The Moorish Wanderer

Fiscal Policy? What Fiscal Policy?

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Tiny bit of Politics by Zouhair ABH on July 3, 2011

Sometimes, reading the budget from top to bottom does not tell much about the policy the government of the day is set on pursuing. So other documents come in handy, like the fiscal expenses report attached to the budget law; It shows how articulate government policy is in its effort to stir the economic variables deemed to be important in a certain direction, so as to achieve a certain policy objective. It might be interesting to have a look to these figures, because it is a cause of concern for me: it seems the Finance Ministry cannot make up their mind on the proper policies, especially on fiscal policies, and end up every year squeezing its receipts, and not in a good way.

Caring Government.

Assuming that the broad ideological objective is to relieve Moroccan taxpayers (households and businesses alike) from the burden of excessive taxation, and that such policy is bound to increase welfare among the communities and the economy as whole, the least Finance Minister Salahedine Mezouar and his staff can do is to make sure there would be some sort of equitable effect across classes and sources of revenues. Though the supply-side economics can be beneficial -up to a point- these policies have unfortunately been damaging, rather than healing income dispersion and discrepancies. It seems budget policy -at least since 2003- is to hope for high growth figures, so as to reduce income inequality. The 2007 tax cuts are an even more obvious faith in an economic growth robust and long enough so as to reduce poverty and income dispersion, indeed, HCP study “La croissance est-elle pro-pauvres au Maroc ?” (2009) reports:

“Il en résulte un indice de croissance pro-pauvres inférieur à l’unité (0,930) et un taux de croissance d’équivalent pauvreté de 44,7% inférieur, de son côté, au taux de croissance observé (48,0%). Rappelons que lorsque l’indice de croissance pro-pauvres est compris entre 0 et 1, les riches bénéficient plus que proportionnellement de la croissance que les pauvres. C’est exactement ce qui s’est passé entre 1985 et 2007″. (p.2)

Suffice to say that what holds for extreme levels of poverty is particularly true when it comes to the difficulty, for the real middle class in Morocco (and the lower, working classes too) to benefit this growth. That supply-side economics of his makes the 2002 and 2007 governments more pro-Business than ever, but with no obvious positive effects on the vast majority of ordinary Moroccans.

The 2011 Budget bill has passed a deficit of MAD 12.13 Bn, a rather modest figure when compared to earlier deficits (but already topped by the unexpected increases in expenses, mainly on subsidies and wages) though it hides some policy decisions that do not seem to be very sound, or if they were, are quite ideological and socially very divisive. Among others, there were MAD 4.2 Bn income tax cuts in 2010 (and an effective MAD 7.6 Bn) only half of which benefited to middle and lower-class households; These cuts are not economically beneficial to the majority, especially when those economic sectors that benefit from these tax cuts (whether on income tax or others) are not productive: over the last couple of years, certain fiscal measures have been taken to boost real estate in Morocco. In 2010, real estate tax deduction amounted to MAD 4.438 Bn that is 15% of all the MAD 29.8 Bn tax cuts plan in 2010 (scheduled for the 2011 Budget) The 39 measures that enabled these cuts benefited only up to MAD 1.3 Bn in social housing (while other cuts benefit to the well-off) while the rest goes in the pockets of property and real estate developers, large housing owners and corporations. The problem does not reside in these categories benefiting from these tax cuts, the real problem is the hypocrisy surrounding the social housing project. This is but one instance of the amateurish at best -if not outright carelessness on the government’s behalf- in assessing the effects of implemented policies.

Jobs for the boys. An annual MAD 10Bn goes into rich pockets

On average from 2003 to 2011, tax cuts and loopholes amounted to MAD 21.75 Bn; Real Estate and Agriculture get an average share of 30% of these measures, while education gets at most MAD 100 Million while the financial sector receives on average a Billion a year. The trend of this concentrated distribution increases markedly with 2007.

As for Agriculture, it is understood the sector employs a large workforce -thus requiring a particular social policy designed to insure the balances in this potentially volatile part of Morocco are left untouched (a left-wing government would try to improve them in favour of the peasants against the cambradores) governments since 2006 have been cutting taxes on agriculture at increasingly higher paces, from a MAD 1Bn exemption in 2003 to MAD 4 Bn.

