The Moorish Wanderer

Moroccan Elections for the Clueless Vol.9

Someone noted I give Bank Al Maghrib figures too much credit; but the truth is, they are the ones setting interest rates, and they are the ones holding the chips when it comes to foreign reserves, banking regulation and all things monetary. And when HCP datasets are adjunct to the whole thing, detailed analysis paints a pretty accurate picture, one, it seems, political parties (partisan or others) do not take into account when they launch their “Grand Designs” and other commitments. Ambition is good for political projects, but it should not come to the expenses of reality.

Plus Bank Al Maghrib Governor is truly independent of the elected executive and legislative branches -since he is appointed by Royal Dahir– so yes, BAM (and HCP’s) projections are credible and will tie the next government’s hands. In growth, public debt, inflation and unemployment, manifestos will have to adjust to these realities; some of them already did not, and I do hope the next batch of announcements will be a little bit more realistic on their economic promises.

Potential Growth will not go beyond 5% on average

This is a fact. And that level of growth determines a whole lot of other variables: expected government receipts and employment are a few real variables that government can more or less influence during their tenure. And so, a 5% (average and relatively stable) growth till 2016 means GDP will stand at 1.03 Trillion dirhams (so congratulations for the next government who will preside over passing a symbolic landmark) Since HCP projects an average demographic growth of 1.02% over the period, the projected GNI per capita will rise from MAD 19,700 to MAD 24,900 in 2016.

(relatively) modest figures political parties would do well to consider theirs, too.

Projected growth has a direct impact on government receipts; unfortunately for the spendthrift manifestos, if they do not pledge specific and far-reaching fiscal reforms, their net gain in terms of fiscal receipts will not go beyond 2Bn a year.

But let us go back to the earlier point: the statement “potential growth will not go beyond 5% on average” finds its basis on past performances: even in the best days of post-structural adjustment program, the domestic economy has not broken through 6% in any 3-years period since 1998. And in a troubled world economy, I would find it extremely difficult to believe that any party, including PJD, would bring this economy to a sustained 6% and above growth over their tenure. Plus it would be a sure sign of maturity to work with the Bank’s numbers and instead pledge to stabilize and spread growth instead.

Government Policy will have to deal with public debt first

This has huge repercussions on government anticipated receipts, the size of its balance sheet budget, and subsequently on any policy they might be set on pursuing; So manifestos should integrate these facts in their growth projections, because in all candour, high growth leads to high expectations in terms of receipts (thus triggering an inflation of earmarked projects) and when the promised growth does not show up, they will have to settle for less, or even cut back on many of these programs.

And it is not like there is room for manoeuvre: the projection assumes a strong de-leveraging in public debt, and bring down the public deficit to acceptable levels (around 3% following the same projections) in fact, government budget policy will have to find a way to reduce its net public borrowing from 28Bn to 21Bn until 2016. And unless the next coalition is ready to face a hike in main interest rates, they will have, one way or the other, to reduce the domestic debt ratio from 38.2% to an average of 36%, an annual de-leverage of 2Bn to achieve such a target.

The only getaway remains to look credible in cutting spendings, so as to attract enough foreign borrowings to make up partially for the shortfall. The risk of an interest rates hike is always looming: because Bank Al Maghrib pledges to maintain Dirham currency value at an announced pegged level, it will hike up interest rates whenever it considers it necessary to maintain its currency reserves. That means the cost of debt (whether public or private) will go up, and that usually hurts an economy, considering that our economy performs -at the moment- below its potential growth level.

And there goes the classical trade-off of government budget: cutting spendings to pay back the debt, or pay for all the tax cuts and incentives, the programs and investment political parties have promised in their manifestos. With IMF breathing heavily on their neck, rest assured our elected (and non-elected) officials will make the right and fair choices for our economy.

Observe Real Increases vs Nominal Increases

When a party like USFP promises to double GNI per Capita over 5 years or a decade by promising a certain growth rate, they often seem to skip the next crucial word: “in real terms”. And that may be due to a certain confusion on the effect of inflation on their pledges, USFP or otherwise. And I use the  opportunity to explain how things do not look the same.

When a manifesto claims it will increase, say, minimum wage by a certain percentage, it does not state the nature of such increase. Equivalently, when a pledge is made to maintain a certain level of growth, it does not specify whether it is a nominal growth, or real growth. Before I go on, I should perhaps specify that the potential growth rate of 5% is in real terms i.e. that no inflation is embedded in it, so there is no issue of discrepancies in terms of real income and real growth gains.

In order to make sense of inflation and its link to nominal rate, just think of it as a discount rate:

(up to a marginal term that goes to zero when both values are small enough)

And so, when inflation grows higher, the benefits of nominal growth grow smaller than expected; so unless the same manifesto nails down their own target inflation rate, these numbers should be considered very carefully with healthy scepticism.

I don’t have time for the projected number of job creation, but that will most certainly be the subject of my next piece on electoral manifestos.

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