Press Release:

IMF Executive Board

Approves US$6.2

Billion Arrangement for Morocco under the Precautionary Liquidity LineAugust 3, 2012
Morocco: Letter of Intent

July 27, 2012

The following item is a Letter of Intent of the government of Morocco, which describes the policies that Morocco intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Morocco, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Country’s Policy
Intentions Documents

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Ms. Christine Lagarde Managing Director International Monetary Fund Washington, D.C. 20431
Dear Ms. Lagarde,
Rabat, Morocco
July 27, 2012
1. We welcome the recent approval by the International Monetary Fund of the Precautionary and Liquidity Line (PLL) as a new financial instrument designed for countries with sound fundamentals and policies, but moderate vulnerabilities. This line can operate as insurance fulfilling immediate financing needs if external shocks or an unexpected deterioration of the international environment.
2. Morocco has sound economic fundamentals and a track record of sound policies. In a difficult external environment, Morocco’s economic performance was broadly satisfactory. Growth averaged 4½ percent during 2009-11; inflation remained around 1 percent; and reserve coverage remained comfortable. Unemployment markedly declined from
13.6 percent in 2000, stabilizing at around 9 percent in 2011, even though youth unemployment remains high. The financial system is sound and remained resilient to the global financial crisis and more recently, to the financial turmoil in Europe. Morocco’s investment grade sovereign debt rating has been reconfirmed, reflecting its strong economic performance in a difficult external environment
3. Even though Morocco does not currently have a balance of payments need, we continue to face risks arising from uncertainties in the global economy, particularly regarding the potential for adverse developments in Morocco’s main trading partners and international oil prices. While we remain committed to following strong policies and to responding appropriately to any deterioration in the external environment, these risks could cause a widening of the trade deficit and a significant reduction in foreign reserves, and may undermine our growth and employment strategy.
4. In this context, a PLL arrangement would support our economic strategy by enhancing investor confidence and supporting macroeconomic stability, including by providing rapid access to resources in the event of external shocks or a worsening international situation which puts pressure on the balance of payments. We would like to request that the IMF approve a precautionary PLL arrangement covering 24 months in the amount of SDR 4.12 billion (700 percent of quota), with a maximum of 2.35 billion SDRs (400 percent of quota) available during the first twelve months of the agreement. We intend to draw only in the event of unforeseen external shocks or a worsening of the international outlook relative to current assumptions.
5. In line with the government program adopted by Parliament in January 2012, and the macroeconomic stability principle enshrined in our constitution adopted July 1, 2011, the government pursues economic and financial policies to boost growth and reduce
unemployment, while continuing to strengthen our fiscal and external sustainability. The objective of the Government’s program is to increase the rate of real GDP growth to
5½ percent over the period 2012-16, based on three main drivers, namely supporting domestic demand, promoting private sector development, and the continued implementation of structural reforms and sectoral strategies. With regard to reducing unemployment, mainly among the young, the government will intensify its efforts to strengthen the adequacy of training needed for economic sectors and the ongoing active labor market programs.
6. In terms of fiscal policy, the government program envisages a steady reduction of the budget deficit to about 3 percent of GDP by 2016, by strengthening the rationalization and efficiency of public spending, as well as revenue optimization. As envisaged in the Government program, particular emphasis is given to the rationalization and efficiency of public spending. In this context, a draft decree which aims to modernize regulations governing public procurement is being adopted. At the same time, a project to redesign the organic budget law introducing program budgeting and a focus on a results-based framework is being developed. The reform of the subsidy system is also one of the priorities of the government to improve the system of protection of vulnerable populations by targeting these expenses, and to reduce expenses to preserve spending on public investment. In this context, we intend to hold before the end of the year a broad consultation with our economic partners and civil society to determine the best strategy to reform the subsidy system in order to improve social protection and reduce its cost to a sustainable level in line with our fiscal consolidation objectives. In addition, we intend to redesign compensation in the public sector to better link it with performance. This reform will be implemented in parallel with that of
the pension system in order to ensure its long-term sustainability. Regarding the optimization of revenue, a global strategy encompassing tax revenues, revenues from government property and from monopolies is under consideration within the government. The objective is to broaden the tax base, improve collection, streamline tax and property expenditures, and raise the value of the private assets of the state, while maintaining a climate conducive to private sector activity. On this basis, the fiscal deficit (excluding privatization revenues, including grants) should be reduced from 6.9 percent of GDP in 2011 to 6.1 percent in 2012 and
5.3 percent in 2013.
7. In terms of monetary policy the statute governing Bank Al-Maghrib (BAM) enacted in 2006, establishes price stability as its fundamental mission, and gives adequate independence in defining and conducting monetary policy. The Board of BAM will continue to ensure price stability over the medium term, while following closely the changing internal and external environment, particularly any risks that may put pressure on prices. As part of
the implementation of monetary policy, BAM will continue to provide the necessary liquidity to ensure appropriate financing of the economy. The effective management of liquidity has always allowed the money market rate to remain close to the policy rate on a daily basis. To address structural liquidity needs, BAM has gradually reduced the reserve requirement ratio from 16 ½ to 6 percent. Banks now have a satisfactory level of reserves providing a safety margin in case of need. As for interest rate, the Central Bank will continue its efforts to strengthen capacity and instruments for effective regulation of the money market. Indeed, BAM now utilizes long-term repos in its interventions. In this context, it also expanded the collateral required for lending to banks. In addition, BAM will offer banks a broader range of refinancing instruments to adjust their balance sheets such as securitization and covered bonds. In this regards, it will continue to monitor the implementation of refinancing plans adopted by some banks, in order to ensure credit growth is supported by stable resources that
are better suited for their use. It will also ensure that banks hold appropriate liquidity buffers on their balance sheets and adopt plans to deal with liquidity crises.
8. BAM will continue to monitor the health of the banking system through strong regulation and effective supervision. To this end, it will gradually adhere to the norms of Basel III, in particular those relating to capital adequacy and liquidity. BAM has already increased the Tier 1 capital to risk-weighted asset ratio to 9 percent and the regulatory capital adequacy ratio to 12 percent, which will take effect in June 2013. It will then carry out the reform of the liquidity ratio towards international standards. Starting from 2013, banks will
be required to comply with stricter rules on risk diversification. Nonperforming loans (NPLs) of banks have fallen from 6 percent at the end of 2010 to 5.1 percent at the end of May 2012. BAM will maintain its requirements for adequate funding of such loans. In addition, BAM will strengthen its micro-prudential surveillance in the context of the risk-based approach. In parallel, the Ministry of Finance, BAM and other regulators are strengthening their coordination in order to preserve financial stability.
9. We will maintain a fixed exchange rate relative to a euro-dollar basket for the time being, which has contributed to economic stability in the last decade. We will continue to maintain an adequate level of international reserves. In particular, gross international reserves are expected to stabilize in the second half of 2012 at about four months of imports, mainly due to lower international oil prices, combined with an increase in export volumes of phosphates and derivatives, the export production of new industrial plants, and a pick-up in tourism receipts. Moreover, the government’s financing strategy comprises the possibility of accessing international financial markets.
10. In summary, our sound economic fundamentals and institutional policy framework, and our track record of sound policies recognized by the positive assessment of the Executive Board of the IMF in the context of our most recent Article IV consultations, as well as our commitment to such policies in the future, provide sufficient assurance that we will respond appropriately to deal with any potential problem of financing of the balance of payments.
11. We will provide the Fund all needed information to monitor economic and policy developments under the requested PLL arrangement, including in relation to the indicators listed in Attachment II and Table 1. We will also observe the standard criteria related to trade and exchange restrictions, bilateral payments arrangements, multiple currency practices, and non-accumulation of external debt payments arrears, in accordance with requirements under the PLL.
12. We believe that the policies contained in this communication are adequate to achieve our economic goals supported by the PLL, and will take any additional measures that may be necessary for this purpose. Morocco will engage with the Fund in accordance with relevant Fund policies, towards the success of our economic policies.
/s/ /s/
Nizar Baraka Abdellatif Jouahri
Minister of Economy and Finance Governor of Bank Al-Maghrib