But then again, doesn’t this square with the idea that government taxation should not fall on this fragile sector? Of course it does, unless these measures were actually helping the affluent farmers, those who can afford dozens of thousands acres of land, mechanized techniques and large markets, both abroad and domestically. As for the small peasant with a few dozens of acres, these tax breaks mean nothing. On the other hand, tax breaks can also be applied, so as to improve the domestic purchasing power (at least, that’s the official argument behind these cuts) it seems that the Finance Ministry has fully assimilated the supply-side economics, since their tax policy also believes in a trickle-down economy, whereby a decrease in costs (and in this particular case, VAT taxes) can generate a lower price for consumers. While this argument might hold -when buttressed with some serious econometric computations, we in Morocco do not observe this, and the starkest example is that of subsidies: indeed, edible oil, sugar, milk and other strategic commodities are subsidised, and yet manufacturing companies are recording high levels of profit, and prices are not always low.

Consider the 32 measures targeting Agriculture and Fishery sectors:

Exonération à l’intérieur et à l’importation d’engins et filets de pêche destinés aux professionnels de la pêche maritime. Art.92 (I-3°);123

Exonération à l’intérieur et à l’importation des engrais. Art.92 (I-4°);123

Exonération à l’intérieur et à l’importation de matériels destinés à usage exclusivement agricole. Art.92(I- 5°);123

Exonération des ventes aux compagnies de navigation, aux pêcheurs professionnels et aux armateurs de la pêche de produits destinés à être incorporés dans les bâtiments de mer. Art.92(I-34°)

Application du taux réduit de 7% avec droit à déduction sur les aliments destinés à l’alimentation du bétail et des animaux de basse-cour. Art.99(1°); 121

Exonération à l’importation des bateaux de tout tonnage servant à la pêche maritime, les engins et filets de pêche, les rogues de morues et appâts destinés aux bateaux pêcheurs ainsi que les appareils aéronautiques destinés aux armateurs et aux professionnels de la pêche en haute mer et utilisés exclusivement pour le repérage des bancs de poissons. Art.123(9°)

Exonération à l’importation des Animaux vivants de race pure des espèces équidés, bovine et ovine ainsi que les caprins, les camélidés, les autruches et les oeufs à couver des autruches. Art.123(12°)

And the list goes on. It seems these tax breaks are very much subsidizing imports of specific items the vast majority of farmers and fishermen cannot afford. Of course, there are some commendable measures to be recorded, like those:

Exonération de la vente des dattes conditionnées produites au Maroc ainsi que les raisins secs et les figues sèches. Art.91(I-A-4°)

Exonération de l’huile d’olive et des sousproduits de la trituration des olives fabriqués par des unités artisanales. Art.91(I-A-7°)

Application du taux de 14% sur le beurre à l’exclusion du beurre de fabrication artisanale. Art.99(3-a°);121

But that’s about it. And these amount to very little in terms of fiscal expenses, compared to the potential gains when imports taxes are applied to the item delineated above. The same can be said of the fiat exemption until 2014 of the whole Agricultural output from any taxation; such a measure, while seemingly populist and caring, benefits mainly to the wealthy farmers, and adds up to the double-exemption this population benefits from: tax exemption when importing these items the Budget bill considers vital for farming, tax exemption on exports -their main market- and finally, tax exemption on income they derive from these businesses.

Bumpy road ahead: Morocco's CDS is taking up a few dozen bps

The list of strange and unjust exemption is long; suffice to say that this unsound fiscal policy, added to the debt the Moroccan government is taking on to defuse social discontentment, do not allow for optimistic outlook. On financial markets, the Kingdom’s CDS Debt -a good measurement has climbed some 50 basis points up since the beginning of 2011, and is now at the same level it was during the 2009, while it almost doubled over one year. It is also worth mentioning that the fundamentals of Moroccan debt are not the ones to worry about, nor the current level of CDS (compared to other countries like Greece or Ireland) but rather the discrepancies between terms: while all maturities move across time in the same direction, the shorter maturities seem to be more sensitive than the longer ones. It does vindicate the idea that somehow, fiscal and debt policies do not seem to be motivated by any kind of long-term strategy, but the one to prevail, even at the price of abysmal budgeting and subsequent austerity plans.

