The Moorish Wanderer

The Crushing Weight Of The Debt

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco by Zouhair ABH on September 25, 2011

… On future generations.

This statement has no ideological content when it comes to the debt minister Mezouar accumulated throughout his tenure. Or perhaps it does. In any case, Salaheddine Mezouar, a herald of smaller government and other trickle-down economics has failed to live up to his principles: he cut income taxes in 2008 – thus enervating public finances with some MAD 15Bn package gift to the richest households, and yet he obligingly expanded the compensation fund from 25 to 48Bn. He promises the IMF he is going to operate a 10% cut across the budget, but at the same time Makassib trumpets the recruitment of 71,000 civil servants and the increase of minimum wage.

Although Central Bank reserves have stood resilient, national debt goes back to early 1990s level, a period of stationary growth.

Now, it is to this country’s benefit to have conflicting views and heated debates on how to run an economy, but the constant flip-flopping on behalf of the bland finance minister just look ridiculous; as a matter of fact, his hesitancy and the apparent contradiction in his economic and fiscal policy only show that he cares only about his true constituency, one that has appointed him and to whom he is responsible. Not parliament, nor the electors who got his caucus some 68 seats during the last election.

But let us get back to the issue at hand: if not returning to his position, minister Mezouar will leave this country’s public finances in a worse shape than when he took over the finance ministry in 2007: the amount of national debt takes us back to the early 1990s, a time when economic growth barely sustained itself, a time of recession we still are paying for (the low growth observed after ending the structural adjustment program has put a strain on the cumulative wealth per capita, thus leaving us behind other emerging economies) and the taxpayer is likely to be still paying for it: while the efforts to keep the level of overall debt as low as possible are laudable, the package structure, so to speak, does not denote of similar shrewdness in public debt management: the ministry is taking on more debt in smaller instalments,  but fail to consider the implication of rising interest rates, thus making borrowings marginally more expensive, but markedly more expensive than they would have been a couple of years ago.

The consequence is, interest paid on debt service has picked up dramatically in less than two quarters from 12% late 2010 to 28% early 2011. The justification for this increasing reliance on debt is obvious: government policy sought to minimize likelihoods of social unrest, thus expanding subsidies on strategic goods. But then again, there is now a sizeable chunk of the public budget debt-funded, in a way that defies all financial orthodoxy the minister and his government said they were set on standing by.

Paid interest over service shoots up in less than 2 quarters to represent almost 1/3 of debt service

As a matter of fact, it looks as though minister Mezouar yielded to expediency over structural policies, and held forth to the most peripheral items of his politics: a refusal to end tax cuts to top income earners, and at the same time borrow money to keep the compensation fund afloat, both policies which deepen budget deficit and endanger the sustainability of government payroll and investments.

Total expenditure reached MAD 293Bn in 2011 for a MAD 54Bn total borrowing; that’s almost a fourth of expenditure financed by borrowings, where taxes would have done better. The claim here is taxpayers are better off paying stable taxes every year, instead of shouldering the interest on government debt. After all, every one of the 6.65 million households has, on average an outstanding debt of MAD 55,000 and annual instalments of MAD 3,650 including some 860 dirhams of debt. Incidentally, HCP standards considers the median monthly income of MAD 5308 to be a good indicator of Middle Class, and their income roughly equates the weight of debt on their finances, while they have to sustain a 6% annual drain on their gross income. That’s 3 basis points above Bank Al Maghrib main interest rates, 2 basis points above GDP growth and more alarmingly, more than 5 points above GNI growth in 2010. What does it tell about the government’s boasting it has improved standards of living, when its own fiscal and debt policy saddles households with an expensive debt? This is not a question of debt sustainability in terms of volume (after all, the MAD 55,000 stock debt has to be equated with households’ assets instead of annual income) but rather the cost at which this debt is bought, and the strain it puts on individuals’ finances.

National debt means every taxpayer is a collateral to the debt, commensurate to their income and wealth. But, taxation in Morocco is not equitable, nor is it progressive, especially since 2008 with the scrapping of the 42% marginal rate. To 50% of all households, debt on average 11% of their annual gross income, while for the top 10%, it represents less than 2% of their annual income. Again, debt stock and debt service puts a great deal of strain on the finances of the huge majority of Moroccan households: according to their income distribution, the bottom 10% contribution would pay for MAD 6Bn of service debt, while the top 10% contribute only MAD 500 Million. That means a household with an annual income of 21,800 dirhams would pays 9 times more than a household earning 186,000 per annum.

On a more macroeconomic tone, the level of stock debt is alarmingly going high, especially when compared to gross capital formation: sound economic policy suggests to compare total accumulated assets to the stock of debt (foreign and domestic) because it gives a good indicator on whether debt is managed properly. The evidence so far suggests otherwise: over the last two decades, the leverage ratio of total debt over domestic assets has gone down from 4:1 to 2:1. But, in the last two years, climbed 17% and basically wipe out any gains obtained between 2006 and 2010.

a bump of a dozen of bps in less than one year over specific terms is not good news.

The situation isn’t as black as I made out; first because growth is in line with the last 5 years-trend, foreign reserves are not in disarray (and as a matter of fact, we are doing pretty fine with MAD 173.3 Bn of foreign reserves) and debt-to-GDP ratio is at it lowest, certainly much lower than observed figures in the 1980s and early 1990s. But, and this are the early-warning signs of a pending debt crisis (with its cortège of budget cuts, austerity and social unrest) the interest paid on debt is increasing. The gross yield on domestic borrowings has gone up between 2009 and 2010 from 5.10% to 5.25% real yield on 5years treasury bills. Indeed, over longer terms, yield has increased from 2009 and 2010. No significant increases of course, but when considered over the course of only one year, and when these are most important on intermediate and medium terms, this means some policy is needed to address the frantic borrowings, and instead look for revenue enhancement. But then again, this is not minister Mezouar’s creed, he doesn’t believe wealthier individuals should contribute more in times of financial dire straits, or at least close up the obscene loopholes they directly benefit from, up to MAD 7.9Bn in the 2011 budget, that is more than a quarter of all tax cuts as priced in the budget law. So far, the trickle down economics doesn’t serve our government well.

One Response

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  1. Anonyme said, on September 26, 2011 at 16:05

    “thus making borrowings marginally more expensive, but markedly more expensive than they would have been a couple of years ago.”
    You probably meant to say:
    “thus making borrowings marginally more expensive, but markedly more EXTENSIVE than they would have been a couple of years ago.”


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