- International Monetary Fund
- Published Date:
- August 2003
As an introduction to the description of public debt management in Morocco, it is useful to present some aggregates, illustrating trends in Morocco’s public debt burden and associated charges.
At the end of 2000, external public debt (direct and guaranteed debt) amounted to US$16 billion—equivalent to 48 percent of GDP or 121 percent of balance of payments current revenues. External public debt is distributed between the treasury’s direct debt and guaranteed debt in the proportions of approximately 70 and 30 percent, respectively. Charges on the external public debt paid during 2000 amounted to more than US$2.5 billion, in other words, 19 percent of balance of payments current revenues.
The treasury’s direct debt (domestic and external) at end-2000 amounted to the equivalent of US$25.2 billion, representing 76 percent of GDP, including US$14.1 billion, or 42 percent of GDP, in domestic debt.
The treasury’s direct debt service amounted to US$3.7 billion, including US$2 billion in domestic debt and US$1.7 billion in external debt. Interest charges, which amounted to the equivalent of US$1.7 billion, absorbed 22 percent of current budget revenues.
During the period 1983–92, the Moroccan authorities concluded six rescheduling arrangements with the Paris Club and three with the London Club, entailing the rescheduling of US$12.7 billion (US$6.9 billion with the Paris Club and US$5.8 billion with the London Club). Morocco ended the rescheduling cycle in 1993.
Framework for Public Debt Management
Public debt management objectives
The objectives pursued in the area of public debt management have been established in the light of the trends in Morocco’s economic and financial situation and the constraints that the country has had to address. Accordingly, until the early 1980s, emphasis was placed primarily on raising the funds required to finance the central government’s ambitious investment program. In this context and to offset insufficient domestic saving, the authorities relied substantially on the international financial market, where abundant liquidity was available with favorable interest rates.
With the outbreak of the debt crisis in the early 1980s, debt management objectives shifted substantially to reducing pressure on the balance of payments and the budget by rescheduling of debt charges, mobilizing concessional financing; and relying on domestic resources to cover the treasury’s requirements.
Beginning in 1993, as Morocco’s macroeconomic viability was restored, the authorities adopted a more dynamic approach to debt management, with the objectives of
- financing the treasury’s requirements with optimized costs and risks through arbitrage between domestic and external resources, and
- reducing the burden and cost of existing public debt to sustainable levels.
Legal framework for debt management
Public debt operations, in terms of borrowing (domestic borrowing issues and external loan arrangements) as well as debt expenditure (payment of principal, interest, and commissions), are, like government revenue and expenditure, subject to the principle of prior authorization incorporated each year into the budget law.
The annual budget law voted by parliament therefore includes specific provisions authorizing the government to borrow externally within the ceiling of the programmed overall amount and borrow domestically to cover the treasury’s deficit and cash requirements. Parliament also approves the budget appropriations required to honor payments of principal in connection with medium- and long-term debt and interest on all debt.
On the revenue side, the authorization to borrow is covered by two decrees accompanying the budget law, under which the prime minister delegates power for that purpose to the minister of economy and finance or his or her authorized representative to arrange external borrowing and provide government guarantees under the first decree and issue domestic debt under the second decree.
On the expenditure side, the minister of finance, who is the authorizing officer for settlement of domestic and external debt service, delegates powers to make scheduled debt payments to the managing units’ officers.
Institutional framework for debt management
Public debt management is the responsibility of the treasury and external finance department of the ministry of economy and finance. This department is responsible for
- meeting the treasury’s financing requirements through mobilization of the required domestic and external resources,
- borrowing and payment of debt service,
- dynamic management of existing debt, and
- proposing legislative and regulatory texts and reforms relating to the treasury financing and the financial market in general.
At the external level, the treasury and external finance department establishes the external finance strategy and coordinates the tasks of negotiating and mobilizing the resources involved. The department is therefore responsible for negotiating financial protocols, mobilizing borrowing in connection with the balance of payments and structural adjustment loans, addressing issues related to on-lending, and providing guarantees for external borrowing. It also centralizes external debt data relating to the public and private sectors.
