The Moorish Wanderer

Towards a New “Corporate Morocco”

The thing one needs to know about Corporate Morocco is that there are good companies and bad companies; at first sight, there is little difference between them: all of them create output and wealth, most of them create jobs -or at least provide facilities for jobs- but ultimately, the “moral” judgement -or in a agnostic setting, “social judgement”- lies in the distribution of profit (or in accountancy terms, EBITA) the post is not going to be about the evils of crony monopolies, but rather a general description of what companies in Morocco are up to, if they can indeed perform in similar proportions in a strict environment of rule of law and impartial regulatory bodies (in contrast with the very predatory, very concentrated and quite corrupt present state of affairs)

I suspect many left-leaning people in Morocco still view corporations as the source of all evil. In fairness, the prejudice held against corporations is not entirely unjustified – history taught us that much; But then again comes back the paradox many liberals and radicals in Morocco are wading through when it comes to the whole paradigm of government action vs individual/collective rights. It seems even the most vanguard thinker does not imagine improving the lives of fellow Moroccan citizens without the constant nudge of governmental intervention, even though the record on state intervention’s part is not that glorious (and USFP people sure illustrated the case in 1997).

What, Makhzen is going to disappear when progressive people are going to be in charge? Empowering individuals and communities surely contributes to bring it down; A heavily activist state, even when pushing for left-leaning project, could be just as bad as the old one. But coming back to corporate issues: though regulations are not precisely anti-business, it is the general framework within which laws are enacted, plus large businesses have always enjoyed close relationship with the equally high circles of power. In most countries, this is true indeed; But in democratic countries with a genuinely independent judiciary and impartial executive bodies, it is inconceivable that such an incredible leverage would be at the disposal of both a financial and executive power.Breaking down the Makhzen is equally a matter of weakening central government as well as big business. My claim here is that promoting small business and growth-potential companies is actually the smart thing to move, and that our pale imitation of Korea and its Cheabol model is, so far, a failure, and benefits only a few nucleus of influential people.

Also, it is high time the fight against big business was clarified so as not to give the impression liberals and radicals are anti-business, and that the way to expand the economy, create jobs and improve standards of living is though smaller, more innovative and more engaged in involving its employees in the productive activity and creating output.

The graph compares some indexes on Moroccan businesses. Since 2008, the national economy took a hit following the shock wave of the credit crunch. Though the broad macroeconomic variables held forth, the economic resilience, as it turned out, was not that strong in face of negative shocks. The pick up trend recorded early 2009 does not make up for the losses, and it has proven to be very volatile for most large-cap indexes. By contrast, the small-cap index did better and made up 92% of an all-times high in 5 years. A shrewd investor entering early 2009 would have made, so far, a gross 37.5% profit over small cap Moroccan companies (or a net profit of at least 35%).

They would have broken even at best (or make an average loss of 14%) with other indexes encompassing larger companies (supposedly with stronger fundamentals) The index analysis provides plenty of insights on the limitations of Moroccan capitalism: here are large companies whose share value is going down for the last three years, and yet manage to squeeze out enough cash and distribute it to its wealthy shareholders. The policy of accumulating earnings and invest them in tangible assets to expand companies’ capacities so as to accelerate recovery, it seems, is not the order of business of (big) Corporate Morocco.

In addition to the  small caps out-performing the larger ones, it is worth mentioning the robust growth they have been enjoying, especially when compared to the bumpy ups-and-downs of other indexes; But let us start off with an overview of what goes up and what goes down;

Even though dividends recorded a daily average of 8.9% decrease, the 3-years net period yielded a robust 5% (BVC)

The standard indexes to gauge how well companies are doing in the Moroccan economy are those used for the Casablanca Stock Exchange BVC. The MASI (Moroccan All Shares Index) and MADEX (Moroccan Most Active Shares Index) provide a usually comprehensive picture of the whole thing. Since early September 2008, the MASI has been losing so far 18% of its value, a daily average decrease of 2%, as of late August 2011. The volatility did not help, too: a 7% relative dispersion over the last 3 years only complicates further BVC’s poor showing and compromises hopes of recovery. These observations equally apply to the MADEX as well.