Table 1. Morocco: Quantitative Indicative Targets


2012 2013

Indicative targets 1/

12/31 10/30 4/30


Net international res erves (NIR) of Bank Al-Maghrib (BAM) (floor, end of period (eop) s tock, in m illions of U.S. dollars (US$))




Fis cal deficit (ceiling, cum ulative s ince beginning of fis cal year, eop in m illions of dirham )




Mem orandum item :

Adjus tor on NIR (in m illions of U.S. dollars ) 2/



Adjus tor on the fis cal deficit (in m illions of dirham ) 3/



1/ Evaluated at the pro gram exchange rate (end-A pril 2012 8.429 M A D/US$ ) fo r the years 2012 and 2013.

2/ The adjusto rs are specified in the Technical A ppendix. A cco rdingly, the flo o r o n NIR o f B A M will be adjusted do wnward in the event o f a sho rtfall o f o fficial grants and budget suppo rt lo ans relative to pro jectio ns.

3/ The adjusto rs are specified in the Technical A ppendix. A cco rdingly, the fiscal deficit ceiling will be adjusted upward in the event o f a sho rtfall o f budget suppo rt grants relative to pro jectio ns.
Table 2. Morocco: Schedule and Terms Under the Precautionary and Liquidity Line Arrangement

Indicative targets 1/

Credit Available 4/

Review Date Conditions for acces s

Central governm ent fis cal deficit, ceiling, cum ulative s ince beginning of fis cal year (eop in m illions of dirham ) 2/

Net international

res erves (NIR) of Bank Al-Maghrib (BAM), floor, eop s tock, in m illions of U.S. dollars (US$) 3/

Million SDR 5/

Million Dollars 6/

Percent of

Quota, cum ulative

Percent of

Total Acces s

Augus t 3, 2012 7/ Board approval of the PLL -55,776 20,268 2,352.8 3,543.3 400 57

February 2, 2013 Firs t review, bas ed on October 30, 2012 indicative targets -41,601 16,752 2,352.8 3,543.3 400 57

Augus t 2, 2013 Second review, bas ed on April 30, 2013 indicative targets -18,556 16,557 4,117.4 6,200.8 700 100

February 2, 2014 Third review, bas ed on October 30, 2013 indicative targets

To be s et in the s econd review

To be s et in the s econd review

4,117.4 6,200.8 700 100

Total 4,117.4 6,200.8 700 100

Source: Fund Staf f estimates.

1/ Evaluated at the program exchange rate (end-April 2012 8.429 MAD/US$) f or the years 2012 and 2013.

2/ The adjustors are specif ied in the Technical Appendix.

3/ The adjustors are specif ied in the Technical Appendix.

4/ Credit available assuming no purchase.

5/ Additional access equivalent to 300 percent of quota w ill be available on August 3, 2013.

6/ SDR/Dollar Exchange rate of 0.664016 as of July 17, 2012.

7/ Corresponds to the date of approval of the PLL arrangement.


1. Under the first year of the PLL arrangement, quantitative indicative targets as defined in Table 1 of our written communication will be set for end-October 2012 and end-April