Moroccan authorities target diversification to secure long-term economic growth

Despite its dependence on agriculture for strong GDP figures, efforts to strengthen other export sectors, coupled with the diversification of its trading partners, have allowed Morocco to develop competitive industries and increase their presence in international markets. Traditional segments such as phosphate production remain strategic, but a range of emerging manufacturing capabilities are promoting growth across a broader base of economic activities. In addition, reforms in recent years have allowed the authorities to pursue budget consolidation efforts. These are assisting the state in reinforcing the country’s fiscal position, while also helping to structurally change the financial management of a country that has long been characterised by costly and inefficient subsidy programmes.

Agricultural value added still accounts for erratic GDP expansion rates from year to year, but as private and public investment continues to be channelled towards the expansion of the automotive and aeronautics sectors, among others, achieving more consistent growth patterns should become progressively easier. Greater economic output could help fund remaining reform priorities. Quality of education remains a challenge, affecting the country’s ability to innovate and compete in international markets. In addition, regulatory limitations on competition and excessive red tape still hinder business activity in many sectors, affecting small and medium-sized enterprises (SMEs) more acutely.

AGRICULTURE: Because of its weight in the economy, at just under 15% of GDP, agriculture still has sufficient pull to help drive annual growth rates in Morocco. As it stands, the amount of rainfall in the country influences economic performance, leading at times to fluctuating trends in GDP expansion. Record cereal production levels in 2015, for example, led the economy to expand by 4.5% that year, according to the High Commission for Planning (Haut Commissariat au Plan, HCP). However, this was followed by a drought in late 2015 and 2016, which saw agricultural production contract by 10%, according to figures from the World Bank. The government classified it as the worst drought in 30 years, and it resulted in a 70% fall in cereal production, decreasing from 11m tonnes in 2015 to 3.35m tonnes. However, the positive impact of abundant rainfall towards the end of 2016 improved growth prospects for 2017, leading the government to project GDP growth of more than 4% for the year. Speaking in January 2018, Ahmed Lahlimi Alami, high commissioner of the HCP, forecast GDP growth would be in line with the trend recorded over the last 10 years, as agriculture is increasingly supported by public programmes, but said these improvements were likely to be hampered by less rainfall in late 2017.

Jean-Pierre Chauffour, lead economist for Morocco and regional trade coordinator for MENA at the World Bank, told OBG, “The sector has become more resilient with the weight of non-irrigated agricultural production within the total agricultural production declining over time, representing less than 20% of agricultural added value and, in turn, total GDP.”

OTHER SECTORS: Growth in non-agriculture sectors was expected to remain around 2.7% in 2017 and reach 3% in 2018, according to early 2018 HCP estimates. To hedge against the weight of agriculture in the economy, Moroccan authorities have been following a strategy of industrialisation, creating an enabling environment for emerging sectors to become export engines. Measures were initially framed in the 2008 National Pact for Industrial Emergence, and later solidified through the establishment of the Industrial Acceleration Plan (Plan d’Accélération Industrielle, PAI) in 2014. Under the PAI, manufacturing’s contribution to GDP is anticipated to grow from 14% in 2014 to 23% by 2020.

The stronger focus on industrial development and a more varied export base underscores consensus about the need to shift away from the previous growth models. Morocco’s economy underwent a period of consistent high growth for most of the 2000s, propelled by a combination of important reforms, the economic impact of large-scale infrastructure projects and the liberalisation of certain economic sectors.

BUDGET DEFICIT: Externally, the kingdom also benefitted from a favourable global environment, taking advantage of its close ties with Europe to increase exports. The result was an annual average growth in non-agriculture GDP of between 4.5% and 5%, according to Karim Gharbi, partner and head of research at CFG Bank. The impact of the international economic crisis, starting in 2008, affected Morocco belatedly. The kingdom was initially spared the worst effects because of the government’s expansionist budgetary policy, continuing to invest even when the overall climate of crisis had settled around many of its economic partners, especially in Europe. This allowed solid growth rates to be maintained between 2008 and 2012. Government expenditure was further burdened by the need to maintain social programmes in the context of regional upheaval brought about by the Arab Spring of 2011.

However, the consequence of high expenditure was a substantial erosion of the government’s fiscal position, with the budget deficit rising from 6.5% in 2011 to 7.2% of GDP in 2012. Equally worrisome was the expanding public debt, which grew from 58.3% to 63.5% of GDP between 2011 and 2014, according to figures from the IMF. Reining in the deficit became a critical government priority from 2013 onward, with moves made to reform Morocco’s large-scale subsidy system. These efforts yielded a steady reduction in the kingdom’s budget deficit, to 4% in 2016. The government estimated that the budget deficit would shrink further to around 3.5% by end-2017, and would reach 3% in 2018. Budget consolidation and the growing role of emerging industrial sectors are two key factors on which Morocco’s future economic performance is likely to be based.