At the domestic level, this department’s tasks consist of
- initiating domestic borrowing issues by supervising operations to issue treasury instruments and establishing the needed amounts to be borrowed, issue conditions, and redemption modalities;
- monitoring debt stock and repaying debt charges;
- processing records related to domestic central government guarantees; and
- supervising the program to modernize and reform the financial sector and initiate the relevant legislative and regulatory texts.
The role of Bank Al-Maghrib (BAM), the central bank, acting as financial agent of the government, consists of
- collecting drawings in foreign currencies in connection with external borrowing and supervising treasury instruments auctions (domestic issues), by crediting the treasury’s current account for the dirham equivalents of external drawings and the amounts subscribed through the auction market; and
- making settlements on the basis of payment orders received from the treasury and external finance department for debt service in foreign currencies to foreign creditors, and in dirhams to local subscribers, by debiting the treasury’s current account.
Last, a central depository, known as Maroclear, was established after the dematerialization of certificates of indebtedness (including treasury instruments). Maroclear is responsible for custody of treasury instruments and supervising settlement and delivery operations in connection with buying and selling of treasury notes on the secondary market.
Organizational framework for debt management
Debt management is the responsibility of the treasury and external finance department, primarily through three divisions:
- Treasury operations division, whose tasks are to (a) prepare budget projections, monitor government finance equilibria, and determine the treasury’s financing requirements; (b) mobilize domestic resources needed to cover financing requirements by conducting treasury instruments auctions; (c) propose reforms and measures to stimulate the market; and (d) process and monitor on-lending of external loans.
- External debt management division is responsible for (a) covering public external borrowing and settling central government debt service; (b) preparing debt statistics and analyses on debt, on a sectoral basis and in aggregate form (by country, sector, currency, and so forth); (c) analyzing debt and financial conditions for loans and formulating proposals to reduce debt service, debt stock, or both; and (d) implementing debt relief activities, such as refinancing onerous debt and renegotiating interest rate.
- Debt restructuring and international financial market division is responsible for (a) implementing debt relief and restructuring operations, such as conversion of debt into public and private investment; (b) preparing for Morocco’s return to the international financial market and initiating issuance operations in that market; and (c) executing swap operations involving existing debt.
The treasury and external finance department also has a subdepartment responsible for mobilizing and coordinating traditional external financing, a division responsible for bank regulation and monetary research, and a balance of payments division responsible for, among other things, regulating external financial and commercial operations.
In terms of human resources, the debt management units have a team of 30 professionals highly trained in the areas of economics, finance, law, computer science, and statistics, among others. These professionals have developed sound expertise in debt management through their acquired experience in this area and through targeted continuing education—internally (study days, workshops, and training seminars) and externally (in-service training and courses organized by international banks and institutions).
Budget and monetary policy coordination
Coordination of debt management policy with central government budget policy and the monetary policy implemented by the central bank poses no particular problems.
In this connection, the treasury and external finance department, which is responsible for debt management, participates actively in defining the orientations of the budget law, particularly at the level of the budget deficit and the resources to cover it, budget execution, and rectification of any overruns that may occur. It also prepares government cash projections generated during the budget execution and identifies and implements financing mechanisms.
At the monetary level, coordination with the central bank is the task of an oversight joint committee that is responsible for, among other things, defining monetary and inflation objectives, monitoring their execution, and proposing reforms and measures to be enacted. Guidelines and measures to be applied are presented to participants at meetings of the national committee on money and saving, which is held at the central bank and is chaired jointly by the minister of economy and finance and the governor of BAM.
Further, as the main borrower on the domestic market, the treasury enhances the stability of the money market, primarily through its constant presence on the auction market and the announcement of its financing requirements to provide maximum visibility on that market. This is increasingly important as the interest rate curve on government bonds has become a reference for Morocco’s financial market in general, particularly for remuneration of saving and financial instruments.
Transparency and communication
During the annual press conference on financing policy held after adoption of the budget law, the minister of economy and finance assesses indebtedness by presenting the key results and statistics on debt for the year ended and announces the objectives established to cover the treasury’s financing requirements for the current fiscal year and the measures and actions to be implemented in the area of financing.
