Austerity Measures Ahead… But No One Cares
I’ve enjoyed a good laugh when I found this Bloomberg TV interview with Minister Salaheddine Mezouar.
I might have been saying some mean things about his politics, either as a minister or as a coalition leader, but to be actually invited to an interview with one of the biggest financial data providers and answer questions in French, s’il-vous-plaît, has been the killer: the next Head Of Government-to-be proves to be a shallow person. He was presented as a new kind of technocrat-politician, a corporate manager of sorts; he turned out to lack intellectual depth as well as wordiness.
But these are only a trifle when compared to the hidden truth about future austerity measures and budget adjustments recommended in IMF Article IV findings. To bring back deficit within the 3% GDP threshold is going to take some tough fiscal consolidation measures; not because Morocco’s economy is in a bad shape, but because the outgoing government, and the likely next government do not have what it takes in terms of political courage to venture into deep structural fiscal reforms, including the decision to put an end to a host of fiscal exonerations, breaks, preferential regimes and moratoriums.
The successive political parties in charge of treasury and finance departments always referred back to the King as the source of all executive last-resort decisions, but now the new constitution no longer provides them with this panacea of a cover; whether the King still holds these extra-constitutional powers or no longer does is only relevant to the point that partisan politicians cannot invoke it now: they have repeated, time and again, before and during the referendum campaign that the new constitution was scheduled a long time before Feb20 activists took to the streets, and that it was in His Majesty’s wish to relinquish as much power to the political personnel to manage this country and preside over its destiny.
It is understood therefore that those manifestos each party -or coalition of parties– is releasing, are what they are set on applying once they take office. I suggest citizens interested enough in the affairs of the State should rise up to the challenge and question those pledges; Starting with the Minister’s coalition.
The Alliance For Democracy commits to a lot of spending. Those programs they have priced and evaluated will load up the next couple of Budget Bills with an average of at least 50Bn additional spendings per annum. He has, in short, committed public finances to a net cumulative spending spree of 205Bn over the 6 years. Supposedly these programs are there to make Moroccans feel better, and there is nothing wrong with it. The trouble is, the same Finance Minister has received communication from IMF that he needs to bring back budget deficit to 3% GDP. The draft budget bill predicts a deficit of 22.5Bn, in line with the 3% threshold, but the bill has provisioned for 40Bn, too low a figure, considering the constant intervention to replenish the fund mid-year. And it is even more worrying that the fund starts off with 10Bn more than what was observed in the past couple of years; It means we should be expecting an actual cost of 65-70Bn for compensation, if no reforms (or cuts) are implemented in the mean-time.
But there is two things left out by the profligate M. Mezouar: where will he get the money, and how will he accommodate his spending commitments with the promise to IMF to bring down deficit to 3% GDP? He will have to cut between 20 and 30Bn in spendings to do so, and he is not telling the Moroccan public about it. But why cut spendings? Why not continue borrowing, or better still, let the deficit run beyond 3%? Somehow, that commitment to increase spending at least 50Bn on average over 6 years is in line with the Alliance’s own promised growth rate; there is a betting on a quasi-linear growth in fiscal receipts to match the expenditure increase, approximately 6%. But this recent Radio Interview with Minister Nizar Baraka shows that in the high circles, that 6% growth (let alon 7 and 8% promised by PJD and USFP manifestos) is a charade:
Le ministre istiqlalien chargé des affaires économiques et générales propose un taux de croissance annuel moyen de 5% ainsi que la création de 150 000 emplois par an. Des objectifs bien en-deçà des promesses de l’Istiqlal formulées à la veille des législatives de 2007.[…]
Radio Aswat: La CGEM souhaite un taux de croissance annuel moyen de 6,5 % de croissance, qu’en pensez-vous ?
Nizar Baraka : Cette étude n’est pas du tout réaliste. C’est un modèle économique qu’ils ont souhaité transposé au Maroc. En voulant savoir combien de taux de croissance nous faut-il réaliser pour résorber le chômage. Ce sont des mathématique et moi je suis mathématicien, mais il ne faut pas oublier le contexte international.
