Morocco Gets Positive Evaluation from IMF – In So Many Words

A colleague dropped by my office yesterday and said, “This looks like something for you; it’s just gibberish to me,” handing me the latest review by the IMF Executive Board of Morocco’s second PLL Arrangement and its final assessment of the first PLL. Yes, it certainly did sound incomprehensible to those of us uninitiated into the vocabulary of financial instruments related to government fiscal behavior (have I lost you yet?). So I decided that the good news story underneath the jargon needed to be translated so that more people are aware that Morocco continues to be headed in the right direction in its spending policies.

A PLL or Precautionary and Liquidity Line is a two-year arrangement whereby the IMF provides Morocco insurance against external risks, such as defaulting on government loans or excessive borrowing against its foreign currency reserves. Essentially, it meant that during the first PLL, Morocco could draw up to $5 billion to support its balance of payments, if needed. The PLL facility, as these instruments are called, introduced by the IMF in 2011, is designed to support countries that have the right budgetary policies but are experiencing difficulties due to external circumstances, such as natural disasters that devalue local agricultural or commodity production, excessive increases in imported energy costs, or other factors that upset their normal fiscal stability.

Morocco is now in its second two-year PLL. It treated the first, and now the second PLL as insurance policies and has not drawn down any of the available funds, preferring to implement budgetary and fiscal measures that strengthen the country’s capacity to absorb challenges to its economic health.

The IMF, as a matter of policy, reviews the PLL after the first year to assess how successfully the country manages the facility. So this year’s Executive Committee meeting both completed the final review of the first PLL and carried out the second evaluation of the current PLL.

Why so many assessments? The IMF does not give away money; rather, it provides financial means to countries under strict conditions linked to performance and agreed-upon metrics, sometimes requiring reforms on the part of the recipient country. In other words, no free rides.

Report Card on Morocco

So how did Morocco do? Well according to Mr. Min Zhu, IMF Deputy Managing Director, “Morocco’s overall economic performance has been strong. Following a slowdown in 2014, growth is expected to pick up in 2015. Policy action has helped reduce fiscal and external vulnerabilities and significant progress has been achieved on reforms. In an environment that remains subject to important downside risks, sustaining the momentum will be important to reduce remaining vulnerabilities and achieve higher and more inclusive growth.”

Min Zhu, Deputy Managing Director, IMF
credit: IMF

So Morocco has been moving to lessen the negative impact of expensive energy imports; increased its exports to generate more foreign currency reserves; and continued with incremental reforms to its public budget to reduce inflationary items such as public pensions, to close the spending and revenues gap.

The IMF noted that Morocco is improving its banking sector by adopting the Basel III standards related to increased currency reserves and implementing a new banking law. It cautioned, however, that “an important further step should be the timely adoption of a new central bank law. Ongoing work toward a more flexible exchange rate regime and a new monetary policy framework, in coordination with other macroeconomic and structural policies, is welcome.” It also noted that “further progress on structural reforms, including improving the business environment, governance, transparency and the job market will help strengthen competitiveness, growth and employment and enhance the economy’s resilience to shocks.”

In looking back at the previous 2012-2014 PLL, the board agreed that Morocco had performed successfully due to sound economic fundamentals despite rising external risks such as decreased exports to Europe and investor concerns with stability in the region. In fact, the board commended “the authorities for not drawing on the arrangement in spite of external economic headwinds.”

All in all, it was a valuable report for both the IMF and Morocco. The country is more aware of the need to look at several medium-term policy challenges, such as controlling public expenditures related to salaries and increased imports of high-value items; and the IMF Directors “noted some useful lessons learned with regard to program design and implementation.”

So, gibberish aside, Morocco is acting responsibly and proactively to maintain fiscal discipline, reduce its budget deficits, and adopt even more helpful reforms to the business and financial policy environment. That’s the good news and why Morocco continues to deserve support from the IMF.