Morocco, Tunisia to face bloated energy costs over 2023-2024
Al-Monitor Pro Members
Journalist and analyst specialized in North Africa
Dec. 16, 2022
The volatility brought about by the Russian invasion of Ukraine in February 2022 has pushed up global energy prices. For net energy importers in the Maghreb, the consequences have been financially strenuous. Tunisia and Morocco face inflated trade and budget deficits, as governments move to attenuate the impact of higher energy prices on firms and households. Looking ahead, high energy costs will continue to put pressure on electricity generation, business operations, and state budgets.
- Energy prices will drive economic and political outcomes in the Maghreb, potentially over the coming two-to-three years. High energy costs are eating into government budgets, especially in Tunisia and Morocco, reducing public investment capacity and rising external financing needs. They also disrupt populations and employment prospects, by reducing household incomes and pushing up the cost of doing business for foreign and domestic firms.
- Algeria, a net energy exporter, has been spared the pressures faced by neighboring Morocco and Tunisia. In fact, the rise in energy prices is expected to take Algeria’s hydrocarbons export revenues to $50bn by end-2022, relative to $35.4bn in 2021. High energy prices secure the ruling regime by increasing social spending.
- Although it exports natural gas, oil, and small amounts of refined petroleum products, Tunisia still imports large volumes of petroleum products, natural gas, and even electricity. Over the first ten months of 2022, Tunisia saw its energy trade deficit widen by 92%. Over Jan-Oct 2022, its energy trade registered a TD8.2 billion ($2.6 billion) deficit compared to TD4.3 billion ($1.3 billion) over the same period in 2021.
- The worsening trade deficit was caused, to a large extent, by the rise of import costs for petroleum products such as gasoline, diesel and jet fuel. After spending TD4.1 billion ($1.3 billion) importing petroleum products over Jan-Oct 2021, Tunisia paid TD7.4 billion ($2.3 billion) for petroleum products during the same period of 2022.
- Morocco has also been affected by higher energy prices. The kingdom depends on imported hydrocarbons for over 90% of its energy needs. According to figures by the Office des Changes, which handles trade statistics, over the first ten months of the year, Morocco’s energy import costs more than doubled to Dh128.3bn ($12.2bn), compared to Dh59.3bn ($5.6bn) in 2021.
- Besides energy prices, Tunisia is also dealing with a weaker currency, due to the country’s economic and political crisis. Between October of 2021 and September of 2022, the value of the Tunisian Dinar fell 11% against the US dollar. Over the same period, the price of a barrel of Brent oil rose by 50%, from $69.3 to $104.1.
Fuel prices hit populations
- Tunisia’s worsening energy deficit is having a heavy impact on the country. Since October, nationwide fuel scarcity has seen drivers repeatedly queue for hours to secure petrol and diesel. The state’s inability to pay for imports of subsidized goods such as petrol on time led to shortages and fuelled protests. In November Libya donated 30.000 tons of fuel to Tunisia to help stem the shortage.
- Fuel prices have continually gone up in Tunisia and Morocco over 2022. While Morocco eliminated fuel subsidies in 2015, they remain in place in Tunisia. Tunisians fear a gradual removal of fuel subsidies, as the country implements reforms in a bid to secure a $1.9bn loan agreement with the International Monetary Fund (IMF).
- Morocco’s import costs for petroleum products – which rose by Dh35.3bn ($3.3bn) to reach Dh63.6bn ($6bn) over the first ten months of 2022 - accounted for the large proportion of the increase in energy imports. In early December, thousands of Moroccans protested in the capital, Rabat, against high prices.
Costlier electricity generation
- Higher energy costs are worsening the financial situation of state-owned electricity providers. In mid-April, the Office national de L’électricité et de L’eau potable (ONEE), Morocco’s utility, announced it expected losses of Dh24.1bn ($2.3bn) in 2022 on the back of higher energy costs. ONEE planned to spend Dh47.7bn ($4.5bn) on acquiring fuels to run its power plants over 2022, up from Dh21bn ($1.9bn) in 2021.