Some statistical data on treasury debt such as drawings, amortization, and outstanding balances are published on the Internet (www.mfie.gov.ma/dtfe/tbstat.htm) in a note de conjoncture (economic brief) produced monthly by the treasury and external finance department.
The Moroccan authorities also report external public debt data annually to the World Bank (Report Forms I and II) for publication in the form of summary statements and intend to subscribe to the IMF Special Data Dissemination Standard.
In addition, the treasury and external finance department organizes meetings from time to time among various participants in the domestic market and, in particular, the central bank and transactors (treasury securities dealers, mutual funds, stock brokerage firms, and so forth) to enhance communication and transparency in indebtedness policy. Topics discussed are mainly related to macroeconomic fundamentals, financial market developments (such as the liquidity in the market and the interest rate curve), and reform proposals.
In addition, while working toward achieving the adopted objectives, the treasury and external finance department issues monthly announcements of the amounts to be raised on the auction market and the results of subscriptions in terms of volume, interest rates, and maturities.
Collection of debt data
The treasury and external finance department is responsible for collection and centralization of public debt data. The data available to the department are supplemented and cross-checked regularly with information provided by
- various departments of the ministry of economy and finance and, in particular, the budget department, central guarantee fund and foreign exchange office;
- the central bank for credit and debit notices relating to drawings and reimbursements of treasury debt;
- public enterprises benefiting from a government guarantee, for data on their external borrowing; and
Where government debt is concerned, data collection does not pose any particular problem as the channels for systematic data reporting are well established and the indebtedness processes—external (commitment, disbursement, and repayment) and domestic (subscription and repayment)—are centralized within the ministry of economy and finance.
For external debt guaranteed by the central government, data collection problems were solved by recording information upstream upon the issue of guarantees and by disseminating a circular from the minister of economy and finance instituting the requirement for public enterprises to register their external financing agreements with the external debt management division and file monthly or quarterly reports with the division, containing the data on their external debt, using standard reporting forms provided for that purpose.
For domestic guaranteed debt, data collection poses no problems because guarantees are granted by a decree of the prime minister and decision of the minister of economy and finance establishing the maximum amount of each issue. In addition, guarantee operations have so far involved only a few public institutions, and securities issues have been subscribed by government agencies and insurance companies.
Private debt statistics are collected by the foreign exchange office based on information collected at the level of the banking system, in which a form must be completed for each customer’s external borrowing operations and the relevant movements. Similarly, an awareness campaign was conducted with the banking system, and major enterprises were informed that they should report this information directly to the foreign exchange office.
Computerization of debt management
A debt management computer system designed by a Moroccan research firm for public external debt (both central government and public enterprises) became operational in mid-1993 and was later extended to domestic debt and on-lending activities. This system, developed on the basis of a relational database management system known as Informix, operates in a Unix multitask, multiuser environment. A program generator is used to facilitate maintenance and development of the management system, which are the responsibility of the computer unit of the treasury and external finance department.
The system was audited in 1997 by an expert from the United Nations Conference on Trade and Development (UNCTAD), who deemed it satisfactory from the standpoints of design, functioning, and functionalities. In fact, it meets the requirements for current management, including establishment of a comprehensive debt database, calculation and generation of repayment schedules, issue of payment orders, and coverage of payments. It also can be used to produce a full complement of statistical statements required for management, analysis, and preparation of reports to be used as decision-making aids.
This system was recently updated to
- incorporate active debt management operations implemented, such as conversion of debt into investment, prepayment, and cancellations;
- reflect the introduction of the euro while maintaining all prior transactions in the original currency; and
- register swap transactions, particularly currency and interest rate swaps to be initiated in connection with risk management.
In the area of statistical processing, the system produces standard statistical reports on debt—theoretical (based on initial schedules and conditions), actual, or projected—and on outstanding balances, debt service (principal, interest, and commissions), and drawings, broken down by lender, borrower, currency, interest rate, and so on. The system can also be used to produce World Bank Report Forms I and II and generate treasury debt charges to be incorporated into the budget law.
Debt Management Strategy
After a decade of structural adjustment and external debt rescheduling, the Moroccan authorities have managed to reduce the country’s vulnerability through significantly enhanced economic and financial equilibria and by ending Morocco’s rescheduling cycle in 1993.