And yet, distributed dividends perform extraordinarily well; When considering the MASI Gross and Net returns differential, the distributed dividends on the considered period increased 5%. 2008 was a grim year for both BVC and the distributed dividends index-although MASI did worse- but dividends recovered next year with a respectable 8.65% per annum increase, and then 33.82% in 2010 (which resulted in a total of effective distributed dividend of approximately MAD 20.63Bn from potential MAD 30Bn reserves)

Big companies prefer, even under stringent economic conjecture, distribute their dividends, even when the price of their shares are down and have difficulty picking up. The dividend strategy could very well be a gesture of appeasement towards its shareholders, but it does not, on the longer term, benefit them, nor does it benefit the domestic economy.

Other indexes tell the same story: the FTSE Morocco index, considered a more comprehensive an index (compared to MASI/MADEX) provides very similar results on how well corporations are doing;  As a matter of fact, the FTSE index is even more pessimistic starting from July 2009, as it lost a third of its value over the period September 2008 – August 2011. That discrepancy between MASI and FTSE can be explained by the more stringent set of criterion applied by the company.

FTSE Morocco lost 31.44% of its value over three years, MASI 18% (Bloomberg)

To be included in the Index, a stock must pass free float and liquidity criteria.
5.1 Free Float
        a) A security that has a free float of less than or equal to 5% will be ineligible for the Index.
        b) A security that has a free float greater than 5% but less than or equal to 15% will be eligible for the Index providing the security’s full market capitalisation (before the application of any investability weight) is greater than or equal to 1% of the full market capitalisation of universe at periodic review.
The actual free float will be rounded up to the next highest whole percentage number.” (page 7)

And this reflect the ‘desirability’ of company shares. As a matter of fact, it now safe to argue that the dividend policy is subject to no other objective but to distribute the highest possible levels of dividends, a complete contradiction with the so-called “national champions’ strategy.

What if an alternative strategy was considered instead? There is no systematic evidence large companies provide an emerging economy with the leverage needed to promote exports or bring hard currency to the domestic economic circuit; Couldn’t smaller companies do Morocco’s bidding just as well? When compared to regular indexes, the small cap index not only beats them on recovery and returns over the last three years, but it has a robust growth compared to large and mid-capitalizations: over the last three years, gross returns recorded levels varying between 22% and 29% and starting from April 2010, growth as been consistent, in contrast with the large-cap indexes.

Growth-Small caps index systematically beat down mainstream,large cap-focused indexes over short and medium term. (Bloomberg)

The point is, and contrary to the theory that smaller companies cannot stand global competition, growth industry in Morocco provided good returns, further emboldened by the flexible structure of its capital. It could be indeed just a phase, and it could well be expected that these companies would eventually slow down their growth; but over a longer period of time (the longest available being 5 years) the small caps index still beats down with a 12.25% 5-years return, while MASI performs a -4.3% returns.

A reasonable case can be raised on whether the index analogy holds: after all, the index composition tends to fluctuate, and it has its shortcomings. After all, MASI and other indexes do not represent the overall showing of the domestic economy; But this goes beyond it, or rather, goes into the specifics of private sector contribution to growth. With no excessive generalization, the ingredient of good and stable growth for Morocco are investment (both public and private) and now as it turn out large corporations actually harm growth, smaller, more innovative and high growth-led industries.The political implications for shifting away from big corporation is that the financial war chest of Makhzen will dry up, and with it, its power and hold over all aspects of political, economic and social life will fade away in favour of a more open, democratic and equitable society.

If these can be cooperatives as well, My crypto-communism would be achieved. In the mean-time, let’s buy us some MSCI Morocco Small Caps, it earns good money.

Middle Of the Road: Morocco and the Rest of The World

The great thing about growth that it sometimes give the illusion of development. in Morocco’s case, it serves well the mantra of “Morocco is Changing”: things are no longer the same. Things are improving; slowly, yes, but improving nonetheless. As a matter of fact, and save for the hardened nihilist, there is little to discuss over the occurring “change”, meaning that on absolute terms, we are improving standards of living and structural investments are being carried out. The real debate is over whether it is “too little too late” and “not enough” on the one hand, and “sureness of touch” and “prudence” on the other; Between a thrust for more rapid change, and the contentment with the current pace of change.