SHIFT POINT: After years of depending on a small number of traditional sectors to drive economic growth, these sectors appear to be reaching their maturity phase. “Construction and real estate have traditionally been a key engine, but they have seen their importance somewhat diminished,” Gharbi told OBG. “Cement consumption per inhabitant at the beginning of the 2000s was about 200 kg per year in Morocco, and now we are at 450-500 kg per person per year. This shows that high growth rates are not to be expected. In other countries, consumption levels have reached about 600 kg per person and then stabilised or began to go down.” Telecommunications have also had a strong impact on GDP expansion over the years, but with 42.1m mobile subscribers as of June 2017, the sector is set to begin registering lower growth rates, according to the National Telecommunications Regulatory Agency. Banking penetration has also expanded substantially, with services now reaching 70% of the population.

The automotive industry in particular has been a priority for development since the opening of the Renault production unit in Tangiers in 2012, and the positive results of automotive manufacturing in Morocco represent an important gauge for the potential of industrial acceleration as a whole. For the third consecutive year, automotive production was the most important export industry, posting foreign sales of Dh54.4bn (€5bn) in 2016, compared to Dh38.9bn (€3.6bn) in export revenues from the phosphate sector, according to regional press reports released in 2017. Other car manufacturers are entering the market, and the authorities expect automotive manufacturing to generate annual exports of Dh100bn (€9.3bn) in the years to come. Although nominally the automotive segment is now a bigger export earner, phosphates still have more of a net impact on the trade balance, according to local stakeholders. This is because automotive manufacturing depends to an extent on imports – the industry has a local integration rate of about 40% – whereas all of the income generated by phosphates stays in the country.

BUSINESS ENVIRONMENT: Despite the growing importance of manufacturing, the overall level of competitiveness in the country has led to somewhat paradoxical results. The failure rate of Moroccan companies is much lower than in more developed countries, but this is largely due to a lack of competition and can result in low productivity when businesses face little pressure to expand. This has a detrimental effect across the economy, making it harder for SMEs to grow and have a greater impact on employment creation. Currently, Moroccan SMEs employ 80% of the working population, according to Gharbi. Marie-Alexandra Veilleux-Laborie, director and head of Morocco at the European Bank for Reconstruction and Development, told OBG, “At the same time, SMEs have been confronted with many administrative burdens, limited access to finance, severe delays of payment and competition from the informal economy. Implementing policies to enhance transparency, improve the efficiency of the judicial system and promote competition will support the development of reforms critical to SMEs, which in turn will generate growth and create jobs.”

A rebounding industrial sector with increased investment in modern production capacity channelled towards exports is doing much to diversify the economy away from agriculture and re-establish sectors that in the past provided fast growth rates. However, the renaissance of Moroccan industry has in large part been led by foreign direct investment, with international actors operating in new industries. “To a large extent, the first line of suppliers for these large industrial foreign companies are generally made up of foreign capital,” Chauffour told OBG. “The second- and thirdline suppliers have more domestic Moroccan capital.”

As a result, Moroccan capital is not sufficiently invested in industry or the productive economy, relying more on real estate and construction, or a handful of protected sectors that yield predictable returns. One of the main challenges ahead will be to encourage Moroccan investors to focus more on sectors of exchangeable goods, where competition is higher and there is considerably more risk.

Despite this, the integration of Moroccan firms into global supply chains has been increasing. One clear example is the automotive industry, which saw its level of local integration move from 20% in 2012 to 43% by the end of 2016, according to Jad Benhamdane, senior business analyst at BMCE Bank of Africa. Overall, the percentage of manufactured products with a technological component has risen from an average of 23% of total exports in the 2000-07 period, to about 40.1% between 2008 and 2015, according to figures from the Ministry of Economy and Finance.

SKILLS & EMPLOYMENT: Overall, the kingdom’s unemployment rates have generally been stable, despite the fact that unemployment rose from 9.9% in 2016 to 10.2% in 2017, according to figures from the HCP. However, similar to its neighbours in both North Africa and Southern Europe, the country still struggles with high rates of youth unemployment, which rose from 25.8% in 2016 to 26.5% in 2017. Looking ahead, the IMF forecasts the unemployment rate will edge up to 9.5% in 2018, before falling to around 9.2% in 2019 and easing further to 8.9% over the course of 2020.

The gender gap also plays a part, with female labour force participation at just 25%, according to the World Bank. Although gross enrolment has progressed for both genders, education in Morocco also faces a number of challenges. A recent government report found that over 75% of students that reach high school are older than the official age for enrolment, and 38% of students have failed at least once. Additionally, the report found that the majority of students completing programmes in either public or private institutions do not acquire the full range of necessary competencies. According to various stakeholders, the key to growing Morocco’s economy lies in its ability to channel more investment into raising the quality of education, as this will help to produce a more skilled workforce that is capable of delivering the diversification required to expand (see Education & Health chapter).

