Inflation in Maghreb will continue to undercut real wages and feed social discontent

To:

Al-Monitor Pro Members

From:

Francisco Serrano

Journalist and analyst specialized in North Africa

Date:

Oct. 4, 2022

Bottom Line:

Morocco, Algeria and Tunisia have sustained high levels of imported inflation, driven by higher food and energy prices. The Russian invasion of Ukraine in February has destabilized government budgets in Morocco and Tunisia while boosting the reserves of hydrocarbons exporter Algeria. But populations in all three countries are paying for costlier food with weakened currencies, and this has the potential to trigger large-scale social instability, disrupting governments and business activity in those countries.

Background Facts:
  • Higher food and energy prices are exacerbating social pressures on Maghreb countries. On Sept. 25, neighborhoods of the Tunisian capital saw protests against the rising costs of living and the scarcity of key products such as sugar, poultry and milk.
  • The government and the Tunisian General Labour Union (UGTT) recently signed a deal to increase public sector pay by 5%. This might help to mitigate discontent, but salary raises remain far below inflation.
  • Inflation in Tunisia reached 8.6% in August, relative to the same period in 2021, fueled in part by an 11.9% rise in food prices. Dependency on imported foods — namely cereals, sugar and vegetable oils — will continue to pressure household incomes and exacerbate shortages of some basic goods. A continued depreciation of the Tunisian dinar is adding to inflationary pressures.
  • In Morocco, annualized inflation reached 8% in August. The rise in the price of fuel and gasoline forced the government to establish a financial support mechanism for the transport and logistics sector and to continue to support cereal imports to keep the price of bread from spiraling.
  • In neighboring Algeria, revenues from hydrocarbon exports amounted to $34.5 billion in 2021 and are projected to reach $50 billion in 2022. But the country is also facing pressure from mounting prices, with annualized inflation at 9.4% in July.
  • Buoyed by higher oil prices in early 2022 (even before the Russian invasion of Ukraine), Algerian President Abdelmadjid Tebboune launched a monthly stipend of AD13.000 ($92) to support unemployed Algerians aged 18 to 40. Higher hydrocarbon revenues will allow Algeria to enact additional social spending measures, countering the decrease in household incomes impacting the majority of Algerians.
  • Maghreb countries face food insecurity, which is being accentuated by the conflict in Europe and a severe drought. Tunisia produced an annual average of 1.7 million tonnes of cereals over the 2017-2021 period. Cereal output is projected to reach 1.8 million tonnes in 2022 but remains well below annual consumption levels of 3.1 million tonnes.
  • Morocco will need to raise its cereal imports by 35% to 10.4 million tonnes over 2022-2023 to cover domestic consumption. Government subsidies help reduce the pressure of global prices on the domestic market. But this doesn’t fully prevent bread price increases and adds pressure on the national budget.
  • Algeria too will need to import about 8.1 million tonnes of wheat in 2022, a 25% increase on 2021 requirements.
  • Despite its vulnerability to recession in Europe and security concerns in the Maghreb, tourism is recovering as a source of employment and foreign exchange.
  • In Tunisia, tourism revenues rose by 86% over January-September 2022, to reach TD3 billion (928 million). Over the same period, tourist arrivals rose by 168% to 4.3 million. Morocco saw a 179.1% rise in tourism revenues over the first seven months of the year, to MAD36.7 billion (3.36 billion).
  • The three Maghreb countries face divergent financing constraints. For Tunisia, all will depend on securing the $2-4 billion loan agreement it is currently negotiating with the International Monetary Fund (IMF). This will require keeping labor unions in check and potentially eliminating food and fuel subsidies, which in itself would trigger a new round of social protests. It is also seeking a potential $500 million in bilateral financing from Saudi Arabia.
  • Morocco, which imports over 90% of its hydrocarbon needs, will have to moderate budget deficit reduction targets. The country has a good track record of reigning in inflation and maintaining currency stability. But some depreciation of the Moroccan dirham is likely, given a projected 34.5% jump in the value of imports in 2022, largely on the back of MAD135.1 billion ($12.2 billion) in energy imports. Still, the country will be able to secure financing through debt markets and multilateral financing institutions to cover any budgetary constraints.
  • Central banks in the region will continue to face pressure to raise interest rates to stem inflation, despite the likelihood that these increases further dampen economic prospects in the short term. Bank Al-Maghrib, Morocco’s central bank, raised interest rates by 50 basis points to 2% in late September in an attempt to stem inflation. Tunisia is likely to follow suit.
  • All three countries will remain vulnerable to global food and energy price variations for as long as the war in Ukraine keeps markets tight. For Algeria, this will be easier to pay for, given its energy revenues. But persistent unemployment will mean that average Algerians will continue to feel the pain of higher food prices. For Morocco and Tunisia, tourism, phosphate exports and a potentially good agricultural season might have important mitigating effects amidst the overall turbulence.
Alternative Scenarios:

Scenario 1: The conflict in Ukraine intensifies, ensuring that food and energy prices remain high through the winter and all through 2023. Pressure builds, especially in Morocco and Tunisia, as populations continue to see inflation erode salaries and household incomes. Because of its diversified economy and good export performance, Morocco is likelier to ride out bouts of social discontent. In Tunisia, continued price controls accelerate the scarcity of some food products. Protests resulting from a combination of economic and political discontent result in a robust security response, which aggravates social conditions. High food and energy prices continue to put pressure on Morocco's and Tunisia’s fiscal and current account balances and reduce foreign currency reserves. Currency devaluation in these two countries worsens inflation.

A perfect storm of continued food and energy inflation, coupled with another season of insufficient rainfall over winter 2022-2023, would trigger this worst-case scenario. But there are still mitigating effects that might allow North African countries to avoid large-scale and generalized social instability.

Scenario 2: Russia and Ukraine negotiate a cease-fire toward late 2022 to 2023, which eases energy and food prices. Inflation decelerates, and this — in conjunction with adequate cereal production in Morocco, Algeria and Tunisia — lowers domestic food prices, lowering social tension. Budgetary pressures are also reduced, especially in Morocco and Tunisia, due to lower food and energy prices. In Algeria, however, lower energy prices reduce export revenues, limiting the regime’s ability to use social spending to quell political dissent and economic dissatisfaction.

This is unlikely, given Russia’s recent military mobilization and its decision to annex several regions of Ukraine. Kyiv’s recent military successes and support from Western countries will galvanize Ukraine to remove all Russian presence from its borders.

Conclusion - Most Likely Scenario:

Despite the ongoing conflict in Ukraine, social chaos in the Maghreb is averted through a mix of policy measures and conjectural improvements. Social stability is maintained, despite weak economic prospects. Governments are able to implement adequate support mechanisms to keep food prices from spiraling further and enact poverty reduction measures. Although this is easier for Algeria, due to energy export revenues, Morocco continues to benefit from access to international debt markets to finance budgetary shortfalls. Tunisia — although mostly cut out from debt markets — secures a deal with the IMF before the end of 2022, avoiding debt default. A recovery in tourism revenues for both Morocco and Tunisia allows these countries to attract sufficient foreign currency to stem currency devaluation. Higher phosphate prices also benefit Tunisia and especially Morocco. Algeria channels higher energy export revenues toward social spending, offsetting the impact of high food prices on the population. Rainfall patterns over the winter support domestic cereal production in Maghreb countries, reducing the weight of food imports.

Contributor Background: 

Francisco Serrano is a writer and analyst who focuses mainly on North Africa. He has been published in several outlets, including Foreign Policy, World Politics Review and the Middle East Institute. His second book, "As Ruínas da Década," about the past decade in the Middle East, was published in March 2022.

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