It is a truism of emerging markets — and developed ones, for that matter — that structural reform commitments are usually more honoured in the breach than in the observance. Despite urging from domestic and international experts, prudent economic measures tend to be enacted only when unavoidable. It is relatively rare to find a country that follows the IMF playbook without the stimulus of crisis and recession. Morocco’s progress over the past five years is therefore all the more striking. Across a relatively benign economic and political backdrop, policymakers have pushed through a raft of improvements in areas from public spending and welfare support to industrial development and banking regulation.
“In terms of commitment to implementing difficult reforms, Morocco is a standout in the North Africa region,” says Amelie Roux, a sovereign analyst at Fitch Ratings.
Easily the most ambitious of these reforms and the one that has generated the most interest has been a drastic reduction in government subsidies. In 2012, Morocco’s government spent the equivalent of 6.4% of GDP on keeping the price of commodities including fuel, wheat and sugar artificially low. This year, the figure is expected to come in at just 1.0% following the phasing out of all subsidies on diesel and gasoline.
Impressively, and unusually, this has been accomplished with minimal domestic pushback, thanks to a combination of effective communication by policymakers and the allocation of a sizeable chunk of the savings to welfare programmes.
Even allowing for increases in social spending, however, the effect on Morocco’s public finances has been dramatic. The current account deficit has been reduced from close to 10% to below 2%, allowing for the rebuilding of foreign exchange reserves — to nearly seven months of import cover — and a reduction in net external debt for the first time since the global financial crisis.
Meanwhile the budget deficit, which was hovering around 7% of GDP in 2012, declined to just 4.3% last year and is expected to fall further to 3.7% in the current fiscal year. That in turn should halt the recent rise in public debt levels. Moody’s forecasts overall government debt to peak at 65.3% of GDP next year.
Policymakers have also taken steps to ensure that public spending remains at sustainable levels through the introduction of an organic budget law. Passed at the start of this year, the complex legislation includes a golden rule allowing net new borrowing only for purposes of capital spending, as well as provisions restricting carry-overs between budgets and putting binding ceilings on wage appropriations.
A further reduction in the budget deficit is now targeted to 3% of GDP next year — a level that some analysts see as ambitious given the limited scope for further spending cuts. “Subsidy reform has been the major driver of deficit reduction in Morocco thus far,” says Roux. “The question is whether the government will be able to maintain this consolidation going forward.”
She notes that the emphasis is now likely to switch to revenue collection, mainly in the form of tax receipts. The government has already announced plans for an overhaul of VAT legislation as well as the introduction of a new system of corporate tax brackets.
Policymakers have also proved surprisingly bold in addressing the thorny issue of public sector pension reform. A key demand of the IMF, which has supported Morocco with a precautionary liquidity line since 2012, plans to curb the pensions bill have nonetheless predictably provoked a domestic backlash.
Despite looming parliamentary elections in October, however, politicians in the ruling Islamic Justice & Development Party (PJD) have faced down opposition and pushed ahead with the first stage of reforms. A new law passed in July raised the retirement age for civil servants from 60 to 63 and mandated increased worker contributions.
CURRENCY PEG
Next up on the IMF checklist is the abandonment of Morocco’s longstanding currency peg in favour of a flexible exchange rate. Again, policymakers have shown an unusual readiness to tackle the issue. The country’s central bank, Bank Al-Maghrib, took the first steps this year with the reweighting of the currency basket used to set the exchange rate for the dirham and a move to a fully floating rate has been promised for next year.
That is due to be followed by the lifting of controls on currency leaving the country — although analysts say this will likely be implemented more gradually. “The authorities are extremely cautious about the process so we are not expecting any major shifts,” says Roux.
Mohamed Abu Basha, an economist at EFG Hermes, agrees. “What we are seeing in Morocco is a structural shift in the economy but one that is happening in a relatively safe macroeconomic environment,” he says. “They are therefore moving slowly but surely.”
He notes that a flexible currency, in particular, will be essential if policymakers are to achieve their ambition of developing Morocco into a financial hub linking Europe and sub-Saharan Africa.
Even with a pegged currency, however, significant progress has already been made on this front. Casablanca Financial City, a flagship project launched in 2010, has attracted a raft of international banks and companies including BNP Paribas, Bank of China, Boston Consulting Group and AIG.
