Necessary measures: Major efforts to lower the nation’s twin deficits

A move to reduce fuel subsidies is expected to help the government’s efforts to strengthen its balance sheets. Largely as a result of a protracted slowdown in Europe, the primary trade partner and major source of foreign direct investment, Morocco’s “twin” (fiscal and trade) deficits have risen steadily in the past five years. In addition to lower demand from the Eurozone, an increase in global oil prices and a particularly weak agriculture harvest in 2012 pushed the two measures up to 7.3% and 23.8% of GDP, respectively, for that year.

MAKING STRIDES: In January 2014 the government announced it would eliminate subsidies on gasoline and industrial fuel not used for electricity generation, and that diesel subsidies would gradually be reduced from Dh2.15 (€0.19) per litre to Dh0.80 (€0.07) between February and October of 2014. Subsidies will remain in place for butane and industrial fuel used for power generation; spending on these two products together is expected to equal 1.8% of GDP in 2014. This builds on initial steps adopted in 2013 when authorities launched a mechanism to index the domestic price of three products – gasoline, diesel and non-electricity industrial fuel – to global prices, which will help to stabilise energy spending and protect against volatility.

While national debt is at a sustainable level, the country remains vulnerable to external price shocks. Morocco depends on imports for nearly all its energy needs and significant quantities of cereals, sugar and other key food products. The government is working to introduce measures to restore financial buffers and protect against future volatility, including reforming the pension system, rationalising its expenditure on wages, along with reducing subsidies on fuel and food.

NECESSARY MEASURES: The adoption of fuel subsidy reforms passed relatively smoothly in 2014. Consensus appears to be growing at a national level that subsidy reductions are necessary to rebuild financial buffers, particularly as the country works to manage a persistent liquidity shortage in the financial sector. Expenditure on blanket subsidies for energy and food products amounted to Dh53bn (€4.7bn) in 2012, equivalent to 6.4% of GDP.

Initial efforts to reduce subsidies and index domestic energy prices, and a bumper agricultural harvest and lower global oil prices, helped to reduce expenditure to Dh43bn (€3.8bn) in 2013, equivalent to 4.7% of GDP. With the changes introduced in January 2014, subsidy spending is slated to drop further to Dh35bn (€3.1bn), or 3.7% of GDP, in 2014. Government officials have set a target of lowering subsidy spending to 3% of GDP by 2016. Combined with other measures, including tax reform and reductions in public spending on wages, these efforts are slated to push the fiscal deficit below the 5% mark in 2014, for the first time in three years.

SOCIALLY MINDED: The goal of the reform programme is to replace blanket subsidies with more targeted measures that directly benefit low-income populations. The government estimates that 75% of payments for diesel and fuel subsidies benefit the top quintile of the population. The subsidy reform stands to have a noticeable impact on transport costs. To the extent that higher energy costs could affect low-income populations, the government moved in January 2014 to limit fare increases on public transportation. Additional measures set to be introduced, including expanded support for school age children and medical care, are expected to improve access to key services for this segment. Modifying the food subsidy regime will likely be a trickier process. Current spending on products such as wheat and sugar, which are expected to account for costs equal to 0.5% of GDP in 2014, will remain in place.

Simultaneous efforts to reduce spending on public sector wages, widen the tax base, reform the VAT regime and eliminate tax exemptions should help in the short term to strengthen public finances. The state’s commitment to enacting reforms has helped to strengthen investor confidence, which is particularly important as the High Commission for Planning estimates that the kingdom will need to seek an amount equivalent to 7.4% of GDP through external financing in 2014.