In line with growth in manufacturing, vocational training has become essential to both providing better employment opportunities for Moroccans as well as ensuring that emerging sectors have the necessary human resources to expand over the coming years. To this end, the Office for Professional Training and Employment Promotion has set a target to train up to 1.7m workers between 2016 and 2020. Specialised training centres have been established in close proximity to relevant manufacturing clusters to facilitate this objective (see Industry chapter).

EXCHANGE FLEXIBILITY: A more sustainable fiscal policy will also help the country as it moves towards an increasingly liberalised exchange system. Government plans to add flexibility to the Moroccan dirham accelerated in July 2017, with the support of the IMF. In a February 2017 report, the fund stated that moving towards a more flexible exchange regime would “… help preserve competitiveness and better incentivise the reallocation of productive resources between the tradable and non-tradable sectors within the economy”.

The dirham has been pegged to a basket of currencies. Bank Al Maghrib (BAM), Morocco’s central bank, reduced the weight of the euro in the dirham’s value from 80% to 60%, and increased the participation of the US dollar from 20% to 40% in April 2015. BAM has traditionally allowed the value of the dirham to fluctuate to a maximum of 0.3% in either direction of its peg, but in January 2018 BAM announced this band would widen to 2.5% either side. Abdellatif Jouahri, governor of BAM, has stated that Morocco will likely establish a managed float of the currency and, eventually, a free float. However, this move will be gradual, possibly taking place over several years. For now, the authorities will want to assess the impact of the new band, and will likely increase it further in the near future.

The move towards a more liberalised exchange rate is a sign of the maturity and increased diversification of the Moroccan economy. One key indicator supporting the kingdom’s readiness to switch to a more flexible exchange regime is the rising volume of foreign exchange reserves over recent years, moving from the equivalent of four months of imports at the end of 2012 to seven months by February 2017. A more flexible exchange rate is expected to bring several advantages. First, it will allow the country to better align itself with the world economy, a critical step as Morocco increases its trade partners and export industries. It will also allow the kingdom to absorb external shocks more easily. “For example, if the international price of oil goes back to $100, and as a result our trade balance enters into deficit, the value of money depreciates, and with it, exports increase and imports decrease. It allows us to adjust more easily,” Gharbi told OBG.

Furthermore, the new regime will allow BAM to set specific inflation targets, and better transmit monetary policy into the rest of the economy, freeing the banking sector regulator from the responsibility of managing both an exchange and interest rate regime. “The flexible exchange regime was launched in 2010 in consultation with other countries that have undergone similar processes in the past,” Taoufik Rabbaa, managing director of Citibank Maghreb and head of Citigroup’s North Africa Treasury and trade solutions, told OBG. “Making the regime flexible may take years as regulations are gradually changed. As of now, however, Morocco has the right macroeconomic triggers to embrace a gradually flexible regime. This process will also keep speculation to a minimum, as investors are incentivised by the fact that the dirham is not overvalued.” However, one side effect of the new regime once it is fully implemented is added risk and volatility for the dirham, with market observers noting the risk of depreciation and potential impact on the cost of imported goods for the Moroccan economy.

TRADE: Morocco has been able to establish a solid network of international trade agreements, encompassing free trade deals with Canada, the US and Turkey, as well as being part of the European Free Trade Association. Furthermore, under the Agadir Initiative of 2004, preferential trade ties with Jordan, Egypt and Tunisia are well established. To diversify export markets and reduce exposure to the negative impact of the financial crisis that has affected most European countries, Morocco has signed cooperation and trade deals with an array of different partners, strengthening economic ties within the African continent and Gulf countries. Despite this, the EU still represented 58.9% of Morocco’s total trade in 2016, according to European Commission data. The bloc accounts for 64.9% of the kingdom’s exports and 55.6% of its imports. Trade between the EU and Morocco reached €34.6bn in 2016, from €30.6bn in 2015 and €29.3bn in 2014.

OUTLOOK: With increased rainfall towards the end of 2016 set to benefit the agriculture industry, much better GDP growth rates were expected for 2017, with the IMF estimating it would rise from 1.2% in 2016 to 4.8% in 2017, before moderating to 3% in 2018. While the large share of agriculture in the country’s GDP and its correlated dependence on rainfall strengthens the perception of the economy as somewhat unstable, the kingdom has been largely successful in sustaining a high degree of consistency in terms of economic growth. However, until an effective strengthening of the manufacturing sector takes hold, Morocco will remain considerably dependent on agricultural performance over the medium term.

Although the country is moving in a promising direction, the remaining challenge for policymakers is how to implement the changes and reforms that are needed for the economy – and specifically non-agriculture GDP – to expand at a faster rate. Improving the quality of education and strengthening overall governance in the country are two key areas that are expected to aid in this endeavour. Morocco’s stability in a tumultuous region has allowed it to attract growing interest from investors. This bodes well for the country’s economic development over the long term. However, promoting job-creating growth would likely require improvements to the mechanisms that allow foreign investment in the manufacturing sector and other areas of the economy. Additionally, such measures would help to increase the competitiveness of domestic actors as well.