Morocco sets benchmark for subsidy reform

20 August 2014

Morocco has set the standard for subsidy reform in North Africa while its plans to increase investment in industry will build a foundation for economic growth and employment

Morocco’s subsidy reform programme is setting a template for other North African countries to follow, as the government juggles the immediate needs of the people and the urgent requirement to bring spending under control.

While other states continue to be plagued by political volatility, frequent changes to government and social unrest, Morocco has enjoyed a relatively high degree of stability, enabling it push forward with its subsidy agenda.

Reforms so far have helped the country reduce its current account and central government deficit, and the country is on target to hit analysts’ projections for a further reduction by the end of the year.

In recognition of the country’s efforts to reform subsidies, the Washington-based IMF renewed its $5bn precautionary and liquidity line in late July for a further 24 months. The line was first signed in 2012.

The extension of the line, which will only be drawn upon in emergency situations, has reassured investors and analysts that Morocco’s economic policy is moving in the right direction.

Economic achievements

Following the mass protests in 2011, the Moroccan government quickly responded with a step up in public spending including increased subsidies for energy and food, as well as wage hikes.

This helped to ensure the country avoided the violent turn of events seen elsewhere in the region and which remain unresolved today.

Yet, the efforts to appease a disgruntled population came at a price, and coupled with the rising cost of oil, Morocco’s subsidy bill soared, peaking at 6.6 per cent of GDP in 2012. This compares with 3.6 per cent in 2010.

As current spending increased, eventually the government was forced to rethink its strategy and it began reforming its subsidy programme in 2013, starting with the indexation of domestic administered prices of diesel, gasoline and fuel to world prices. To prevent social unrest the government maintained subsidies on wheat, sugar and cooking gas used by the poorer sections of society.

The reforms were not without controversy, however, with the secular Istiqlal party to resigning in July last year from Morocco’s coalition government, led by Islamist Justice and Development Party (PJD), in protest at the cuts it said were being pushed through too quickly. At the beginning of this year, the government announced it would end subsidies for gasoline and fuel oil, and would significantly reduce subsidies for diesel.

Pragmatic approach

The wider population has generally accepted the subsidy cuts without too much protest, although in April this year, three trade unions organised protests against them as well as plans to raise the retirement age to 62 then eventually to 65.

“The government took a very pragmatic approach to subsidy reform and I think that was key to the success of the reform because it is such a politically and socially sensitive topic,” says Arnaud Louis, a London-based director for sovereigns at US ratings agency Fitch Ratings. “Compared with other countries in the region, they have been quite successful. Even though it has been gradual, it has had a real impact on the deficit,” he said.

Although, to date, the government has avoided cutting subsidies on vital foodstuffs, it is likely it will have to widen the scope of its reforms.

“In future we will see the reform extended to a larger basket of subsidised products, which would include food. However, we are not yet there,” says Louis.

By the end of 2013, Morocco’s subsidy bill had fallen to 4.7 per cent of GDP

Central government deficit also shrank, reaching 5.4 per cent of GDP, compared with 7.3 per cent in 2012. Fitch forecasts a further decline to 4.3 per cent by 2015, as the subsidy burden on the government lessens.

Subsidy and transfer expenditures for the first six months of 2014 fell by approximately 47 per cent, or MD13.3bn ($1.6bn), compared with the same period last year, according to research provided by US rating agency Moody’s Investors Services, which is more bullish on the pace of subsidy cuts.

Elisa Parisi-Capone, assistant vice-president, analyst sovereign risk group at Moody’s, says Morocco is on target to hit a reduced bill of MD35bn by the end of the year, lessening the cost of subsidies to 3.8 per cent of GDP.

Social spending

Opposition parties continue to use the subsidy issue to slam the PJD-led government, criticising it for its close links to the IMF programme.

Opinion polls taken earlier this year, however, suggest that 55 per cent were satisfied with the government, according to local press.

This is perhaps due to Rabat’s efforts to make subsidy cuts more palatable by ramping up social spending.

“The retrenchment in subsidy expenditures has allowed the government to expand public investment expenditures significantly in the first half of 2014 compared with the same period last year,” says Parisi-Capone.

In July, the government also brought in a 10 per cent increase in the minimum wage for both public and private sectors, starting with a 5 per cent increase from July 2014, and a further 5 per cent increase in 2014. This was implemented partly as a means to appease disgruntled trade unions that oppose subsidy reforms.

Although such policies come at a cost to the government’s budget, given that the wage bill is already fairly high at 11.3 per cent of GDP at the end of 2013, they are seen as a vital means of ensuring long-term subsidy reform is accepted by the population, rather than being a catalyst for unrest.

Morocco’s reforms won the praise of IMF managing director, Christine Lagarde, following a visit to Morocco in May.