The external debt burden, however, has remained high, and the balance of transactions induced by the public external debt (amortization plus interest less drawings) during the period 1993–97 led to significant net outward transfers, which exceeded US$1.5 billion per annum. These transfers were expected to increase sharply with the beginning of principal repayments of rescheduled debt from 1999 for the London Club arrangement and the Paris Club’s fifth arrangement, as well as from 2001 for the Paris Club’s sixth arrangement.
As a result of this debt trend and considering the macroeconomic framework improvement, Morocco has undertaken an active management strategy for its debt with three main thrusts, described in the following.
Treatment of the treasury’s external debt
Since 1996, treatment of the treasury’s external debt involved a stock of more than US$2 billion (20 percent of the treasury’s external debt). In this connection, the following two mechanisms were used.
This mechanism is applied as provided in the Paris Club proceedings. The last two rescheduling arrangements (the fifth and sixth) concluded with the Paris Club provided that the lenders may sell or exchange—in the framework of debt-for-nature, debt-for-aid, or debt-for-equity swaps or other local currency debt swaps—the amounts of outstanding loans rescheduled and eligible for rescheduling with a ceiling of 100 percent for governmental debt and 10 percent or US$10 million for commercial debt. The latter ceiling was increased to 20 percent in 1997 and subsequently to 30 percent or US$40 million in 1999.
Implementation of these provisions has required identification of (a) potential rescheduled debts suitable for conversion operations classified by lender country and (b) actions to be undertaken to convince these countries of the advantage of the debt conversion mechanism to both the lender and the debtor.
Two types of conversions were implemented in this connection:
- Conversion of debts into public investment: The creditor cancels an agreed amount of the rescheduled debt, and Morocco uses the counter-value of the canceled amount to carry out public investment projects.
- Conversion of debt into private investment: After debt conversion agreement, the foreign investor presents an investment project to Moroccan authorities for approval. This approval sets a redemption price of a given amount of the debt. After that, the investor purchases the said amount of debt from the creditor country at a lower price. Then, the investor transfers this debt to Morocco and receives the agreed price after committing to carry out the investment project.
This treatment is carried out through prepayment of onerous debts using domestic or external resources associated with more favorable terms or by renegotiating interest rates on onerous loans to align them with the rates prevailing on the financial market.
Implementation of this mechanism requires preliminary work in these areas:
- use of the debt database and use of actuarial techniques to determine onerous debt potential and to identify onerous loans;
- analysis of legal clauses in loan agreements to determine the conditionality of prepayment, refinancing, or interest rate revision;
- identification and selection of refinancing resources that can be mobilized with relevant financial conditions; and
- assessment of the present value of the gain—debt service to be saved—and potential for annual reduction of the interest charges generated by the operation.
For operations involving treatment of guaranteed debt of government institutions, the initiative may come from the treasury and external finance department or from the debtor institution. In both cases, the department, in consultation with other departments of the ministry of economy and finance, issues an opinion on the prepayment operation envisaged based on an assessment of the institution’s financial situation and the budget implications that may be involved.
Policy to mobilize financing
Since rescheduling ended, domestic financing has been relied upon substantially to cover the budget deficit and negative net transfers associated with external borrowing. Despite low levels of the budget deficit, this situation has led to an increase in the stock of domestic debt, which amounted to US$14.1 billion (representing 42 percent of GDP) at end-2000, compared with the equivalent of US$12.5 billion (35 percent of GDP) at end-1996 and US$8.8 billion (31 percent of GDP) at end-1993.
This policy, which is explained by the prudent stance of the authorities in the area of external financing, was fostered by availability of resources on the domestic market at favorable rates and the authorities’ concern to develop an efficient, modern domestic market to meet the requirements of all transactors in connection with the overall reform of the domestic financial market undertaken in 1993.
For external financing, a highly selective approach was established, characterized by
- selection of new commitments according to the degree of concessionality,
- enhanced selection of investment projects to benefit from financing from bilateral sources or multilateral financial institutions, and
- improved performance in executing financed projects.
