkages.

Major structural reform developments

The business environment has improved, but further steps are needed to promote investment and increase competitiveness. The World Bank Doing Business 2015 report ranked Morocco at 71st (out of 189 countries) for ease of doing business, gaining 23 places between 2011 and 2014. This is largely due to a number of improvements in the procedures for starting a business, such as ease of registering property and paying taxes. A law strengthening the autonomy of Morocco’s Competition Council was adopted in February 2014 – another positive development with respect to the business environment. As of autumn 2014, the implementation of a new procurement law is also in the pipeline, and efforts are under way to create a structured legal framework for the identification and development of public-private partnership projects. However, important gaps in reforms must be bridged in order to improve the business environment, particularly for small and medium-sized enterprises. The legal and institutional frameworks that support lending to SMEs need improvement. The creation of a movable assets registry and a reform of insolvency laws to strengthen credit rights would help expand access to finance for SMEs.

Some steps have been taken to address structural fiscal issues, but implementation challenges remain. In February 2014 all remaining subsidies on petrol and industrial fuels were removed, following on from a price indexation system set up in 2013. In parallel, measures have been taken to limit the effect of price hikes on vulnerable low-income groups and on the cost of public transport. Progress on other reforms (such as broader subsidy reform and the adoption of a new organic budget law) has been slower, owing to their politically sensitive nature and the difficulty in achieving consensus. One of the most crucial fiscal topics to be addressed is pension reform. The government has submitted draft proposals – which include measures to gradually lift the retirement age, increase employee contributions and decrease annuities – to the relevant parliamentary council. Talks between the government and labour unions are set to resume in September.

Reforms aimed at deepening and safeguarding the financial sector are ongoing. These reforms advocate fostering the development of alternative financial products, increasing access to finance and strengthening macroprudential supervision. On the alternative products front, efforts are under way to develop a framework for Islamic finance in Morocco, which will cover equities, deposits and Islamic bonds (sukuk). On the access to finance front, microfinance, financial literacy and risk management initiatives are ongoing. On the macroprudential front, reviews of the statutes of Bank Al-Maghrib and the Banking Act are ongoing, with technical assistance provided by the IMF to better monitor systemic risks to the financial sector. This is especially important in light of the cross-border expansion of Moroccan banks, particularly into sub-Saharan Africa, which will complicate banking supervision and increase the need to monitor risks related to branches or subsidiaries.

Regulations governing capital markets have been strengthened. A new securitisation law was adopted last year and a draft law is being prepared to establish a regulated market for the trading of derivatives. A draft law is being prepared to introduce a framework for asset-backed securities, and in particular covered bonds, as banks have expressed a willingness to issue mortgage-backed bonds. In foreign exchange markets, the central bank has announced plans to gradually allow greater flexibility of the exchange rate over the next three years, in order to reduce external vulnerabilities and strengthen competitiveness.

The implementation of decentralisation plans remains slow in view of the complexity of the reform. Authorities are expected to develop an organic law detailing the transfer of decision-making powers to the regions. This will require the development of a funding framework and the creation of specific instruments (for example, setting rules for direct borrowing at state level and establishing a fund to support the development of poorer regions). However, limited capacity at the level of regional administrations will be a challenge. Effective decentralisation must be accompanied by political governance and electoral reforms, so as to genuinely shift responsibility for decision-making and implementation from the central government to local regional authorities and improve the quality, responsiveness and accountability of regional policy.