Moroccan Inflation Rises Again In July

Moroccan consumer price inflation rose to a year-on-year 5.1 percent in July from 4.7 percent in June, official figures showed on Monday. The annual inflation rate was 5.4 percent in May. Food costs, inflated by soaring world commodity prices, were up by 9.1 percent compared with July last year, according to data from the High Planning Commission. On a monthly basis, consumer prices were up 0.2 percent in July versus June as transportation costs grew 5.6 percent, although there was a 0.1 percent decline in food prices.

Analysis


Morocco's annual inflation rate rose to 5.1% in July, from 4.7% in June--this is a marked acceleration from average inflation of just 2% over 2007 as a whole. Food prices continued to expand more quickly than the headline rate of inflation, up by 9.1% year on year in July after gaining by 8.7% in June. Meanwhile, transport price inflation accelerated to 3.2%, more than double the 1.3% increase seen over the two preceding months, largely because of the government's decision to allow the state-controlled prices for several types of fuel to rise with effect from July 1st. The price of petrol has risen by Dh1 (US$0.14) to Dh11.25/litre, with the subsidy amount maintained at Dh3.4/litre. The price of diesel has also risen by Dh1/litre, and that for industrial fuel has increased by Dh500/tonne. However, the government has maintained the prices of regular diesel and butane gas, which account for the majority of demand from households and from the transport sector, and has stressed that it is still spending heavily on subsidies in order to limit the impact of higher oil prices on the average Moroccan's cost of living. Meanwhile, housing costs rose by just 0.7% for a fourth consecutive month--which seems low in light of anecdotal evidence--while the rate of inflation showed little change across the remaining components. Inflation will be substantially higher in urban centres and tourist resorts than in the less well-off rural areas.

The fuel price increases in July will have ramifications for other categories of inflation, as transport costs will rise and retailers will seek to pass these on to consumers. The Economist Intelligence Unit is forecasting that the official rate of inflation will average 5% this year, a marked rise from the very low official rate reported in 2007, before easing slightly to 4.7% in 2009, assuming that world oil and food prices decline next year after this year's surge.

In theory, the government is committed to cutting subsidies in the medium term yet action on this front appears unlikely in the near future, given the country's extensive poverty and the potential for unrest over the rising cost of living (as was seen in the riots earlier this year in the port town of Sidi Ifni). Morocco's subsidy bill contributes to a structural budget deficit, but with tax revenue rising on the back of strong inflows of foreign direct investment, the deficit narrowed last year despite the rising cost of the subsidies. This year Morocco has been promised grants from Saudi Arabia and the UAE, which have pledged US$500m and US$300m respectively to help Morocco cope with the effects of rising food prices. Rather than targeting inflation, 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. 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. Indeed, the central bank left its policy rate unchanged at 3.25% at its June monetary policy meeting, despite several consecutive months of rising inflation.

The government expects the economy to grow by 6.8 percent this year from 2.7 percent last year and at an average of 6.3 percent annually over the next four years.