BKAM Monthly Review: February
I was thinking: Bank Al Maghrib issues a monthly digest on economic conjecture, A good reading I enjoy. Unfortunately, I don’t get the opportunity to share my own thoughts of their findings. Plus it’s going to be more up-to-date than other posts I like to write on economics.
The report is undeniably optimistic about an array of indicators, mainly economic growth (all things considered, it is quite understandable, given the main thrust is simply to produce more and more goods and services to lift us up from poverty) but also the current account and balance of commerce deficits. Growth at Q4 2010 was about 3% (at annual rate). If the Moroccan economy managed an annual 3% over just one-quarter, then forecasts for the remaining quarters, ceteris paribus, are likely to yield some good numbers too. However, when one takes a look at the February 2010 issue, numbers are not so good: There was a growth of 5.2% at that time (compared to 2009) so this is hardly a feat. Worse, the actual growth is 0.5 basis point short. Tiny numbers, but when averages are computed, it amounts to almost one GDP basis point. For an economy that boasted its resilience in times of global crisis and recession, these numbers are not encouraging at all.
There are however, others things one can cheer: current account deficit abated, and –Ô Joy, Ô rapture unforeseen– exports increased more rapidly that imports. In a sense, I begin to understand why the Office des Changes relaxed some of its legislation on hard currency dealings. Indeed, exports increased by 30.8%, while imports expanded only 13.3% (which means Q1 2011 terms of trade are improving, especially when compared on a year-on-year basis) as reported: “Au terme de l’année 2010, le déficit commercial s’est élevé à 151,3 milliards de dirhams, en stabilité par rapport à la même période de l’année précédente, contre une diminution de 11,4% une année auparavant.” But that is mainly due to the jump in price commodities like Phosphates (l’augmentation des exportations résulte notamment de l’accroissement de 96,6% des ventes de phosphates et dérivés.) [p.18] Besides, for the first quarter, the flow of FDIs was higher compared to 2009 the low-ebb, but it actually decreased in 2010 (about a 11.8% decrease).
All in all, the appreciation of terms of trades is not due to volume, but rather to the sky-rocketing commodity prices, especially Phosphates. Other indicators are either stable or in the red. The good news is that the terms of trades (as well as the Exports/Imports ratio) are closing in to the last decade’s average. Again, Phosphate industry was the main item sustaining the 3% GDP growth.
But apart from that, numbers are not really encouraging. Though one should refrain from painting the situation black, it must be pointed out besides that public finances are haemorrhaging compensation expenses (the now-famous government decision to subsidize further strategic commodities), at times of scarce liquidity. On a different issue, the Moroccan government is frantically raising cash to keep itself afloat. Consider the regular communiques published every time the finance ministry raises cash: in the first two months of 2011, 28 interventions were needed (by comparison, 13 adjudications were settled in Q1 2010) It is obvious that on top of difficult financial situation, a further strain of 15 billion can only damage the state of public finances. It is worth mentioning that government GDP growth was almost in line with GDP growth, which means that even this scheduled intervention will not be of great use. Indeed, if government expenditure was to sustain growth, and even though it increased by 3.4%, its net contribution was merely 0.4 basis point, a low figure that proves how inefficient economic stimulus policies are in pushing for higher growth (it is worth mentioning that a 3% growth is well below the decade average, or the potential output).
The digest reports a budget deficit of MAD 30.1 Billion, i.e. about 4% of GDP. As pointed out, the main reason for such deficit is: “Ce résultat reflète une quasi-stabilité des recettes ordinaires, avec une légère reprise des recettes fiscales et une baisse des recettes non fiscales, ainsi que l’accroissement des dépenses, tiré notamment par l’augmentation des charges au titre de la subvention des prix.” It is quite strange that, in times of economic stringency (not necessarily crisis, but quite difficult times) fiscal receipts remained stable. And what is usually referred to as non-fiscal revenues designates to peripheral and accessory receipts (about MAD 12.6 Billion ) a marginal amount compared to the fiscal revenues.
It is also strange to not that, while income tax (corporates and individuals) remained stable or decreased (in terms of income tax, there was a drop of 4.4%, thanks to the tax breaks minister Mezouar introduced for the upper bracket of income-earners) revenues from VAT increased as consumption increased too.
Bearing in mind that domestic consumption saved the day in 2009 in terms of economic growth, it is a rather harsh punishment on households (especially those with higher propensity to consumption, i.e. the less well-off ones), at a time the government is boating about ‘supporting purchasing power’ (basically, taking away what has been given with subsidies). It is even more alarming to note that while current expenditure increased by 12.6% over the last quarter, public investment increased only by a modest 1.6%, which leaves investment with a lower percentage in expenditure budget.
The figures displayed on the report are worrying, not for their levels (although some will sooner or later develop into insoluble problems if not dealt with) but because of their volatility, especially on indicators like inflation.
There is at least on commendable thing about the adjustment program (not necessarily offsetting the painful social and economic downsides of it) and it is the durable taming of inflation in Morocco. And as pointed out: ‘La poursuite de la modération des pressions émanant de la demande […] interne […] et la lenteur de la transmission du renchérissement […] vers les prix domestiques, continuent de maintenir l’inflation globale à un niveau relativement modéré.‘ And core inflation is even lower (an order of magnitude of 0.9% compared to total inflation of 2.2%).
What authorities (monetary or government) failed to tame -or at least contain- is mainly the volatility of a range of products: consumption goods, essentially. one might argue that authorities cannot tame total inflation. And yet, for all the efforts in subsidizing the very products whose volatility is large, it just proves how ineffective this policy proves to be.
On the other hand, volatility is not that important; as the graph shows, it remains well below unstable levels (at best,a maximum of 4%). But again, the levels themselves do not matter, their volatility, the deviation from the annual average is quite disturbing. Under the assumption that the very goods the government subsidizes are the ones with the highest levels of inflation as well as the highest levels of volatility, the deduced outcome can only point out to the inefficiency of such policy. It is also worth mentioning that since the Caisse de Compensation dries up at August, the true indicators of inflation show up for a month or two (the real level of total inflation in august is about 3%) and whatever gains from lower inflation, these are not enough to justify billions paid in subsidy.
This however is not Bank Al Maghrib’s opinion (they hardly venture one on such indicators) but as far as I am concerned, the price paid with a chronic CdC deficit for subsidizing food and fuel is not worth paying, in view of the insufficient results in inflation, purchasing power or simply in income and consumption distribution.