A focus on fiscal consolidation and financial reform has helped Morocco weather the challenges of the current economic environment while steering the country toward a solid first quarter performance in 2013.
Morocco has grappled with a number of exogenous challenges in recent years, including a liquidity shortage and growing deficits sparked by the downturn in Europe, and rising commodity prices.
Economic conditions were difficult in 2012, with higher oil prices and a particularly poor harvest pushing annual GDP growth down to 3% from 5% the previous year, while the fiscal deficit grew from 6.8% of GDP in 2011 to 7.5%. The continued poor performance of Europe's markets has contributed to a further erosion of revenue sources this year, with tourism receipts and remittances falling by 1.6% and 3.8%, respectively, in the first quarter of 2013.
However, indicators are expected to improve later in 2013 with a number of encouraging developments helping increase momentum.
The IMF awarded Morocco a $6.2bn precautionary liquidity line in August 2012 to support the state budget if necessary, although the country had yet to tap it as of early 2013. A February assessment by IMF officials highlighted Morocco's sound monetary and financial policies, alongside its positive structural reform efforts, which it said had provided solid foundations for the current economic programme. The fund added that Morocco's strategy should help navigate the economy through the current challenging times.
Despite falling tourism and remittances receipts, the economy has been buoyed by improvements in the trade deficit and foreign direct investment (FDI) levels. Morocco's trade deficit decreased by 5.2% year-on-year (y-o-y) to reach Dh44.79bn (€4.02bn) in the first quarter of 2013 as imports slowed. Total FDI rose from Dh7.35bn (€0.66bn) in the first quarter of 2012 to Dh10.57bn (€0.95bn) in the same period this year, buoyed by the sale of the National Investment Company's (Société Nationale d'Investissement, SNI) stake in several agro-industrial groups. SNI's divestment from a number of operations, including the dairy firm Centrale Laitière and edible oils producer Lesieur Cristal, brought in roughly $900m from international buyers.
However, while Morocco's economy gave a positive performance in the first quarter of 2013, the country will have to adjust its spending patterns further if it is to rebuild its fiscal and external reserves.
In April, the government cut its 2013 investment budget from Dh180bn (€16.16bn) to Dh165bn (€14.81bn), creating savings of Dh15bn (€1.35bn) in an effort to ease strained public finances. The move signals a 12% drop on last year's allocation of Dh188bn (€16.87bn) for planned investment, with cuts expected to be introduced across the government in each ministry's budget.
In comments carried by the international press, government officials also suggested that a review of subsidy and pension systems could be on the horizon. The IMF had urged Morocco to address the issue of subsidies in its recommendations, saying such a move could help streamline public finances. Food and energy subsidies weigh heavily on the public sector, having shot up from Dh29.8bn (€2.67bn) in 2010 to Dh53bn (€4.76bn) last year as a result of social policies enacted in late 2011.
The government hinted in January 2013 that a reform programme to replace some subsidies, alongside financial support for low-income families, could be introduced by June. However, the politically sensitive nature of subsidy reforms will make it difficult to implement changes, particularly in the current economic environment. More recent reports suggest officials may choose to put subsidy reform on hold, with a view to revisiting it later in the year.
Morocco will also need to recapitalise and restructure its heavily indebted public retirement fund, the Caisse Marocaine des Retraites (CMR). According to local press, reforms could focus on reducing the government's high level of contribution, increasing employee contribution rates or revising the retirement age. While discussions on the contentious issue of pension reform have sparked minor protests outside the CMR headquarters in Rabat, the government is unlikely to meet its goal of bringing the fiscal deficit down from 7.5% of GDP to 3% by 2016 unless spending cuts are implemented.
In the interim, the government is considering a further debt issue in 2013 as a means of supporting public finances. Ministry of Finance officials indicated in the international press that either a conventional or Islamic bond (sukuk) could be issued, with a decision expected by July. The 2013 budget is based on projections of 4.5% GDP growth, and the government's current financing needs will be determined by economic performance in the first two quarters. The final outcome of the agricultural season, expected by end-May, will be an important indicator for the year.
Tough measures will likely be necessary to support long-term fiscal stability and growth. But interim action aimed at strengthening the economy, streamlining public spending and reaffirming investor confidence, should keep Morocco on a firm footing in the near term.
© Oxford Business Group 2013