“I commended the authorities for the important steps taken recently to reduce economic unbalances, including the courageous subsidy reform and the extension of social programmes to support the poorest,” she said.

Government debt

General government debt remains high, due to increased social spending over recent years. It is forecast to hit 64.6 per cent of GDP this year and peak in 2015 at 67 per cent of GDP. This compares with debt being approximately 50 per cent of GDP in 2010.

Morocco’s external debt share has increased in recent years due to a decline in foreign exchange levels in 2011 and 2012 and increased borrowing requirements to 11.6 per cent of GDP in 2013.

The government continues to mainly fund itself with domestic debt, which represents around 76.6 per cent of the total.

However, the government has also been tapping international markets for financing, raising a €1bn ($1.3bn) international bond in June 2014. The securing of this funding reflects investor confidence in the direction Morocco’s fiscal policy is taking.

Export industries

To bolster long-term finances and attract much-needed foreign investment, Morocco has also focused on developing its export-oriented industries.

In April, the government launched its 2014-20 National Industrial Growth Plan, which aims to increase the GDP contribution of industry from 14 per cent in 2013 to 23 per cent by 2020. The programme has a budget of MD20bn.

The strategy is also intended to create much-needed jobs. Unemployment in Morocco is running at 9 per cent, with youth unemployment far higher.

Targeted industries include the automotive, aerospace and electronics industries, and the programme will also see the setting up of a public industrial investment fund.

The automotive industry in Morocco has been flourishing even before the launch of this programme with the opening of a factory by France’s Renault in Tangier, in early 2012. The plant had an initial capacity of 170,000 vehicles a year and is to be expanded to 400,000 by 2016.

Foreign direct investment

Morocco expects its new strategy to encourage even more foreign direct investment (FDI) in the coming years.

FDI inflows doubled to 4.5 per cent of GDP in 2013 from 2009 levels, with much of the investment flowing in from a recovering Europe and being invested mainly in the industrial sector, followed by real estate and tourism. Tourist numbers exceeded 10 million for the first time in Morocco in 2013 as global economies recovered.

Although Western Europe remains Morocco’s main trading market, accounting for 80 per cent of foreign tourism and about 50 per cent of exports, ties are also being forged with regional powers, such as those in the Gulf.

Earlier this year, UAE telecoms operator Etisalat concluded a $5.7bn deal to acquire a 53 per cent stake in Maroc Telecom.

At the end of 2013, Abu Dhabi National Energy Company (Taqa) completed the initial public offering of its Moroccan unit Jorf Lasfar Energy Company. The subsidiary provides 38 per cent of Morocco’s electricity.

GCC sovereign wealth funds are also backing tourism and transport projects in Morocco.

Earlier this year, Moroccan investment fund Wessal Capital, which is supported by several Gulf sovereign wealth funds, including the UAE’s Aabar; Kuwait’s Al-Ajial, Qatar Holding and the Saudi Arabian Public Investment Fund along with the Moroccan Fund for Tourism Development, launched a €775m tourism project in the capital, Rabat. The project, which involves the construction of various cultural attractions including museums and theatres, aims to attract additional foreign private investors.

This project is Wessal’s second in Morocco having announced in April a €530m investment in the Casa-Port project to renovate Casablanca’s port.

The schemes are intended to “showcase” the investment prospects in Morocco, Tarik Senhaji, CEO of the Moroccan Fund for Tourism Development and board member of Wessal Capital, tells MEED.

He adds that the project will set a precedent for Morocco in terms of the use of public-private partnership (PPP) investment structures. Although the country has previously used PPP structures in its electricity sector, Senhaji says Wessal Capital’s approach is more “innovative”.

“Last year, a PPP law was passed and what we need now more than legislation is… practice, we need international investors to discover this market,” Senhaji adds.

Springboard into Africa

Morocco is also keen to attract investors to not just invest in Morocco, but also consider it as a hub for doing business in the rest of sub-Saharan Africa.

The country’s ambition to be a gateway to the continent is evident in its efforts to improve its transport infrastructure. Tangier-Med port in the north of the country is the largest port in the Mediterranean and is set to be further expanded, in addition to the upgrade of Casablanca port.

Casablanca Finance City, which launched in 2010, aims to attract regional and international financial institutions to use Casablanca as a means of accessing African markets. The development has drawn approximately 50 companies to-date from Europe, the US, the Gulf and other parts of Africa.

Building on stability

Morocco is not without its problems. Like its neighbours, it has acutely high unemployment levels. It is also geographically placed in an increasingly unstable region, meaning the threat of terrorism and thriving jihadist cells is never far away.

The government’s finances are highly vulnerable to fluctuations in oil price and are overexposed to volatility in Western European markets.

But so far it has maintained stability, a quality lacking in most of its neighbours, making it an attractive prospect for investors. Other governments could be well advised to look to Morocco as a template for their own policy decisions.

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