In addition, a process to enable Morocco to reaccess the international financial markets was undertaken with the establishment of an international rating by Standard and Poor’s and Moody’s to allow investors to assess Morocco’s risk, and through a familiarization with risk management instruments by developing technical skills for ongoing monitoring of the exposure of Morocco’s debt to market risks, as well as the use of appropriate swap operations, as required.
Framework for risk management
The process of implementing a risk management framework, undertaken in 1996, primarily involves three factors, described in the following.
A study of the legal environment has revealed that Morocco’s legal system does not contain any provision opposing dynamic debt management and that the government is authorized under the current legislation to use hedging instruments only for the purpose of stabilizing or lowering debt-service costs.
Accordingly, a decree of the prime minister has since 1998 been appended to the texts accompanying the budget law, delegating authority to the minister of economy and finance, or his/her authorized representative, to contract external borrowing to repay onerous debt and enter into foreign exchange and interest rate swap arrangements to stabilize debt service.
Further, with a permanent budget law provision, a special treasury account was established to reflect foreign exchange and interest rate swaps separately and on a multiyear basis, as well as to cover the charges generated by these operations.
Analysis of the treasury’s external debt structure shows that this debt is substantially sensitive to exchange rate and interest rate fluctuations and that the liquidity risk is limited because the debt is amortizable and arranged exclusively in the medium and long terms.
Where the exchange risk is concerned, debt exposure exists because the foreign exchange structure of the debt is still inadequate to accommodate Morocco’s foreign trade structure. As for interest rates, the risk is attributable to the substantial share of debt associated with floating interest rates, which represents more than 36 percent of the debt.
Accordingly, a benchmark portfolio was identified for external debt, with which the treasury’s current debt structure must converge, and to guide external debt financing and management policies. The foreign exchange structure of this benchmark is 60 percent euros, 35 percent U.S. dollars, and 5 percent yen, and the interest rate component entails 20 percent floating-rate debt.
In this connection, the conversion into euros of World Bank currency pool loans denominated in U.S. dollars and yen was undertaken in the amount of US$1.3 billion to increase the euro-denominated debt’s share.
After the establishment of an auction market with the key features of a modern financial market, analysis of the debt portfolio has brought to light certain risks related to maturities and interest rates, and a risk management program was implemented to manage risks related to repayment, financing, and interest rates.
- To address the repayment risk, debt managers try to smooth the debt schedule as much as possible to avoid excessive concentrations of maturities.
- To offset potential financing risk and enable the treasury to raise the required funds in a timely manner, in addition to smoothing of the debt schedule, the treasury ensures, in connection with government cash management, that the rate of revenue collection is commensurate with the rate of expenditure execution.
- Concerning the interest rate risk, first, it should be borne in mind that treasury instruments are issued at fixed rates. The risk therefore appears when rates decline and remain below the rate of the issue. To address this risk, then, the treasury and external finance department has established the objective of adopting a level of 25 percent, which is deemed sustainable, for short-term debt. The treasury is also now focusing on indexing medium- and long-term maturities to shorter ones. The treasury, accordingly, has already proceeded with two 10-year borrowing operations indexed on 52-week treasury bills and is now studying the possibility of issuing 5-year indexed bonds.
Debt managers are provided direct access to the debt database by use of client Windows stations with Graphical Query Language, making it possible to use customized queries to perform data analysis and generate various reports and graphics. In addition, these data can be exported to other applications or software (Excel spreadsheets, for example) for other types of processing, as required.
This flexibility also makes it possible to prepare medium- and long-term projections based on different assumptions of trends in interest rates, exchange rates, or both. Similarly, different indebtedness or refinancing strategy scenarios are prepared with arbitrage between use of domestic or external resources and the choice of currency and interest rates.
In addition, managers of the treasury and external finance department were introduced, with support from international financial institutions and with a management system used by banks, to techniques for managing different types of risks inherent in external debt, mainly interest rate risk and exchange rate risk, and a model for managing domestic debt is being prepared.