My claim here is to prove, with a set of figures, that Morocco is behind the global trend of growth in income, wealth, productivity and other indicators, and perhaps even so relative to comparable countries and synthetic benchmarks. Along other pieces of evidence, we might as well conclude that since we are going to slowly, there must be something wrong, and considering the discrepancies with comparable countries, that is imputable to some sort of cost, a cost to development, so to speak, that might be multifarious, perhaps mainly institutional. But that, of course, remains to be proven. In any case, the evidence is there to prove that even if we are increasing wealth per capita -among other indicators- we are either slightly behind, or the increasing process is not full mastered; too much ‘noise’ in the economy’s progression hinders that very progress.

The proposed methodology, without a significant loss of generality, considers Moroccan economic indicators with respect to synthetic indexes, the World Index and various “Morocco counterparts” Indexes – as provided by the World Bank Database (the World Index for instance, is going to be a much-used benchmark)

The one basis point advantage to Morocco did not make the difference

Morocco vs the World: Respective countries are given weights commensurate to their GDPs across time so as to obtain the World index. These are.We then consider 1980 as a base year – a 30 years time scale can be considered to be long enough so as to deliver meaningful results. We then run these weights on the following constant variables:

– GDP Per Capita: in 1980, Moroccan GDP made up for 0.17% of World GDP– in 2010, it was only 0.14%, even though Moroccan GDP grew on average 3.8%, while global average growth, on the other hand, was 2.86%. So over the last three decades, Morocco grew 1 basis point a little bit above the whole world, and yet manages to grow smaller in relative size… It has to do with a higher growth volatility, which tends to have a negative impact on the cumulative benefits of growth (and development, if some extrapolation might be allowed here) the stated policy of growth as a mean of development, officially endorsed by the government (as well as the IMF and Morocco’s significant partners) seems to overlook the other, equally essential feature for this to succeed: stability in growth.

The graph shows the high volatility that prevents consolidating cumulative output – for the record, world growth volatility (i.e. standard deviation) amounted to 1.41 over the considered period, while Morocco’s was much larger -4.6- which means, among others, that Morocco experienced more recessions (or negative growth)

Because the economy is unable to stabilize its dynamics across time, we end up with a lower relative GDP, but also, lagging behind wealth creation as well: Morocco almost tripled its GDP per capita between 1980 and 2010, but that is not enough, since global wealth almost quadrupled in the meantime, thus rendering the one-point advantage in average growth pointless.

Morocco GDP conditioned by its agricultural output.

All is not gloomy however: the strategic choice of agriculture, made very early on, pays indeed: when compared to the global trend, Moroccan agricultural output per worker is way above, both in average returns and computed trends; Then again, the global trend is less volatile, but previous observations on GDP do not apply in agricultural output. It is worth pointing out however, the very strong correlation between Agricultural and total GDP shapes up the Moroccan economy’s growth (by contrast, there is little correlation worldwide) and there is evidence that agricultural GDP, whether through its direct contribution to economic growth, or with its influence over macroeconomic variables, tends to condition growth overall.

The discrepancy between Morocco’s growth and the world’s, in effect, can be accounted for by measuring agricultural volatility; Though the choice of this particular economic activity is subject to debate, even this stated policy failed in delivering consistent results; A policy designed to make sure Moroccan agriculture strong, efficient, or, in short, aimed at insuring Morocco’s self-sufficiency, but fails to sustain stable levels of output, fails to fulfil itself as well.

Gross Capital Formation 1980-2009

These odd occurrences are not restricted to agriculture or GDP growth; indeed, on investment, Morocco does better than the rest of the world, yet it does not sustain its commitment to expand output; Indeed, there again volatility in investment spendings is higher than the global average, which squanders the advantage of “doing better”. The indicators, for all their shortcomings (after all, GDP does not capture other items,on which Morocco might be performing exceptionally well…) do deliver a message of inconsistent growth; the structural policies -the strategic choices made by the highest authorities- should address the pressing problem of volatility, and promote stable policies, instead of engaging in bombastic projects.

