Morocco's Stalling Economy
Author: carnegiemec Posted May 28, 2012
In Morocco, it took three months of give-and-take between the government and the legislature for the 2012 budget to be approved by both parties. Given the difficult economic circumstances at both the domestic and the international levels, this is hardly surprising.
During the first months of 2012 the average oil price for a barrel of oil exceeded $100. Morocco imports more than 95 percent of its oil, and slow economic growth in Europe has negatively impacted Moroccan exports, tourism and remittances from the more than three million Moroccans living there. The decline in crop yields — caused by erratic rainfall — has taken its toll on the living conditions of many Moroccans whose incomes are directly or indirectly linked to the agricultural sector. Morocco’s economic growth rate is expected to drop down to 2.5 percent this year.
After the constitutional changes imposed by the realities of the Arab Spring, we can say with confidence that the 2012 budget contains nothing new in terms of government-spending policy. Contrary to all expectations, the budget’s final version ended up being a continuation of previous budgets, despite the symbolic importance of the tax increase imposed on tobacco and alcoholic beverages by the ruling (Islamist) Justice and Development Party. In the absence of a thorough study, it is not clear whether this measure will increase revenue, reduce consumption or exacerbate smuggling and black-market activities.
In the coming months, social tensions may increase in light of worsening financial, economic and social indicators, as well as the government's failure to convince large segments of society that it is serious in its fight against corruption.
Some of these indicators are outlined below:
- According to official statistics, during the first quarter of 2012 the number of unemployed persons rose by 93,000. This represents an average unemployment rate of 14.4 percent in urban areas, up from less than 13.3 percent in 2011. The government remains at odds with the representatives of the unemployed peoples who hold advanced degrees over the employment criteria in the government sector.
- The government’s fiscal margin is expected to shrink in light of its very high spending rate. During the first four months of 2012, more than half the funds allocated for the year were spent to subsidize fuel and its derivatives. The government is still undecided over whether it should reform its subsidies fund and move from general subsidies — which do not discriminate between income levels — to targeted subsidies.
- It is likely that the government will reduce investment spending to reduce the budget deficit, which exceeded 7 percent of GDP in 2011. The government only spent 18 percent of its investment budget during the first four months of 2012. In addition to the negative impact this may have on economic growth, any reduction in government investment stands contrary to the commitments made by the ruling parties. These parties have emphasized strengthening the infrastructure, education and health sectors, as well as improving human development — all areas in which Morocco is significantly lagging.
- Indicators relating to private investments are also negative. In the first few months of 2012, investment credits declined while the volume of bad loans went up. This indicates that many enterprises will face a lack of liquidity, and that some will be unable to meet their debt obligations. During its most recent meeting, held at the end of March, the board of the Moroccan Central Bank lowered the benchmark interest rate by 25 basis points (from 3.25 percent to 3 percent). Despite the significance of this measure, its impact will be limited due to the decline in economic activity in Morocco and amid growing doubts about the future. Perhaps that this gloomy outlook explains the 11-point drop in the Casablanca Stock Exchange index since the beginning of the year, as well as the 50 percent drop in transaction volume. This caused an outcry among investors, especially smaller ones.
- Morocco suffers from a severe trade deficit — the country exports less than half of what it imports. This reflects the low competitiveness of Moroccan production and the failure of economic policies enacted to develop and diversify local industry. Morocco has always been able to cover agrowing trade deficit through tourism revenue and emigrant remittances. However, given the rising cost of imports — particularly food and oil — those sources are no longer sufficient. The Moroccan Central Bank’s foreign-exchange reserves have dropped by 20 percent in one year, and can now cover no more than four months of imports.
While these tough circumstances may have influenced the nature of this year's budget law, Morocco continues to suffer from structural imbalances that require a new social contract, one that ensures stability and balances current requirements with future goals. The current government should take advantage of whatever credibility it has left and implement policies to move from a rent-seeking economic structure based on the distribution of benefits for political support toward an economy based on competitiveness, productive investment in promising economic sectors and the lowering of regulatory obstacles that harm small and medium enterprises. This requires realism, courage and the practical implementation of the new constitution. While such an option will not satisfy everyone, it will serve the national interest and maintain stability. It is important to quit making lofty promises that raise expectations, as this is only followed by frustration when these promises are not met.
Lahcen Achy is an economic researcher at the Carnegie Middle East Center
Read More: http://www.al-monitor.com/pulse/business/2012/05/the-moroccan-economy-a-difficult.html
Translate with Google