Rabat must loosen grip on power to let Morocco flourish
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Rabat must loosen grip on power to let Morocco flourish

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Morocco has had good luck with the low oil price, and bad with a drought. What it needs is a more stable economy, less dependent on luck — and that means reforms to modernise ways of doing business, let the regions take their own decisions, and stimulate power generation

Hopes of a sustainable recovery in Morocco depend on the government loosening the capital’s grip on power and giving the regions more autonomy, the EBRD’s country director said on Wednesday.

This tricky reform could become the responsibility of the moderate Islamist PJD, which has been governing in coalition with liberals since 2011, but could take sole power at elections in September.

Growth in Morocco is slowing fast and particularly disappointing when, as an energy importer, it has had a windfall from low oil prices.

Laurent Chabrier said that while big cities like Casablanca, Agadir and Rabat were doing quite well, many Moroccans still lived inland. “What is missing now is a transfer of authority to the regions,” said Chabrier.

“What worries me is that I am not sure it will change. Everything is very Rabat-centric, with everything decided in the capital. The new constitution assumes a decentralisation which never took place, so it’s a two level economy.”

This is holding back infrastructure investment, Chabrier argued, because regions and cities cannot take their own decisions. The capital has focussed on grand projects like a 30 year plan to build 1,500km of high speed rail lines.

Yet much is going right for Morocco. Its fiscal consolidation, begun in 2012, has hit targets. “Central government debt is expected to peak this year, just below 65% of GDP, and reduce to 60% by 2019,” said Elisa Parisi-Capone, senior sovereign analyst in New York at Moody’s, which rates the country Ba1 with a stable outlook.

“Morocco is benefiting from lower oil prices, and our base case is that they will be lower for longer,” she said. “They have been taking advantage of this to reform subsidies and build up the reserve buffer, which reached six months of import cover at the end of 2015.”

GROWTH DRIVER

The economy is upgrading: Renault is investing $1bn to increase production at its Tangiers plant from 170,000 to 400,000 vehicles a year, and wants to double local sourcing of components to two thirds. Peugeot is building a $630m factory in Kenitra.

Yet after a strong 2015 GDP expansion of 4.5%, this year the EBRD reckons the country will manage just 2.3%. That is 1.5% less than it predicted in November — a steep downgrade.

“Morocco needs much more job creation,” said Chabrier. “When the population is growing by 2%, if growth falls below 2% it translates into an impoverishment of the population.”

External factors are partly responsible. Agriculture was a big growth driver in 2014, swelling 14%, but this winter it was hit by a drought.

To lessen Morocco’s vulnerability to changes in the global economy, commodity markets and the weather, it needs more fundamental reform. Chabrier welcomed the coalition government’s “very ambitious plan to regenerate the economy” and develop high tech manufacturing. Another plan is to create a Casablanca Finance City to attract multinationals — Bank of China has chosen it as a hub for its African activities.

But regional devolution and other changes to the traditional, informal way of doing business might help more. Banks still lend to the families that own companies, rather than considering the corporate balance sheets, and under-reporting of revenues is rife, with people addicted to using cash in business transactions. Both constrain companies’ ability to raise the finance they need.

Another issue critical to Morocco's development is energy.  "It's a good example of what has been done, in certain ways very well, and the challenge ahead," said Chabrier. "There is a substantial shortage today - it's difficult to estimate, but without the connection with Spain it would have been impossible to supply demand."

Morocco has international power supply links only with Spain, and has been fortunate in that Spain has had an excess of power recently. The cable has been carrying power the other way from what was expected. "No one ever expected power in Europe to be cheaper than in Morocco," said Chabrier.

But with power demand growing at 6% or 7% a year, as the population runs more air conditioners, TVs and fridges, more generation infrastructure is needed. This problem is the same across north Africa, and the EU and EBRD are well placed to help.

The EU’s long term goal has been to build a Mediterranean energy community with aligned regulations. But Simone Tagliapietra and Georg Zachmann at the Bruegel thinktank in Brussels have published a report arguing that progress is too slow. They call for Europe to speed up energy cooperation with north Africa by striking deals with individual countries, so that advances do not get delayed by waiting for dysfunctional states such as Libya.

“We need better regulation to ensure a good investment climate, and to put in place the right financing schemes to allow private investors to jump in,” said Tagliapietra. “The EBRD is already working in the region and we think due to its expertise this might be scaled up in future.

But, Tagliapietra said: “You need to go to the national level and bring in the real stakeholders.” He sees it as a business opportunity for European companies, which, with energy demand in Europe stagnant, are looking for new investments elsewhere.

Economic competitiveness was the real issue underlying the Arab Spring revolts, Tagliapietra argued, so making sure the power supply is adequate is important for security as well as the economy.

Morocco has captured attention with a 125MW solar plant, but its output was much more expensive than the electricity grid price, Chabrier said, because an expensive storage system had been built with it. It also included very little private sector equity.

He has higher hopes for wind development, where contracts have been awarded to build farms, based on lower prices.


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