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Morocco’s need to balance populism and inflation

Economic situation in the country is by far more enviable than its neighbours

Gulf News

The political agenda in Morocco has been pretty hectic in the past months. The question of Western Sahara, an historical hot issue for Moroccan foreign affairs is just as topical as ever.

The US recently attempted to expand the UN mandate in the disputed territory to human rights but this received a cold reception from both Morocco and the international community and was eventually cancelled. On the domestic front, the resignation of the coalitionist Istiqlal party from the Islamist driven government has been approved by the King Mohammad VI.

The leading Islamist party PJD — which has a relative majority in the House of Parliament — should be able to find another partner to form a new government and elections could be avoided. The current government is benefiting from a wide popular support despite the fact that it is perceived as inexperienced.

The electorate has predominantly voted for this party and want them to complete its mandate. Unlike other countries in the region such as Tunisia or Egypt, the new Islamic power in place is not a source of division in the society.

On the economic side, Morocco has been able to sustain an enviable growth. The country recorded a 3.2 per cent GDP growth in 2012 following a 5.0 per cent increase in 2011. These results have been achieved in spite of adverse circumstances.

Europe, its largest trading partner, is still struggling in the aftermath of the 2008 crisis. The current account deficit reached a new high in 2012 at 10.1 per cent of GDP despite the fact that key providers of hard currencies such as the hospitality sector and remittances from Moroccans living abroad have been very resilient.

The trade balance remains the weak point of external indicators. On the fiscal side, the government struggles to curb the budget deficit which reached 7.1 per cent of GDP in 2012 following the 6.2 per cent in 2011. Energy and food subsidies are a drain on the budget.

In the face of many hurdles, Morocco has nevertheless been able to maintain its debt at 59 per cent of GDP at the end of 2012 and keep a level of foreign reserves above three months of imports, a critical level for international institutions.

These mitigated indicators have to be put in perspective. Despite the fact the country has been caught by the Arab Spring turmoil, its economic situation is by far more enviable than its neighbours. Morocco’s economy suffered only minor disruptions during the unrest.

International rating agencies have maintained the country its investment grade, the only one left in the South part of the Mediterranean. International investors have also given a vote of confidence. The country raised $2.25 billion on the euro-bond market in the past six months at record low yields and spreads, including a rare 30-year issue.

On the equity side, the recent reclassification by MSCI of the country in Frontier Markets wasn’t either a surprise or a fatality. The index promoter’s decision was motivated by a well-known problem — the lack of liquidity on the Casablanca Stock Exchange.

In 2013, the economy will benefit from a good agricultural year, the harvest having doubled compared to last year and reaching an historic high of 97 million quintals. Although agriculture represents only 15 per cent of GDP on average, the sector employs almost half of the workforce. This year abundant crops will add 2 to 3 per cent in GDP growth.

At the same time it will support the country in saving hard currencies and spread wealth, benefiting all farmers. Moreover, the sector is now a top priority for the government as officials want to reduce crop volatility and develop the agro-industry.

Going forward, the new government has to deal with two painful reforms, pensions and subsidies. While they are both important to the country, the second one has to be tackled first considering the heavy burden it exerts on the public budget.

The current subsidy mechanism targets mainly energy and food and costs the country almost 6 per cent of its GDP on a yearly basis. The government should substitute the current system that benefits the whole population with a new one to target the disadvantaged.

The implementation of such a sensitive project by the administration is a question mark. Over the past 10 years, the average inflation rate was below 2 per cent with a peak of 3.9 per cent in 2008. One should remember that inflation was one of the catalysts for the Arab Spring.

This long-awaited economic reform will require some political courage from the government and they will have to make a choice between their popularity and the interest of the country.

— The writer is portfolio manager at The National Investor.