Morocco vs selected benchmarks: the same applies to Morocco compared to selected benchmarks; First off, Middle-income countries tend to do better compared to Morocco’s performances; Overall, Morocco does better than MENA countries in terms of GDP per capita, even in terms of stability; but if it is indeed the case, that advantage is small enough to doubt any significant gains over our neighbours: after all, a 20-basis points advantage over MENA countries conveys the same message: Morocco increased its GDP per capita 2.90 times,  MENA 2.70, it is, for those who like to denigrate Algeria for instance, a pyrrhic victory indeed.

The good news are rather short: for Morocco was comparable enough to Midde-income countries in the 1990s, but then again, right from 2002, the existing gap grew wider, and Morocco lost its bet to become a Middle-income country. And there is indeed a link between the failure to catch up with these countries (among others, Jordan, Tunisia, Turkey, Cuba(!) Iran, Algeria and Romania) and the irregularity with which the domestic economy grew. And if we were to link that further to the potential GDP (and the failure for the economy to stick with its trend) then priorities in terms of development need to be reversed: high spendings on infrastructure (the “Grand Designs“) are all very well, but as far as the official documentation goes, there is no particular anticipation of long-term implications; Will an additional highway insure a robust basis-point growth, or won’t it? Would these investments insure a stable growth and stable economy?

Morocco versus comparable benchmarks: does well, but loses the catchup bet early 2002.

Since Morocco is indeed freed from the downsides (if there were any of those) of short-lived political governments, those in charge are, in effect, responsible for the recorded volatility over the last 30 years, and the failure to catch-up with Middle-income countries in the early 2000s. Political power does come with economic responsibility, the least of which is to grant decent (and stable) standards of living to all Moroccans, and not just the privileged few.

Reform or Radical Change: a False Debate

The following post is a personal account of a pleasant late evening meeting organized by Cap Démocratie Maroc (Capdema) society, a debate in the lines of the theme “Reformism or Breakthrough change?

Before I go on, I should perhaps specify a declared interest, as a (senior) member of that society. Although this is not necessarily a sponsored post, it is merely the expression of my sentiment over what has been said during the first hour and half. As always with that kind of debated abstract concepts, the conclusion -if there was to be any- would be ambivalent: in essence, the real question looming ahead was: do we need reforms in Morocco, or is it radical change we are seeking? The various remarks and mano-a-mano discussions do suggest that it is, above all, a matter of perception. And perception, indeed, already framed the terms of the debate.

The idea of holding such a debate originated from a previous epistolary discussion between Capdema President, Younes Benmoumen, and a young Annahj top activist, Abdellatif Zeroual -a member of a panel held during Capdema’s Summer University– the former has a self-proclaimed reformist streak, while the other is living up to his party’s revolutionary past, and acts as a herald of crypto-communism, Maoism style (yes, they still exist) while he lambasts reformists for being too timid. Anyway, that discussion, for all the important principles and issues it raised, is, to put it politely, a boring one. But then again, it seems not, many young people joined in a week ago to discuss the issue.

Now that the backdrops of the debate has been delineated, let us go back to the terms themselves. It was framed, not out of malice, but because of, essentially, the prevailing sentiment things are going too slow. But then again, that is the polymorphous feature of Feb20 movement: there are too many, if not contradictory tendencies within, and from what I have heard on behalf of prominent Feb20 activists (Omar Radi, for one) the immediate agenda for the movement is to accommodate these groups and make them work with each others. Not very ambitious, and at the same time a necessary preliminary step not to be taken lightly.

V. Lenin, President of Government in Morocco?

I was actually disappointed by Radi’s analysis of what’s reformism, and what is not. The youthful demeanour of many Feb20 belies some old-fashioned approach to political analysis: an analogy with Russia circa 1905, or the split in the Russian Social-Democratic Party earlier (1902) was, in my opinion a bit over the top and far-fetched, while it betrayed a very anachronistic way of thinking. I can understand the common features between the timid reforms we have had and the Czar‘s decision to re-establish a Duma a century ago, but that’s about it. Plus that analysis suffers from what Karl Popper referred to as “The Poverty of Historicism“: Human history is a succession of single event. Popper’s criticism does not contradict the existence of a historical trend, though, nor does it conflict with the possibility of iterative events.