- In Morocco, thermal generation based on imported oil, coal and natural gas accounts for 6901 MW of installed electricity production capacity, out of a total 10.968 MW. This means that nearly two-thirds of electricity production will remain anchored to energy price volatility over 2023-2024.
- As much as 98% of electricity generation in Tunisia depends on natural gas. Besides domestic production and transit fees paid by Algeria, Tunisia buys the remaining gas it needs from Algeria. With its own domestic production falling, the amount of natural gas the country had to buy over the first ten months of 2022 increased to 48% of total consumption, up from 45% in Jan-October 2021. This means that nearly half of what the country needs to generate electricity is exposed to global energy prices. Over the past year, the average price at which Tunisia buys its natural gas rose by 91% in dinar terms.
Scenario 1: Energy prices accelerate in 2023-2024, fueled by a significant escalation in the conflict in Ukraine, and rising oil demand from China as it reopens its economy.
Oil prices average $130 per barrel during 2023. Inflated energy prices push-up electricity generation costs for governments in the Maghreb, and erode incomes. Logistics and energy prices rise further in Morocco and Tunisia, making business operations significantly more expensive. This impacts most sectors, ranging from business-to-business firms with energy-intensive production methods, to retail operations and fast-moving-consumer goods’ manufacturers that depend on consumers’ disposable incomes. Cushioned by higher hydrocarbons revenues, Algeria returns to large-scale public works projects to drive employment. Government spending increases business activity for foreign and domestic firms in Algeria, despite the opaque business environment.
Flush with energy export revenues, Algeria potentially supports Tunisia through gas transfers at reduced prices. This secures most electricity production in Tunisia. But the possibility of social unrest remains due to high fuel prices. Morocco does not receive any energy support from its regional foe Algeria, but it continues to enjoy relatively easy access to debt markets and international financial institutions to shore up financial resources.
This scenario seems unlikely at the moment, unless a major escalation in Ukraine takes place. Brent oil prices have gone down in recent weeks. The likelihood of a recession in European markets and uncertainty over China’s exit from its zero-Covid policy might ease some of the pressure on energy prices into 2023.
Scenario 2: A winding down of the conflict in Ukraine, through a negotiated cease-fire, coupled with a slowdown in China, caused by an increase in covid-19 infections, reduces energy prices.
Oil averages around $60 per barrel over 2023. This changes the macro-economic environment for Morocco and Tunisia. Governments get some respite from the difficult budgetary trade-offs of 2022. Tunisia benefits from a softer environment in which to implement its IMF loan agreement. Business operations in both countries become easier to manage, due to a decrease in energy and logistics costs. Households enjoy lower fuel prices, but tensions remain due to economic reforms. If European markets avoid a recession under a less volatile environment, imports of Moroccan and Tunisian goods help to drive growth and employment in those countries.
This scenario seems highly unlikely given the current state of hostilities between Ukraine and Russia, and also the pressure on the Chinese government to both ease lockdowns and restart economic growth. These two factors alone should guarantee oil prices remain well above $60 per barrel over 2023.
Energy prices stabilize around current levels over 2023-2024, at an average $100 per barrel of oil for 2023, before easing from 2025 onwards. This scenario is based on an acceleration of the conflict in Ukraine after the winter, a recession in some European markets, and a revival of domestic consumption and manufacturing in China, following a partial reopening of its economy.
For Morocco and Tunisia, this still means heavy energy trade deficits, budgetary constraints, and costly fuel. But at more manageable levels than in the first scenario. Firms in both countries continue to face high logistics and production costs, as well as lower household expenditure due to inflation, but these are in line with expectations. Inflation is lower than over 2022, which improves consumption conditions from mid-2023. Despite this, businesses remain wary of investing, expanding operations, or hiring. Both countries still face high costs to produce electricity, but these are in line with Morocco’s budget planning. In Tunisia, the blow is softened through the implementation of its IMF agreement, which attracts additional multilateral financing. Both countries will still face the threat of social instability, driven mostly by high fuel prices. But the risk is higher in Tunisia than in Morocco.
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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