First off, Moroccan officials and policy-makers have prided themselves to follow IMF instructions to the letter ever since the Structural Adjustment Program of 1983. Back then, Debt to GDP ratio was 110%, the war down South was taking its toll, large economies were in recession, and the Moroccan households were reaping the rewards of a decade of budget mismanagement. Save for the nameless Sahara war, we are in the process of replicating the 1970s-1980s scenario not before long.The finance ministry and Bank Al Maghrib have been scrupulously deflating the debt, battling away inflation -to the price of a recession during the 1990s and relatively high unemployment- so as to fit orthodox financial targets. And it did: Morocco has halved its CPI inflation rate from 7% in the early 1990s, to 1% in 2010. It has done so much that at every occasion, IMF officials have always praised our officials for their commitment to stabilizing and balancing macro-economic indicators:
Thanks to several years of sound macroeconomic policies and political reforms, Morocco was well equipped to address the 2008 international crisis and to respond to the social demands that have emerged during the Arab Spring.
Executive Directors commended the Moroccan authorities for the progress made over the past two years in macroeconomic stabilization and in liberalizing the economy, despite the economic and social impact of the recurring droughts.
So there is little reason for the next government -who will almost certainly return with some of the incumbent government officials- to deviate from their policy; if IMF asks for a deficit contained within 3%, they will. So this means that either these pledges for infrastructure, scholarships for students, apprenticeships for labour market insertion and the like promised in Mezouar’s manifesto might not be funded and dropped altogether; or some or all of these policies will be implemented but at the cost of borrowing money on domestic and international markets. Let’s have some fun with it, shall we?
– Scenario 1: Borrow ’till the next election
We are now standing at more than 400Bn public debt stock. That’s almost 54% of GDP. It seems Moncef Belkhayat (bless him) has it in good confidence that as long as we don’t get anywhere near 60% GDP, we are doing just fine. Not so much, no. I suspect The Minister has been skipping economics classes at ISCAE business school (presumably to smoke a cigarette and sketch a business plan to make money out of it in the process)
While the government can borrow as many billions as it possibly can on domestic markets with no immediate danger on its solvency, it drains liquidity away from other economic actors. This means inflation will be pushing beyond the 2% limit observed by Bank Al Maghrib, perhaps even beyond IMF projections of 2.7%; and at the current state of things, a real increase in main interest rates will cripple the economy more than anything else. Not only will borrowing be more expensive for the government to fund its projects, but a host of households will see their mortgages go up and their consumer’s loans repayments turning more and more expensive. At this point, scenario 2 takes place, with the government slashing its spendings and putting a freeze on the compensation fund, civil service pay-wage and many other items.
– Scenario 2: Freeze and stop spending
Smarter officials and ministers will anticipate all of this and abide by BAM and IMF projections on growth, inflation and government debt. A 5% growth with a 2% inflation rate call for government spending freeze, a lull that can be used to reform the tax code, discuss the opportunity of re-introducing the Agricultural Tax and reform the Compensation Fund. But the evidence so far suggests none of this will happen, save for the spending freeze.A 10% cut means 30Bn will have to be saved somewhere, and all departmental hands are at the pump.
But then, these austerity measures do not find favours with electorate; in fact, they are likely to get irate demonstrators, unemployed, poor working class individuals to take to the streets and riot violently, as they have in 1984. This scenario recalls the context in which the late King Hassan II castigated violently the demonstrators.
(On the plus side, the austerity package will bring debt to GDP ration below 50%, it will bring budget deficit below 3%, and inflation (core inflation to be precise) will be in line with target rates).
I am expecting Istiqlal Party to release their own manifesto to make a final judgement on how the political personnel is handling the economic issues; but so far, they have been -PJD included- grossly optimistic about figures they know well will not fit their spending commitments.