The Moorish Wanderer

Beware of an Old Man in a Hurry

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco by Zouhair ABH on August 6, 2012

(by Francis Urquhart)

So this is how it starts, one might think. Late in the evening Friday last, the news was that Morocco would go to IMF and get a line of credit to sustain its dwindling foreign exchange reserves (kudos for the clever timing) I have been following the print newspapers lately, and perhaps now I can understand why our top economic people at the government were banging on about how tight things are: it was prelude to the announcement (wonkish detail: I was told as a graduate student in mainstream economics that government works best when it refrains from making policy announcements suddenly. Obviously the MINEFI doesn’t concern itself with arcane economic theory, or any economic theory to that matter)

The Executive Board of the International Monetary Fund (IMF) today approved a 24-month arrangement for Morocco under the Precautionary Liquidity Line (PLL) in an amount equivalent to SDR 4,117.4 million (about US$6.21 billion, 700 percent of quota). The access under the arrangement in the first year will be equivalent to SDR 2,352.8 million (about US$ 3.55 billion, 400 percent of quota), rising in the second year to cumulatively US$ 6.21 billion.

Obviously, there are many elements in the communiqué released by the IMF that are left unanswered, supposedly because Morocco’s macroeconomic fundamentals are relatively strong. But from what I can see, there is a price to this timely help, both in compounded interests and in policy recommendations (or shall we say, policy nudges) as far as the Precautionary Liquidity Line goes, the only explicit commitment required from Morocco is to ‘maintain sound policies in the future’, and in our case,

steady step back from the brink. (light blue line denotes debt as percentage of GDP, on left hand-side axis)

In short, I don’t think the terms will be as steep as those conditioned on the 1981-1983 Structural Adjustment Program. In the early 1980s, Morocco’s foreign debt was at resounding 107% of GDP. We have come a long way to bring it down to less than 25% in 2011. We are however experiencing comparable levels in balance of payments deficit and low currency reserves (not quite as much, but we are getting close to the 3-months floor level)

But let us first look at how much that PLL help will cost us in the near term. We shall draw a cumulative 700% of our Special Drawing Rights (SDR) quota. Obviously, we are paying for the credit line, and accrued interest has also to take into account various fees the IMF collects:

Commitment fee. Resources committed under all PLLs are subject to a commitment fee levied at the beginning of each 12 month period on amounts that could be drawn in the period (15 basis points for committed amounts up to 200 percent of quota, 30 basis points on committed amounts above 200 percent and up to 500 percent of quota). These fees are refunded if the amounts are borrowed during the course of the relevant period. As a result, if the country borrows the entire amount committed under a PLL, the commitment fee is fully refunded, while no refund is made under a precautionary PLL under which countries do not draw.

Lending rate. The lending rate is tied to the IMF’s market-related interest rate, known as the basic rate of charge, which is itself linked to the Special Drawing Rights (SDR) interest rate. Large loans carry a surcharge of 200 basis points, paid on the amount of credit outstanding above 300 percent of quota. If credit remains above 300 percent of quota after three years, this surcharge rises to 300 basis points, and is designed to discourage large and prolonged use of IMF resources.

Service charge. A service charge of 50 basis points is applied on each amount drawn.

So the government is playing us for fools when they try to reassure us the line is just ‘precautionary’ and very likely to be left untouched, because at the end of the day, the taxpayer is ultimately going to pay (and dearly) for it. Never mind the conditions attached on some pledge to reform the Compensation Fund, we might end up paying a lot more than a straight bond emission on the International Capital Markets. a little above 3% interest + fee over two years is a bit steep (although I am still waiting for a reply from the IMF on that subject)

No. What worries more is the much expected 2013 rebound: that fact the IMF anticipates a rather low 4.3% GDP growth next year, and a higher inflation (around 2.5%) means quite a lot: an inflationary effect is expected -perhaps from a botched reform of the Compensation Fund- and a recovery in MRE’s remittances and resurgent IDEs flowing back to Morocco. But what would happen if only good old domestic consumption from households and government expenditure managed that figure, and balance of payment kept its nosedive? What will our officials have in store for us?

10 Responses

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  1. Mohammed AIT LAHCEN said, on August 6, 2012 at 19:48

    As far as I understand, the cumulative SDR quota to be used amounts to 700% not 1100% (400% the first year and 300% the second year). Please correct.

  2. Mohammed AIT LAHCEN said, on August 6, 2012 at 20:02

    “If credit remains above 300 percent of quota after three years, this surcharge rises to 300 basis points, and is designed to discourage large and prolonged use of IMF resources.” A rate of over6%, this surely will be the case.

    • Zouhair Baghough said, on August 6, 2012 at 20:21

      It is not, actually. The additional 300bps is for PLLs over 3 years, which is not our case:

      ” If credit remains above 300 percent of quota after three years, this surcharge rises to 300 basis points, and is designed to discourage large and prolonged use of IMF resources.”

      • Mohammed AIT LAHCEN said, on August 6, 2012 at 20:25

        I suppose that Morocco will not be able to repay the facility over the 2 years term and thus will be subject to the 300 bps premium after the 3rd year. This is of course a very plausible outcome !

    • Mohammed AIT LAHCEN said, on August 6, 2012 at 23:50

      This is really bullshit. Looking for financing whereas you don’t even have a clear strategy !!!

  3. issam said, on August 7, 2012 at 22:57

    Merci pour ce papier, j’apprécie bien ton analyse, mais j’ai une question, si le gouvernement n’a pas procédé de cette manière ( demander un PLL) , est ce qu’on a des alternatives qui vont permettre de se prémunir contre ce risque d’insuffisance de réserve de devises( à court terme) , à un cout plus faible ?)

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