Fiscal reforms and favourable external environment stabilise Morocco's budget deficit

Given its traditional dependence on energy imports, and agricultural volatility’s significant impact on economic performance, Morocco has witnessed long periods of fiscal imbalances. This is set to change, however, as structural improvements to the economy, coupled with a reduction in international oil prices, have helped the authorities commit to fiscal discipline by enacting a set of key reforms.

Ongoing alterations to the nation’s pension system and improved tax collection are among some of the measures making a notable impact. The result has been a substantial reduction in the kingdom’s budget deficit, underlining the reality that, in order for the country to move forward in a sustainable way, hard economic choices will continue to be necessary. This stance is based on the goal of shrinking the budget deficit to 3% of GDP, something that seemed unrealistic at the beginning of the decade, but now appears more achievable.

ECONOMIC VOLATILITY: Although efforts to modernise agricultural practices and diversify the economy have somewhat moderated the agriculture sector’s impact, rainfall and, consequentially, agricultural yields, still determine much of Morocco’s overall GDP performance. This has translated into volatile economic output over the years. In 2013, for example, GDP expanded by 4.5% on the back of good rainfall, before slowing down to 2.7% in 2014, and picking up again to 4.6% in 2015 as a result of record-high levels of cereal production, according to World Bank data. The 2016 agricultural season was unusually dry, with the Ministry of Agriculture calling it the worst drought in 30 years, which lead to a 1.2% increase in GDP for that year.

The improved rainfall conditions in late 2016 led to good agricultural yields, and as such the IMF estimates made in October 2017 placed GDP expansion at 4.8% for the year. Looking ahead, Morocco’s dependence on agriculture will remain a liability, and is behind the government’s forecast that GDP growth will contract to 3.2% in 2018.

BUDGET DEFICIT: Economic volatility has been a major source of strain on the national budget, as lower rainfall has historically had negative flow-on effects for other economic sectors, such as increased imports of cereals and a worsening trade deficit. Overall, however, Morocco was able to maintain a solid performance for most of the 2000s.

However, the government’s strategy of maintaining high levels of expenditure through successive budget deficits was made more difficult by the global financial crisis that affected its main European trade partners from 2008 onwards, as well as the political and economic instability stemming from the 2011 Arab Spring. These two elements contributed to the acute deepening of the budget deficit between 2008 and 2012, which peaked at 7.2% of GDP in 2012. This stressed the need for reform, prompting authorities to review the biggest contributors to national expenditure, such as the country’s large-scale subsidy system. “Of the public deficit in 2012, about 5% of GDP was accounted for by subsidies,” Karim Gharbi, partner and head of research at CFG Bank, told OBG.

In 2013 Moroccan authorities decided to reduce the public deficit by stabilising recurrent spending, prompting a reform of the subsidy system in 2014 and 2015. This involved the government gradually eliminating fuel subsidies on diesel and petrol, which left only butane gas, flour and sugar subsidies intact. The impact of these measures was felt immediately. In 2015 alone, savings from the subsidy reform reached Dh17bn (€1.6bn). More broadly, in 2014 and 2015 the state cut Dh32.6bn (€3bn) and Dh14.9bn (€1.4bn), respectively, from public expenditure, according to figures from BMCE Bank of Africa. As a result, the budget deficit has seen significant annual improvements: the deficit fell to 4.6% of GDP in 2014, followed by 4% in 2016. The government projected the deficit would narrow further, to 3.5% in 2017 and 3% in 2018.

FAVOURABLE PRICES: The drop in international oil prices, which began in 2014, largely facilitated the subsidy reforms in Morocco, as it allowed the government to pass a series of understandably unpopular measures at a time when the impact on Moroccans would be cushioned. The move to scrap fuel subsidies in particular went a long way towards securing a more balanced budget. However, this also means that the new system of determining fuel prices has yet to be politically tested. “The real test will come when the price of oil starts going up again, as this increase, if it happens, will be reflected on prices at the pump,” Jean-Pierre Chauffour, lead economist for Morocco and regional trade coordinator for MENA at the World Bank, told OBG. Under the current system, implemented in 2014, fuel prices are updated at the pump every two weeks to reflect the international price of oil.

Although most estimates point to relative stability in oil prices for 2017 and 2018, unexpected events – such as international conflict, for example – may push prices back up. This would test the resolve of Moroccan authorities once again, as in the late 1990s the government had attempted to reduce subsidies but was forced to reinstate them after being pressured by widespread discontent. In Gharbi’s view, however, it is unlikely that a new upward surge in the international oil price would make the government back down and reintroduce fuel subsidies. “Next time there is a shock, it will be absorbed by the customers, because the government does not have the means; its role is not to subsidise consumption prices,” he said. “That money needs to be channelled towards productive programmes that can have a sustained impact on growth.”

TAX REFORM: Other important reforms are helping to maintain sustainable budget levels as well. For instance, a marginal increase in the legal retirement age, which is set to be raised from 60 to 63 years by 2019, is in the process of being implemented. In addition, improved tax collection rates over the past decade have contributed to strengthening the budget. Between 2000 and 2014 the tax-to-GDP ratio in Morocco rose from 23.6% to 28.5%, according to figures from the OECD.

The government is implementing a continued reform of the country’s tax system, which, according to the IMF, could add between 1.5% and 2% to public revenue in the medium term. Measures to achieve this have focused on expanding taxation rates for self-employed and liberal professions, but the IMF has also recommended that Moroccan authorities consider gradually revising certain tax breaks, such as value-added tax exemptions.

Additionally, the ongoing devolution process, in which authorities are increasing the role of regional powers in managing local affairs, will also involve government attention from a fiscal perspective. The IMF highlighted the need to establish the proper capabilities to manage public funds. Moroccan authorities have already been strengthening budgetary procedures and control mechanisms for regional expenditure programmes, while debt at some of the country’s public enterprises is also being looked at more carefully by the government.

IMPROVING RATINGS: Efforts to manage the budget more efficiently have been met with positive responses from international financial institutions. In February 2017 ratings agency Moody’s changed the outlook of Morocco’s sovereign bonds from stable to positive. The key drivers behind the decision to change the kingdom’s rating were the build-up of foreign exchange reserves, dynamic new export industries, lower nominal oil imports as well as the additional economic stability that was brought about by the government’s budget consolidation efforts.

In a 2017 report, the IMF noted Morocco’s efforts to consolidate its budget and contain current expenditure through the reforms enacted. However, the fund has also recommended that the authorities focus on reducing public debt, while still continuing to channel financial resources towards social programmes and schemes that will have a positive impact on growth over the longer term. The fund underlined deepening the current tax reform as fundamental to maintaining budget consolidation efforts and increasing the country’s tax base.

Morocco’s fiscal discipline has been critical to solidifying its position as a stable and robust economy, giving it more leverage in its relationships with trade and investment partners, and multilateral institutions. Equally important has been the long-term perspective it has brought to the kingdom’s fiscal management, with the country also moving towards liberalisation of the dirham’s exchange rate. So far, this strategy appears to be successful in supporting more sustainable growth levels.