I believe this is to be the focal point of the bias: because there is a systematic definition with respect to historical events in other countries, we end up forgetting that Morocco has a much lower threshold for these grievances (political or others) and so, any demands climbing above the mainstream/average set of demands will be construed as radical and subversive. And the peculiar thing is to find Annahj activists labelling their PSU and PADS comrades as “soft on change”, even though they are, to many other fellow Moroccans, the spearhead of radicalism. It does not matter to be overtly republican, or to support parliamentary monarchy, both numbers are rabid radicals.

The other misconception around the described duality evolves within the rapport a young activist might have with history. There is need to thread carefully in these territories, but then again, when there is a lack of historical knowledge, inexperienced activists (and would-be politicians) tend to consider themselves as White Knights and the founder of true activism.

The Royal Grand Helmsman. Er...

That claim to be the one and only renewing power in the field has been overused: Istiqlal pushed for a one party- one monarch state; Allal El Fassi famously said: “God has united this great nation under one King, Mohamed V, and one party, Istiqlal”. In its first convention, UNFP defined itself as a lot more than a mere partisan organization engaging in petty party political. It defined itself as a movement, instead. Same rethoric can be found in 1970s radical left, the moderate (PJD) and radical(Al Adl) islamists. The rhetoric of breakthrough thinking and brand-new renewal has been overused, indeed, even by the Makhzen regime too: haven’t we celebrated, just a couple of days ago, the “Revolution of King and People”? scores of progressive discourse have been plagiarized by PR officials. A 4-centuries-old monarchy manages to capture that discourse to its own use, and successfully manages to convince many citizens that it is standing at the vanguard of change.

And so, the rhetoric is not the problem. The content, however, is critical to that idea of reform/radical change. Some interesting ideas have been tossed around: Agrarian reform, regulations over mineral resources, taxation, etc… but that was considered to be “basic reforms”, i.e. that’s how radical change starts. Well, to many, many people out there, it is the thin end of the wedge, not because it is too radical, but because of that lower threshold of attitude toward reform.

I did not attend the full debate, although I left at the point when a bearded gentlemen tried a nasty Ad Hominem attack, implying chain-smokers (and there were many of those around) cannot look after commonwealth, whereas they are destroying their own health. I guess some dog-eats-dog politics won’t die away…

My assessment is very optimistic: save for some rusty ideological background, practicality prevails, and while the rhetoric still needs to be renewed and beefed-up, the idea of change is there. The kind of political regime ranks way behind the real needs of Moroccan households and their future.

600,000 Beamte Und Ein Befehl

Let us consider one particular aspect of the now stated policy of the Finance Ministry, i.e. its commitment to “all budget entities have been requested to economize 10 percent of their budget allocations for some non-essential current expenditure items”. Now, either ministerial departments will cut 10% of their non essential expenses – in which case total savings will amount, at best, to a few hundred millions- or, all departmental bodies will have to cut 10% of their total current expenditure, with cuts justified as such. This scenario means a package of MAD 22 Bn cuts uniformly distributed across ministries, a bad policy, government-wise, since the largest (and most important) departments will be hit harder: Education, Health and Law & Order. 600,000 public servants are therefore held at gunpoint by that one order: “cut 10%”.

The caring government

The cuts are scheduled to target current expenditure, which means civil service pay-wage, purchases of hardware (non-investment hardware) and other current expenses like electricity bills and rent for instance. But let us not be deluded on that point: current expenses are mainly made up of pay-wage, and depending on ministries, these can make up to 94% of total current expenses (Education) but each department has its own ratio, and a non-commensurable cut across departments will inevitably cause great harm to those employing large staff. Whether on believes in small government in Morocco or not, there will be few dissenting voices regarding the reduction of teachers and police force members, just to achieve MAD 4,1Bn savings.