Development of an Efficient Domestic Market
Concurrently with the vast program to modernize the financial sector and institutional reforms of the Moroccan financial system in the area of mobilization and allocation of resources, it was necessary to review the policy in place for domestic financing, which is characterized by
- mandatory holdings in the form of floors on government instruments that the banking system was required to subscribe at low interest rates, which had amounted to 35 percent of deposits;
- issue of government borrowing at widely attractive interest rates and long-term bonds subscribed by institutional investors;
- total exemption of interest accrued on instruments subscribed by individuals; and
- recourse to the BAM for additional financings.
To end this situation, the treasury’s financing method was thoroughly reformed so that the required domestic resources could be mobilized at market terms by instituting the treasury instruments auction market as a sole source of financing, and measures were implemented to eliminate distortion and stimulate the market.
Elimination of the treasury’s privileges
The privileges from which the treasury benefited, compared with other borrowers, were eliminated by
- a gradual reduction of mandatory holdings in the form of a floor on government instruments until their total elimination in 1997;
- subjecting interest generated by treasury instruments subscribed by individuals to the corporate tax or the general income tax; and
- abandonment of different types of issues, such as bond issues at attractive rates, national borrowing operations, and so on, that promote segmentation of the market and limit the liquidity of those instruments.
Institution of the treasury instruments auction market
The treasury instruments auction market, which has become the main financing source for the treasury, is governed by a decree of the minister of economy and finance and a set of joint circulars issued by the treasury and external finance department and BAM.
The treasury and external finance department informs investors of the monthly schedule of auctions to be held with the following periodicity, by maturity:
- every Tuesday for 13-, 26-, and 52-week bills;
- the second and last Tuesday of the month for 2-, 5-, 10-, and 15-year bonds; and
- the last Tuesday of the quarter for 20-year bonds.
The department reserves the right, however, to cancel scheduled sessions or to hold additional auctions. These changes are announced one week in advance.
The auctions, held according to the Dutch auction method, proceed as follows: Institutions authorized to submit bids transmit them by fax to the BAM no later than 10:30 a.m. on Tuesday. The BAM then submits the bids to the treasury and external finance department in ordered, anonymous form. The department selects the interest rate or limit price for the auction, which it reports to the BAM. The latter in turn individually informs the bidding institutions of the status of their bids. The results are also disseminated through Reuters. For the successful bids, the equivalent amounts are paid on the Monday following the auction.
Finally, only issues of six-month bills have been maintained to assist in mobilizing small savers. These bills, reserved for nonfinancial institutions and individuals, are issued below par, with a coupon. They are issued on a continuous basis, with small face values, redeemable after three months by surrendering the coupon. These securities are dematerialized.
Stimulating the auction market
Action has been taken to stimulate the auction market and enhance the liquidity of securities through the following.
To stimulate the auction market and contribute to its well-functioning, certain institutions have been designated as treasury securities dealers. To that end, these dealers agree to report periodically to the treasury and external finance department on their assessment of overall market demand on the domestic treasury securities and subscribe to at least securities.
In return, treasury securities dealers may submit noncompetitive bids within the limit of an approved maximum based on an award coefficient calculated to reflect their participation in the past three weeks in competitive auctions involving securities in the same category.
To encourage treasury securities dealers to contribute effectively to stimulating the secondary market, these operators committed, in connection with an agreement between themselves and the treasury and external finance department, to quote a certain number of lines covering all maturities.
The treasury and external finance department introduced the technique of issues by assimilation to develop the secondary market for treasury securities and enhance their liquidity. This technique consists of announcing the coupon in advance, associating new issues with existing lines to establish substantial resources, and reducing the number of lines issued.
The treasury and external finance department opted to establish permanent contact with the financial community to keep it abreast of its interventions in the market.
To this end, periodic meetings are held between the various participants—the treasury department, the BAM, Treasury securities dealers, and secondary market transactors (mutual funds, brokerage firms, and so on)—for more effective communications.
Further, in connection with the agreement between the treasury department and treasury securities dealers, meetings are organized regularly with these dealers to discuss the market situation and any problems that the different institutions may encounter. The treasury department also coordinates with treasury securities dealers in connection with the implementation of new measures aimed to develop the auction market.
The case study was prepared by Lahbib El Idrissi Lalami and Ahmed Zoubaine from the Treasury and External Finances Department of the Ministry of Economy, Finance, Privatization, and Tourism.