May 29, 2023

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Morocco’s financial conditions are very favorable

The debt issue is still relevant. For Morocco, under high debt and tight fiscal conditions, the challenge is to ensure a balance between fiscal consolidation and the deployment of social strategy. However, overcoming this impasse and reconciling between macroeconomic objectives and socio-economic objectives is polarizing. Badr Mantri, Economist and Senior Fellow of PCNS explains

Participated in a conference under the theme “Stabilizing and Adjusting Inclusive and Sustainable Policies in the MENA Region: A Moroccan Case Study”. First, how is this project overall?

The entire project is actually a regional study whose objective is to assess credit sustainability in the MENA region. Morocco, Tunisia, Egypt, Sudan, Lebanon and Jordan were selected as the team. It aims to undertake in-depth analyzes of the public financial situation, cross-reference countries’ experiences and look ahead to the coming decade to ultimately highlight key recommendations. A report has been released on the background of the scheme.

This being, What are the main lessons you can learn from it?

Regarding the initial results of the Moroccan case, there are many challenges that oppose the path of fiscal consolidation, but with the rigor that the Moroccan authorities have shown in the past, especially in their budget management. Morocco will embark on an adjustment path in the coming years.
Challenges are internal and external. Internationally, the tightening of international monetary conditions is a key factor that may further constrain the path public finances take. Although Morocco has been relatively successful in exiting the international market, the conditions attached to the latter are very tense – as expected – and reflect a trend – which seems to be the structure of an increase in the cost of financing.

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At the same time, today’s dollar is much more expensive than before, which further complicates the situation and adds a new layer to the difficulty of accessing international financial markets. Domestically, the aftermath of the Covid crisis continues to permeate economic activity and public finances, and to recover from it, significant efforts must be made at multiple levels.

In other words, what should we think in light of this statement?

It must be said that Morocco is well engaged in the strategy of consolidating the welfare state through highly ambitious social programs that will create an economic and social framework conducive to inclusive and sustainable economic growth. In the short term, the challenge for authorities is to ensure this balance between fiscal consolidation and the deployment of social strategy under the constraints of high debt and tight fiscal conditions.

But to overcome this impasse, we think that Morocco is in a polar position to reconcile between macroeconomic objectives, on the one hand, and socio-economic objectives, on the other. The final results of the study, likely to be published next June, will allow more material and material to be shared.

This topic is still a topic in the difficult situation of inflation floating in economic activity. What effect has inflation had on public finances?

In 2022, inflation rebounded surprisingly, reaching an average of 6.6%. Initially driven by external factors, it spread across all sectors and is now firmly entrenched in both market and non-market sectors, with the food sector being the hardest hit. Ironically, this inflationary episode is good news for public finances.

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Through its multiplier effect on the dividend, it boosted the expected increase in the public debt-GDP ratio. It also increased tax revenue. In particular, “ad valorem” taxes are proportional to their values, in this case VAT increased by 15.2% and above all its import components and customs duties, which recorded a record with a variation of 17% compared to 2021.

On the expenditure side of the budget, inflation has had an impact on compensation payments, which are set to double by 2022. However, a good performance in earnings partially offset the 42 billion due to recovery in economic activity and demand. Dirhams were spent as compensation.
Ultimately, the government exceeded expectations in terms of budget performance, with the general deficit rising to 5.1% of GDP in 2022, up from 5.9% expected following the budget law.

What about Treasury financing conditions? How are they affected?

We can say that finance, especially in the domestic market, is the channel through which inflation has hit the treasury hard. In 2022, rates in the Treasury bill market continued to rise after each increase in Banque Al-Maghrib’s key rate.

Although the general fiscal situation was relatively comfortable the previous year, it was not enough to curb this upward trend. Inflation pushed investors’ real returns on Treasury bills into negative territory, and as inflation took hold in the country, the demands of these investors continued to rise.

The government’s almost exclusive recourse to the domestic public debt market also contributed to these tensions in the treasury market, thus weakening interest in government bonds. It is important to note that while LF 2022 has provided an estimate of 72%, the domestic market has absorbed almost 90% of the annual requirements.
These tense financial conditions prompted the central bank to intervene in the secondary market by buying Treasury bills to restore demand and ease tensions in the market.

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However, what are the international financial conditions for Morocco?

The invention is comparatively less serious. Like other emerging economies, Morocco’s sovereign spread has been affected by monetary tightening by major international central banks, requiring an annual average risk premium of around 50% relative to 2021.

Nevertheless, Morocco’s financial conditions are more favorable than those faced by emerging and frontier economies. This was demonstrated by the success of Morocco’s latest fundraising in the international financial market in early March, which managed to obtain a spread well below the average for emerging countries.