Of course, clerical and non-essential staff could be laid off, though this means a renewed struggle with “Ghost civil servants“, a fight long lost even before it has begun. So this not a cost-killing operation, but a genuine austerity plan: the blind plan, the size of cuts and the timing, all these elements point out to a difficult 2012 Budget bill and years of near-stagnation ahead. But let us first consider the impact of that 10% cut on human resources, indeed, 600,000 civil servants (from local and central services) will no doubt see their pay frozen, or cut. And contrary to the Intilaka program enacted in 2006, 39,000 departures are not going to be enough to balance the books (as a matter of fact, it makes up only 3/4 of expected savings on wages).

Now, a 10% cut on the 6 largest departments -Education, Interior, Health, Justice, Finances and Equipment departments account for 89,6% of total workforce, means that some 51,800 positions will have to be economized one way or the other. Unless each department manages to strike a deal with unions to cut wages some MAD 7,000 per annum per civil servant -that saves some MAD 4.2 Bn in salaries, i.e. two-thirds of targeted costs. But then again, this modus operandi assumes Unions and government will be reasonable in their negotiations to freeze pay over the next couple of years, but that is very unlikely, given the sad history of horse-trading between both parties. The other alternative is to exhort civil servants to retire well ahead before the 65 years-old limit, thus minimizing payroll. The remaining third alternative, and unless things get very desperate, might not be considered: in short, make people redundant with limited or no pay.

Early retirement is a good policy: regulations specify that any civil servant willing to retire early will receive a reduced part of their wage, until they reach 65. Now, considering that a large chunk of workforce is 50-ish years old, the 15 years gap can be used to reach the average 7,000 annual pay cut target. But the point is, these retired schoolteachers, policemen and attorneys will not be working for the public sector any more, thus inflicting great damage upon public service, a damage it could do without. What is worse, these cuts/early retirement cannot, yet again, be uniformly distributed. The trouble is, large-staffed department will bear the brunt of cuts not because they are the ones with the largest bureaucracies, but because it is the nature of their operations: you need to take on more teachers to keep teacher/pupils ratio low, healthcare officers and workers to reach similar ratios, more policemen to insure neighbourhoods are quiet… the error of an indiscriminate budget cut is that it overlooks such details, and end up hurting essential, front-line services.

Quadruple whammy (sectors make up for 3/4 of job losses)

Could things be  done some other way? it seems not. cutting wages accounts for a third of overall planned cuts. Other than that, departments will need to cancel orders on hardware. There is no way only secondary expenses will be cut; eventually essential services will be on the ministry’s sights. Under the assumption of uniform distribution of total pay wage per department, teachers and Education staff, for instance, receive MAD 11,000 a month -not an unreasonable mean, considering the ageing structure of the teachers’ corps. Healthcare workers are slightly better off, with an average monthly wage of MAD 12,000. Staff from the interior, finally, receive 6,000 monthly on average. Hardly high-income earners indeed.

Now, in his briefing before the Cabinet, minister Mezouar:

a mis l’accent sur la nécessité de préserver les acquis relatifs aux équilibres macroéconomiques et de garantir les conditions de poursuite de l’élan de développement que connaît le pays.

and that means, the stated policy of his budget cut is not to harm public service. That also means, he needs to be more specific about the 10% cut, and exempt departments from what is a sure blow to the standards of their services to Moroccan users. If the ministry is serious about putting together a stimulus package – especially in these trying economic times- then it should consider carefully the budget cuts it is planning, for fear it might take the country to recession, rather than stabilizing macroeconomic balances.

Budget cuts are not pure evil: it is a given that government debt is too large, and its foreign-held, short-term maturity weighs a great deal on the dwindling foreign reserves. Cutting expenses -as well as raising receipts- is the way to go. But instead of targeting blindly departments, the government needs to put into practise its pledge to engage in “structural reforms”, i.e. to end up exemption and fiscal niches that benefit only to the wealthiest.

the VAT and Income Tax reforms need, in effect, to be seriously considered in that spirit. As for expenses,  the Audit Court has pointed out numerous dysfunctional items within the public sector and that saves up capital and expenses over the years. Then, dysfunctional payroll regulations can be addressed as well.

But I digress. The minister obviously knows his job better than I do.