Meanwhile, Morocco’s leading banks have been on a major acquisition drive outside the country buying assets across North and southern Africa. By June 2015, Banque Marocaine du Commerce Exterieur, Attijariwafa and Groupe Banque Centrale Populaire had loan exposure to sub-Saharan Africa of 23.5%, 13.1% and 9.4% of total lending respectively, according to Moody’s.
This rapid expansion initially raised concerns about the suitability of Morocco’s supervisory regime to cope with large cross-border banking exposures. The authorities’ response was a wide-ranging banking law, passed in June 2015, which provided for the establishment of a new framework for macroprudential supervision and crisis management as well as the formation of a committee to analyse the financial system and assess systemic risk.
The new legislation also sought to facilitate technological development by broadening the scope of payments to include electronic currency and widening the definition of credit institutions, as well as bringing Morocco into line with international standards in areas such as anti-money laundering, consumer protection and antitrust legislation.
The bill also set the stage for the long-awaited introduction of Islamic banking in Morocco by creating a legal framework for shariah compliant finance. This bore fruit in September, when Credit Agricole du Maroc — no relation of the French house — announced plans to open the country’s first Islamic bank early next year. The lender, which will be jointly owned with the Islamic Development Bank, will target rural areas and the unbanked population.
INDUSTRIAL BASE
While finance is seen as an important sector for Morocco, however, policymakers’ key focus in recent years has been on leveraging the country’s cheap workforce and proximity to Europe to build its industrial base. A wide range of incentives and initiatives has been introduced to attract international manufacturers, with impressive results.
In 2012, Renault began production of its Dacia range at a vast new plant in the Tangiers Free Zone, which was further expanded the following year with the addition of a second assembly line that increased capacity to 400,000 vehicles per year. Peugeot followed suit in June 2015 with the announcement of plans for a €557m plant near Rabat to open in 2019.
Both firms have also backed government efforts to develop supply chains for the auto industry within Morocco, with Renault pledging $1bn in April to boost local sourcing of components from 32% to 65%. “If Morocco can build on this, it will attract further investment into the country,” says Jason Tuvey, an economist at Capital Economics.
Other major growth sectors include aerospace — Bombardier is a major investor — and renewable energy. In February, the world’s largest concentrated solar power plant began production at Ouarzazate on the edge of the Sahara Desert. When fully operational in 2018, the plant will have a capacity of 580MW and supply electricity to more than one million households, according to the government.
AGRICULTURE DEPENDENCE
Despite these advances, however, Morocco remains heavily dependent on its traditional agricultural base — as is demonstrated by GDP forecasts for this year. While the non-agricultural economy is expected to expand by 3%-3.5%, overall growth is tipped to be as low as 1.8% following a severe drought.
Agriculture still accounts for around 14% of GDP and employs 40% of Morocco’s labour force. Here again, as Tuvey notes, the government is making strenuous efforts to reduce the vulnerability of the sector by encouraging farmers to switch from rain-dependent crops such as wheat to more resilient products such as olives and cherries. To date, however, progress has been limited.
Meanwhile, previously key sectors such as construction and real estate have yet to recover from the post-financial crisis crash, and an initial boost to tourism receipts following security troubles in other North African markets such as Tunisia and Egypt also seems to be fading. “For EU tourists, Morocco is increasingly suffering from being associated with the problems of neighbouring countries,” says Roux.
Analysts also note that most of Morocco’s key industries remain highly sensitive to the economic performance of Europe, the main source of demand for the country’s exports as well as of tourist visitors. “The strongest vulnerability for Morocco is its strong links with Europe,” says Abu Basha.
Nevertheless, the overall mood around Morocco is one of optimism. “We take a positive long-term view of Morocco,” says Tuvey. “Thanks to the government’s prudent fiscal policy over the past five years, the country is in a much stronger position today than it has been for some time.”
Abu Basha adds that, while the country missed out on the periods of high growth enjoyed by other MENA countries in the pre-crisis years, it has also avoided any dramatic downturns. “Morocco has been the most consistent performer in the region over the past two decades,” he says.
In a febrile region, this slow but steady approach increasingly looks like a winning strategy. If policymakers can maintain their commitment to reform, Morocco could yet emerge as one of MENA’s most prosperous, as well as progressive, economies.