Best of luck to the next Finance Minister. Oualalou’s and Mezouar’s respective legacies are a tribute to a pro-wealthy policies… and to the present potential mess lurking in the shadows and ready to burst off. Great show Ministers, you have done very well.

Odd Ball

Posted in Dismal Economics, Flash News, Tiny bit of Politics by Zouhair ABH on February 8, 2011

The news from the financial markets are always funny to read: among many other things, one learns that for all the trouble the MENA region is heading to -or, for some countries there already experiencing it- the cost of insuring their sovereign debt is much lower compared to Greece. Incredible! Or is it?

Consider the following graph; I have to apologize for incomplete information, especially regarding the more recent levels of CDS on Greece, and for Egypt I had to crunch the missing numbers in order to get the current level. When one takes a careful look at these levels, and the way they evolve, there are many thoughts one could foster on the MENA region: Tunisia is a surprisingly low risk, when compared to Greece, or even to Egypt. The level of risk, captured via the CDS did certainly not justify the downgrading by Moody’s. Or if Moody’s did so, it has little to do with its political risk.

Cost Of Insuring Sovereign Debt CDS 2009-2011 (Datastream Reuters)

And for one, Leila Trabelsi was directly responsible for absconding 1.5 tons of gold bullion, which means € 45 Million, or $ 58 Million approximately. The sum might look like small beer, but when one keeps in mind the level of government debt Tunisia has -about $ 25 Billion- then it is obvious that annual payment can be endangered by that kind of blow; Not to mention the effect this has on the exchange rate the Central Bank Of Tunisia wants to sustain. There are other issues about the country’s sustainability in terms of economic growth, but it seems the downgrade was not, shall we say politically motivated, nor was it in reaction to market anxiety over developing events. And the market data shows it: the level of CDS remained remarkably stable, and for a troubled country, the financial markets do not seem to mind the difference with Morocco -as late as February 3th, CDS were slightly lower for Tunisia that Morocco’s-.

Why are Credit Default Swaps a good indicator for a sovereign debt? First, CDS are considered to be an insurance, mainly a guarantee against possible likelihood of default. In that sense, political instability, poor economic policies or unexpected low growth result can be indiscriminate factors in worsening CDS levels. In that sense, CDS are quite useful, but in the sense that they are signals: their prices are subject to demand and supply, and if their price goes up, it is a signal that, say for the Egyptian sovereign debt CDS to climb up to 400bps and counting, it means, first, that to insure $ 10 Million of Egyptian debt, an investor has to take on an insurance of $ 400.000. The signal is about expectations investors might have of the future. The more pessimistic they feel, the higher the price of CDS. And for the moment, levels of expected risk, in Tunisia or Morocco are very similar. Strange?

The same goes for Egypt: even though the country started from comparatively higher levels of risks (the higher CDS level, the higher the perceived default risk, markets-wise) they still operate at early 2009 levels, at which time Mubarak’s position was not particularly threatened – in fact, no one at the time would have bet a dime on successful demonstrations that we are witnessing today and since a fortnight. Again, a source in financial markets tell me that for all the media frenzy -and the local damage to the economy- foreign debt-holders are relaxed even with regime change, whether in Tunisia or Egypt, or other countries that might be on the waiting list. There remain countries like Morocco that were confirmed in their near-investment rating. At the time, and perhaps it might remain so, rating agencies do not see enough warning signals to downgrade the rating, perhaps because financial markets do not seem to mind the whiff of liberty in MENA.

In any case, the rumblings in the MENA region do not look harmful to the financial markets, as they rate Greek sovereign debt far more likely to default. this is good news for would-be protesters too worried they might compromise their country’s ‘good name’. It is also bad news for Greece, but ethnocentrism doesn’t involve me in feeling sympathetic to their miseries. I don’t know if I can stress enough the importance of these results: the MENA region has been experiencing, for many countries that is, sustainably high levels of growth, but the distribution effect has been marginal across countries. The current wave of public anger is not primarily motivated by political claims -this, in my opinion, comes with street protests- but rather by more redistributive policies. It seems financial markets, up to a point, do not mind that.