Budget: Tightening Of the Screw

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco by Zouhair ABH on August 17, 2011

About a week ago, Morocco received it’s Article IV report from the IMF. Though the gist of it does not shed great concerns about Morocco’s economy, but it has doubts over the government’s fiscal responsibility; given the political creed of our Finance Minister, an austerity package is likely to be bundled together and sent up to parliament. Instead of going for structural reforms, budget cuts are preferred to deal with a deeper problem than just a temporary imbalance in receipts and expenses.

I'm Lovin' it ©

But then again, with an official timetable for general elections on November 5th, Finance Minister Salaheddine Mezouar is not worried about the next half a decade, or even the decade laying ahead: he managed to land that $ 1.2 Billion Euro-bond deal June last year, but he does not have to answer for the subsequent coupons, or whether that precious hard currency stock is well spent. He might not return as minister after all, and wasn’t elected in the first place, so why would he answer to anyone if the appointing power does not hold him to account? But that is petty politics, His legacy, the unsoundness of many decisions theoretically under his watch will be, for the better or the worse (and I am sadly betting on the latter) is going to be more than a burden on the future generations, a potential danger indeed.

But first off, let us consider what IMF analysts had in store for Morocco; the report published on August 11th stated:

“Morocco has successfully met major challenges in the past two years. Thanks to sound macroeconomic policy and political reforms, Morocco was well-equipped to address the 2009 international crisis and to respond to the social unrest which has emerged in many countries in the Middle East and North Africa (MENA) region since early 2011. In this challenging environment, Morocco has performed well economically and has seen its social indicators improve”.

And there is evidence to buttress that claim, even though it was mainly a ping-back on strengthening domestic consumption, not something the economy usually relies on, and that barely averted disaster, considering how low our exports sunk in during the early quarters of 2009. Because domestic consumption sustained growth early 2009, social indicators improved, with of course a help from that raise in public servants’ pay wage. The report goes on:

“…driven by the strong performance in the manufacturing sector, nonagricultural GDP grew by 4.5 % in 2010 offsetting the contraction in the primary sector. […] Average inflation in 2010 remained at the very moderate level of 1 percent. In 2011, a good agricultural year and the fact that prices of certain foodstuffs and petroleum products held steady despite rising international prices, are expected to help limit the increase in the average inflation to around 1½ percent. […] Morocco is expected to continue recording sound economic performance. Growth in nonagricultural GDP is expected to reach about 5 percent and to contribute to overall GDP growth, which is forecasted to attain 4½-5 percent in 2011″.

But, and that’s where budget policy comes in, the government’s showing on budget management is the challenge. Simply because both the IMF and the goverment are set on pursuing a very simple, almost simplistic policy: create growth. As much as the economy can, in the hope of:

“…achieving a GDP growth rate that will help reduce unemployment and improve living standards, while ensuring medium-term macroeconomic stability. […]”

and that recommendation does seem sound, though it skips the important fact that economic growth only profits marginally to the poorer households.

George Osborne: "Mezouar's plan exceeds my expectations. Jolly good show" (

Same story goes for unemployment, as there is only a weak tie between the former and growth – under assumption of linear correlation, growth does not affect significantly unemployment. As for macroeconomic stability, it is up to the growth’s stability itself. Now, these objectives need to be completed by sound budget policy, and that’s where the packages of pay rise’s and further subsidizations come into effect: because central government is not willing to increase receipts (for instance, by ending the moratorium on farmers’ tax exemption) they are more likely to cut departmental expenditure, and that, it seems, is the IMF opinion as well:

Revenue efforts were intensified and higher than budgeted revenue were collected at end June 2011 –mainly from indirect taxes. These efforts should continue in the second half of the year and should enhance revenue collection by 1 percent of GDP compared to the 2011 budget. Consequently, total revenues are expected to remain almost unchanged compared to 2010, at around 25 percent of GDP. […] Given the importance of demonstrating the government’s determination to maintain fiscal sustainability, the mission believes that there is little room for further measures to increase government expenditure”.

