FLASH REPORT : 9th EU-Morocco Economic Dialogue
9th EU-Morocco Economic Dialogue
Brussels, 8 July 2011
The 9th EU-Morocco Economic Dialogue took place in Brussels on 8 July 2011. The Moroccan delegation included officials from the Ministry of Economy and Finance, the Central Bank of Morocco, and the Moroccan mission to the European Union based in Brussels. On the EU side, the dialogue included Commission staff from DGs ECFIN, TRADE, MARKT and ENTR, and EEAS staff.
The main issues of discussion were the outlook for the Moroccan economy including the impact of MENA regional unrest, medium-term fiscal consolidation including efforts to streamline the system of food and fuel subsidies, and current challenges of fiscal and monetary policy in Morocco and the EU in the exit phase of the global economic crisis.
Session 1: Macroeconomic developments
The first session focused on macroeconomic developments in Morocco and the EU. The Moroccan Ministry of Economics and Finance (MoEF) gave a presentation on recent macroeconomic developments in Morocco and DG ECFIN gave an overview of economic developments in the EU.
Morocco’s economy showed strong resilience to the global economic crisis in 2009 but GDP growth slipped back from 4.9% in 2009 to 3.7% in 2010. The MoEF indicated that despite the slowdown in GDP growth in 2010 the underlying development of the economy is positive. In particular, non-agricultural GDP is now growing at pre-crisis levels and sectors affected by the global economic crisis have rebounded rapidly. The mining sector expanded rapidly, linked to external demand for phosphates, while there was also solid growth in fisheries, utilities, and tourism. In hand with the revival of secondary and tertiary sectors, investment started to regain momentum in 2010 after a sharp fall in 2009. FDI rose by 28% in 2010. Remittances also rose by 7.8% due to the improving employment market in Europe. The primary sector contracted slightly in 2010. Having expanded rapidly in 2009, following a bumper harvest, the agriculture sector was partially hit by flooding in 2010 which particularly affected fruit crops. The weaker performance of the agricultural sector contributed to a moderation in private consumption growth, as around forty per cent of the workforce are employed in the sector, which accounts for about 15% of GDP.
The current account deficit narrowed to 4.3% of GDP in 2010 from 5.4% of GDP in 2009. Export earnings were boosted by strong demand for raw phosphate and phosphate-based products with signs of further expansion in the sector. The MoEF indicated that inflation declined marginally in 2010 to 0.9% (average, year-on-year) compared to 1% in 2009 as the increase in global commodity prices was absorbed by the food and fuel subsidy scheme. The government also took measures to counter the effect of the ban on wheat exports from Russia by suspending wheat import duties. Central bank reserves were maintained at a comfortable level of around seven months of imports of goods and services.
The fiscal deficit expanded in 2010 to -4.5% of GDP from -2.1% of GDP in 2009 owing to increases in capital expenditure and the negative impact of tax cuts on revenue. The MoEF expects the deficit to contract to -3.5% of GDP in 2011 against a growth assumption of 5%. The MoEF noted that unemployment remained stable at 9.1% in 2010 with a marginal reduction in urban unemployment from 13.8% in 2009 to 13.7%. The MoEF also highlighted a declining trend in the rate of poverty which fell from 14.2% in 2004 to 8.8% in 2008.
Session 2: Public finances
The MoEF (Director of the Budget) gave a presentation on the development of public finances in 2010 and projections for 2011. DG ECFIN gave a presentation on EU public finances including sovereign debt developments and policy responses.
The Moroccan fiscal deficit deteriorated from -2.1% of GDP in 2009 to -4.5% of GDP in 2010. On the revenue side, indirect taxes and customs duties rebounded after having fallen sharply in 2009; while direct taxes decreased reflecting the impact of reductions in tax rates effective from January 2010. On the expenditure side, spending on fuel and food subsidies increased and the government continued to invest strongly in infrastructure, targeting the construction of 150,000 new housing units by 2013. The cost of maintaining the subsidy scheme rose to 3.5% of GDP in 2010, approaching the record high level of 2008 when subsidy spending reached 4.6% of GDP. While subsidy spending rose in 2010, other aspects of expenditure, excluding investment, were reduced in an effort to maintain sustainable public finances. Public debt increased to just above 50% of GDP in 2010, of which around 22% is external public debt.
In September 2010, the government issued the first government bonds on the international market for three years, EUR 1 billion in ten-year Eurobonds, which were oversubscribed and mainly purchased by European and US investors. The MoEF commented that the Eurobonds had been issued to take advantage of lower borrowing costs on the international market. However, no further bonds will be issued in the near future because it is felt that such an issuance may be interpreted as a distress signal by international investors.
The MoEF expects the fiscal deficit to narrow in 2011 to -3.5% of GDP based on strong revenue performance at the start of 2011. The MoEF emphasised that Morocco has no need to go to international markets to finance its debt obligations in 2011. The MoEF’s presentation showed that revenue for May 2011 was 14% higher than in May 2010. On the expenditure side, spending on goods and services and investment was 27% and 16% lower than in May 2010. In contrast, subsidy spending was 85% higher in May 2011 compared to May 2010. Personnel costs rose by just over 7% following pay negotiations in the annual ‘social dialogue’ between the government and public and private sector unions.
The MoEF emphasised that a major priority is to reform the subsidy scheme given its inefficiency and heavy burden on the budget. The MoEF remarked that the current subsidy system mainly benefits the middle-class and they are working with the World Bank to replace it with a programme of direct cash-transfers aimed at poor families, including transfers linked to education, similar to schemes adopted in Latin America. At the moment, a pilot study is being undertaken with the World Bank with a view towards nationwide implementation in future. The MoEF underlined that they are aiming to completely liberalise market pricing for currently subsidised products.
Session 3: Monetary Policy
The Central Bank of Morocco (BAM – Bank Al-Maghrib) gave a presentation on monetary policy focused on the inflation outlook. The ECB gave a presentation on inflation, money and credit developments and monetary policy, including non-standard measures undertaken since the start of the crisis.
The BAM presentation showed that headline inflation was flat in May 2011, year-on-year, due to lower food prices and flat fuel prices, showing the effect of government subsidies. Underlying inflation is running at 1.8%. The BAM were keen to emphasise the inflation has been controlled in Morocco for many years, in contrast to some other countries in the region. With respect to the outlook for inflation, the BAM emphasised that the economic upturn in Morocco’s main trading partners, many of which are now experiencing higher inflation and registering positive output gaps, would create upward pressure. With respect to domestic factors, the BAM noted that industrial capacity utilisation had been picking up since 2009, but still remains below pre-crisis levels and that the non-agriculture output gap has been broadly neutral since 2010. Monetary growth (M1, M3) is still on a declining path while credit growth has increased slightly in 2011. Property prices have also started to rise after falling since 2009. The REER has fallen through 2010 and 2011 mainly due to low inflation.
The BAM has chosen not to tighten monetary policy and has maintained its discount rate at 3.25% since March 2009. The regional crisis has on the whole not made a significant impact on investor confidence in the Moroccan economy. Foreign reserves increased slightly in 2010 remaining at a comfortable level of about 7 months of imports of goods and services and more than the level of external debt. The index of the Casablanca Stock Exchange (CSE) increased by 30% during 2010 but has slipped back 12% since the start of 2011 following the regional unrest.