Translation Please – What Does this Gibberish Mean?

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

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.

IMF report card gives Morocco thumbs up – for now

IMF report card shows challenges to sustained economic growth in Morocco

While there is a great deal of common wisdom about what the Arab governments need to do to more effectively participate in the global economy, there is much less certainty about how to get there. With no magic formula to follow, there is growing attention to the role of multilateral institutions in supporting progressive policies. For example, as Morocco continues to move forward with its economic reform agenda, the Executive Board of the International Monetary Fund (IMF) completed its first review of Morocco’s performance required under a two-year Precautionary Liquidity Line (PLL) arrangement. Agreed last August, the PLL arrangement makes available approximately $6.3 billion over two years to support the government’s program of economic reforms. The PLL provides access to liquidity against external shocks such as decreases in exports caused by shrinking markets in Europe or factors such as an excessive jump in imported energy prices.
The IMF recognizes that some form of fiscal backup is needed by countries with sound economic fundamentals and a history of moving on reforms so that their efforts continue despite factors beyond their short and medium term control. So the PLL is not a handout or a subsidy; it is meant to facilitate the government’s capacity to continue to make the needed hard decisions that will strengthen the Moroccan economy over the long run.
In its statement following the Board meeting, Ms. Nemat Shafik, Deputy Managing Director and Acting Chair, commented on the report. She praised Morocco’s “overall sound macroeconomic policies” and noted that the “worsening of the external environment and a below-average harvest” were threatening further progress.
The PLL brings into sharp relief the conundrum facing Arab governments attempting to respond to popular demands to increase jobs, broaden subsidies, and reduce barriers to accessing markets through government intervention. As Mohsin Khan pointed out in his article last week, the temptation to implement short term fixes through government employment programs, increased general subsidies, and protectionist measures end up mortgaging the country’s future fiscal health. And this is what Morocco is trying to avoid. By attacking subsidies over a four year period, and using the PLL as a safety net to avoid excessive borrowing and budgetary imbalances, the government is hoping to achieve “stronger and more inclusive growth.”
Ms. Shafik mentioned that “The arrangement…has provided Morocco with an insurance against external risks and supported the authorities’ economic strategy.” This gives the government breathing room to “move ahead with the reforms of the general subsidy system and the pension system and to better target social protection.”
Nemat Shafik is no stranger to the dislocations that accompany deep economic reforms. As the youngest ever vice–president of the World Bank and a member of the senior management team at the International Finance Corporation, she has spent several decades promoting reform policies that include “Efforts to strengthen competitiveness and better equip the economy to respond to external shocks…” She strongly emphasizes the role of the private sector and notes that “The planned fiscal consolidation and structural reforms, such as those to improve the business climate and professional training, will help underpin external sustainability.” I have always been impressed with Nemat’s wisdom and clarity, and Morocco will clearly benefit from the IMF’s support and sound advice.
One of the outcomes of the Arab uprisings is the challenge of facilitating growth without compromising the future solvency of the country. While the Gulf countries have the resources to weather short and medium term challenges, countries such as Morocco face strong domestic pressure against painful changes that affect their citizens even if they can bankrupt the country. So the PLL tests Morocco’s commitment by providing short and medium term support to facilitate the long term health of the economy. It is a partnership worth applauding and supporting.