The government believes there is little room, because it has tied its hands over income taxes and exemptions on various sectors. So while I welcome constructive criticism over what I believe to be sound economic policies, “ideological” and “divisive” do apply more to Mr Mezouar’s decision to cut 10% spendings across departments than my own set of proposal regarding fiscal reforms and the institution of a wealth tax. Contrary to what the press seems to hint to, the 10% cut is not an IMF recommendation, it is a stated governmental policy that has been agreed upon and sanctioned by IMF experts:

“On the expenditure side, all budget entities have been requested to economize 10 percent of their budget allocations for some nonessential current expenditure items”.

in relative terms to the budget, front-line services will be hard-hit by 10% cut.

The budget entities are to economize these 10% at the Finance Ministry’s request and initiative, not to the IMF; That is a clever way of  distancing oneself from an unpopular policy decision;

But that goes beyond pwtty politics. For all the expected communication that “these cuts will not affect the quality of public services, nor would they affect essential public sector services”, under the veneer of equanimity and moderation, a uniform 10% cut across ministerial departments means, among others, the following:

– MAD 4,148,818,260 cut from the Education department. That means the following expenses need to be scrapped:

♣ Annual central investment allowance: MAD 1,401,550,905.

♣ Four major Regional Academies need to cancel their orders for hardware and supplies allowances: Souss-Massa, Marrakesh-Hauz, Grand-Casablanca and Rabat-Sale. A total of MAD 1,584,029,581 of tables, chairs, electric cables, the works pupils will not benefit from next year.

♣ The paychecks of about 10,000 teachers and high-school professors frozen for a year.

– MAD 1,089,555,900 cut from Health means one hospital out of four will have to cancel its investment program, or lose 1/6 of the total expenditure on hardware, equipment and other items essential to keep hospitals going.

MAD 723,124,820 cut from Police & Law enforcement allowances: it means half a billion will be cut from 60,000 policemen and policewomen pay-checks, a measure that is going to affect one law enforcement member out of 6 will be virtually out of job or with a freeze on pay-wage.

– MAD 134,357,600 cut from the Penitential administration, even though the exisiting resources are no match to alleviate the crumbling standards inside overcrowded Moroccan jails. Half of the administration’s investment plan will need to be cancelled.

These few instances -and they can be observed with other items on the budget law- show how difficult, almost impossible to perform a 10% cut across governmental departments by targeting “non-essential current expenditure”. These cuts will inevitably hit essential, front-line jobs, planned investments and essential hardware supplies purchases. As a matter of fact, a 10% cut in current expenditure across departments means a MAD 22.65 Bn package cut, or a MAD 39.95 Bn total expenses package. It would be fun to find out how ministries and autonomous agencies will manage to save up 20 Billion in “non-essential” expenditure.

While it is understood compensation fund reform will be more of a long-run project, there is a need to address these tax loopholes the same minister created in 2007 by decreasing the marginal tax threshold from 42% to 38%, or by caving in and refusing to end tax moratorium over agricultural income, paid dividend at BVC exchange, or indeed the creation of a wealth tax over high-income earners. A moderate 60% tax on millionaires can easily bridge the gap of 10% cuts, a break that allows to think in pondered terms structural reforms, like the 37 to 1 ratio in public sector pay-wage, or the imbalance structure of tax receipts.

That 10% cut is likely to damage the economy more than anything else: a 22 Bn budget cut means 2.7% of GDP. Considering the economic importance of government, and considering the contribution of each item in the domestic and foreign demand in GDP growth, that budget cut of 10% is likely to drag down public GDP contribution from 2% to 0.9%, a contribution in line with the 2003-2008 period, with the noticeable difference that the 2009-2011 years are crisis period, and government intervention is vital to keep the economy going. The Mezouar Doctrine, if indeed it turns out to be on, is a bet that smaller government expenditure will whip up the private sector. That is an audacious bet that, so far, has proven to be a losing one in a couple of countries (like the United Kingdom) not because the cuts are economically bad, but because uniform, indiscriminate cuts in public services will harm domestic demand, including that corporate output the minister seems so keen to promote. (There is a small recovery on CFG25 and FTSE Morocco indexes, but there is no evidence that was a reaction to the budget cut announcement)

Are we really considering this? The public sector is already a shambles, so there is no need to cut funding so abruptly and make it worse. Are we really going down the path of “it’s not real until it hurts”? Really?