The Moroccan economy grew healthier in 2014 and is set to improve again this year. Rabat is succeeding in reducing both its fiscal and current account deficits by cutting back on subsidies, a precarious path to tread as it balances the enrichment of state coffers with reforms that could make its people poorer.

Subsidies were introduced in 2000, but, as oil prices rose, so did the subsidy bill – from 2.5 per cent of GDP that year to more than 6.5 per cent in 2012. Then the state began to introduce subsidy reform. By raising retail prices for diesel, gasoline and fuel oil from June 2012, Rabat saved 0.7 per cent of its GDP for the year. Subsidies have been further cut back in a programme completed in January of this year. US ratings agency Fitch Ratings estimates the cost of subsidies will be only 2.4 per cent of GDP in 2015.

Fiscal deficit

This year’s budget has a fiscal deficit objective of 4.3 per cent of GDP, but the authorities plan to reduce this to 3 per cent by 2017, according to the Washington-based IMF. Government debt was 49.2 per cent of GDP last year, higher than the median 41 per cent for other countries also rated BBB by Fitch. The ratings agency expects this will gradually decline to 43 per cent by 2018 if GDP growth remains at 4-5 per cent a year.

The IMF issued an Article IV report on Morocco in January, saying, “Subject to steadfast implementation of reforms, and assuming a continued recovery of external demand, real GDP growth is projected to increase, starting in 2015, and to stabilise over the medium term in the 5-5.5 per cent range.”

In previous years it has fluctuated, from 2.7 per cent in 2012 to 4.4 per cent in 2013 and 2.9 per cent last year. Inflation should remain low, at about 2 per cent.

With economic growth set to remain at a level that can sustain deficit reduction, in July last year the IMF was satisfied enough with Morocco’s progress to provide it with a $5bn line of liquidity. Rabat says it does not plan to draw on these funds except as an insurance against balance of payment issues. In 2011, Qatar, Saudi Arabia and the UAE pledged $5bn in aid between them to Morocco, to be disbursed by 2017.

The Moroccan economy’s Achilles heel is its reliance on Europe for trade and remittances. Although the share of exports that goes to the eurozone dropped from 69 per cent in 2003 to 56 per cent a decade later, according to the IMF, it is still too high for comfort. If Europe’s economic recovery is drawn out, this will hold back Morocco’s development as well.

In 2012, France’s Renault opened a production plant in Tangier. It employs 5,500 people and, combined with an existing plant in Casablanca, brings the carmaker’s Moroccan capacity to 400,000 vehicles a year. Located in a free trade zone, the Tangier plant can export to Europe without paying export duty.

Diversifying income

Although moves like this will exacerbate Morocco’s overreliance on its European neighbours, they also tackle another problem: that of overdependence on the agriculture sector. By expanding existing industries such as tourism, and developing further into new ones including automotive and aeronautics, Rabat can widen its sources of income and its export basket. This will make the economy more stable, and high-tech industries will bring in more revenue and jobs.

In the aeronautics sector, more than 100 firms, centred on the Midpark free zone near Casablanca airport, employ in excess of 8,000 people. The sector has been growing at 15-20 per cent a year, according to the Office des Changes.

Economic growth

GDP growth in 2014 was driven by non-agricultural sectors, which rose 3.6 per cent, says Fitch. The agriculture sector is still growing, though, thanks in part to its ongoing modernisation.

Morocco is on track to achieve its twin goals of reducing its fiscal and current account deficits, and is being supported by international organisations such as the IMF, as well as by GCC governments. Its recovery is fragile, but as long as it has external support it can continue to diversify its economy away from agriculture and away from reliance on the Eurozone. GDP growth should continue at a comfortable rate, but pitfalls such as an economic slump in Europe could still derail this progress.