Sunday, July 13, 2008

Economic Growth Outlook

The king, Mohammed VI is facing numerous challenges such as poverty, unemployment, inflation and concerns arising from non inclusion of the Parti de la justice et du développement (PJD) in the government, despite it holding the second-largest number of seats in parliament. The king is well aware that he and his government will largely be judged on their success in dealing with social and economic exclusion. To this end, the government will continue to ramp up social spending, including on slum clearance and upgrading rural infrastructure. However, given limited resources, an inefficient bureaucracy and widespread nepotism and corruption, addressing the shortcomings of the country's infrastructure will prove difficult.

The government has set itself targets of achieving 6% real GDP growth, creating 250,000 new jobs and building 150,000 new housing units a year until 2013. These targets look overambitious, particularly given the vulnerability of GDP growth to shocks that affect agricultural output. However, they indicate that the government will prioritise efforts to attract more investment and reduce unemployment and poverty. Priority sectors for foreign direct investment are textiles, electronic components, offshoring services and tourism.

Another key policy issue will be reforming the agricultural sector, under a plan called "Maroc Vert", which aims to diversify crops and develop agricultural co-operatives. Details of the plan are to be outlined later this year. There is a great need for investment to upgrade the agricultural sector and diversify it away from dependence on rain-fed crops.

At present the agriculture sector is highly vulnerable to drought, and productivity varies greatly between regions. Output is around ten times higher in irrigated areas than in fields that depend solely on rainfall. Greater domestic use of fertilisers, which Morocco exports in large quantities, would also boost productivity. However, there are concerns that the implementation of the new plan could be held back by the same bureaucratic constraints that weakened the impact of previous agricultural reforms.

The Economist Intelligence Unit estimates that the central government budget recorded a deficit (excluding privatisation revenue) of 1.9% of GDP in 2007, based on preliminary Ministry of Finance figures that show that very strong growth in tax revenue offset a rise in spending. The 2008 budget projects that the deficit will widen to 3.4% of GDP, but we expect that it will slightly over­shoot this target as the government's growth assumption appears optimistic.

Although fiscal revenue is expected to continue to rise on the back of increasing foreign investment and better tax collection, it will not climb as quickly as spending, given higher bills for security (up by 29%), social welfare (17.5%), subsidies (which have nearly doubled) and infrastructure. The government will continue to find it politically difficult to cut total subsidy spending while international food and fuel prices remain very high. It will also face pressure from trade unions to increase wages. In this context, the deficit is unlikely to narrow as a proportion of GDP in 2009, despite continued GDP growth.

The main monetary policy objective of Bank al-Maghrib (the central bank) is to maintain currency stability, by keeping inflation under control and managing the exchange rate. However, the authorities are taking gradual steps to lessen currency controls, with the aim of introducing a fully floating currency at an unspecified date beyond the outlook period.

Local liquidity will remain strong, boosted by workers' remittances from abroad and by tourism revenue, creating some inflationary pressure. Nonetheless, the authorities will be reluctant to raise interest rates in case this leads to speculative pressure on the currency, particularly as the government's inflation forecast remains low.

Despite the global economic downturn, the outlook for Morocco's economic growth remains strong, though the government has revised its growth forecast slightly downwards and anticipates inflation to exceed previous expectations.

On June 3, Moroccan finance minister Salaheddine Mezouar announced that the government's growth forecast had been trimmed from 6.8% to 6.2%. Despite the downward revision, the expected level of growth "still remains quite an achievement considering the circumstances", Mezouar told the international press.

The circumstances to which Mezouar referred are 2007's sluggish growth rate and the worsening global economic outlook. Last year, on the back of a very poor agricultural harvest, Morocco's growth rate was only 2.2%, and a rebound to 6.2% is arguably remarkable given the fact that Morocco's major export markets in Western Europe are experiencing slower growth while still facing the possibility of interest rate hikes to stave off inflationary pressures.

Morocco's Mediterranean neighbours and key trading partners Spain and Italy have been particularly badly affected by the slowdown, with the construction boom in the former rapidly going off the boil, and the latter suffering from worrying stagnation. Nonetheless, Morocco's overall exports continue to grow: by 13% in the first five months of this year, significantly above the forecast 7.5%.

Despite the downward revision in the growth forecast, the government has upped the inflation outlook - Mezouar expects the rate to pick up to between 2.7% and 2.9%, as opposed to an original forecast of 2%.

Given the expected rate of growth and mounting global inflation, a rate of less than 3% would be fairly impressive, and further burnish the Moroccan government's reputation for fiscal probity. Worldwide, and particularly in growing economies such as Morocco's, inflation has been driven up by soaring oil prices - topping $130 a barrel by some measures - and the climbing cost of food that has been driven by climatic changes, shifting consumption trends in emerging markets and the replacement of food cropping by biofuel-focused cultivation in parts of North America and Europe. Construction material inflation, caused in part by a building boom in China, has put further upward pressure on prices.

As agriculture accounts for a large proportion of the Moroccan economy, a considerably better harvest this year is likely to both boost growth and have a disinflationary effect. Another not inconsiderable disinflationary factor will be grants totalling $800m from Saudi Arabia and the United Arab Emirates intended to counteract the effects of the galloping oil price. In the first quarter of this year, Morocco imported $1.1bn worth of crude oil, an increase of more than two thirds on the same period of 2007, which can be accounted for only in part by the falling value of the dollar.

The largesse of Morocco's Arab partners, who play an increasingly important role in the economies of North Africa, will help maintain the budget position. Despite rising fuel import costs and the effects of a public sector wage hike negotiated with occasionally restive trade unions earlier this year, the government has kept its budget deficit forecast at 3%. Mezouar said that increased tax receipts will offset the additional costs, and that therefore the government would not need to resort to borrowing money from abroad to meet its spending plans. "Receipts of value-added tax and corporate tax are up 20%," the minister was quoted as saying. "We are in a situation which will allow us to fulfil all our commitments in terms of both investment and financing. Resorting to international markets is not called for," he added.

There is great potential for exports to Morocco's fast-growing neighbours, while imports from them would enhance competition on the Moroccan market to the benefit of consumers. A gentle thaw is taking place, but for the time being, inter-Maghreb trade remains a missing piece in the Moroccan economic jigsaw.

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