The Moorish Wanderer

A Change is Coming Your Way

Posted in Dismal Economics, Flash News, Moroccan ‘Current’ News, Moroccan Politics & Economics by Zouhair Baghough on October 2, 2011

This is a sponsored post: yesterday, Capdema students and young active Moroccans abroad have organized a Democafé in Paris, Rabat, Ifrane, Lyon, Nice and Montreal on the upcoming general elections scheduled for November 25th. A Great debate, very engaging audience and certainly many new faces all of which only confirm my optimism for what might very well be the second greatest generation in Morocco.

And so the debate on elections goes on, livelier than ever. I would like to coalesce two of my favourite subjects, Politics and Economic Policy, into one blog post, if I may. In my opinion, the next government will have to sort out a swelling Compensation Fund, an unfair taxation system, a galloping bureaucracy, with the implications that unpopular policies will have to be implemented. Incidentally, I have been apprised of another reason with the Democratic/Radical left engaged in boycotting next elections: the idea is, the next government is very likely to collapse before us, partly because the crisis -upcoming or current- will force its disintegration, and force the regime to resort to the last card on the table, a genuine democratic reform. I wish that was possible (but without the crisis bit, obviously) but the thing is, we need a strong, homogeneous government to carry out these policies, because otherwise it is going to be the same set of targets: Belkhayate, Baddou and Abbas El Fassi, for all their perceived weaknesses and corruption, are not really answerable to the people, first off because they need not to account for before parliament, and second because government coalition is too stretched on the ideological spectrum to afford a United We Stand, genuine collective responsibility. Amazing though it may be, El Fassi Government, originally predicted to fall within months or few years, held forth and completed a 4-years tenure with minor adjustments.

The economic policies I was referring to are not those bombastic lines displayed on I am referring to the disturbing Article IV presented before IMF in September, and the willingness displayed by finance minister Mezouar to carry on a 10% budget cut. I am trying to figure out how: if indeed the 10% cuts are aimed at unnecessary expenditures, then all the talks about good government ever since DVD have been idle, and bureaucracy, rather than dying away, is back and well and alive. That’s almost MAD 30Bn off the book

Fan-chart, late 2010. Error in expected inflation "converges" to zero over time.

The 2010 Bank Al Maghrib annual report has been released a week ago: as usual, a great deal of effort has been put in assessing the “Mood of the Nation’s Economy”. Governor Jouahri has been quick to point out that government debt has grown to alarming levels:

Cette évolution s’est traduite, malgré le léger redressement des recettes fiscales, par un creusement du déficit hors privatisation, passé de 2,2% à 4,6% du PIB ainsi que par une rupture de la tendance baissière du ratio de la dette publique directe qui s’est établi à 50,3% au lieu de 47,1% du PIB. [...]

L’exercice budgétaire de l’année 2010 a été essentiellement caractérisé par une accélération du rythme de progression des dépenses, accompagnée d’une modification notable de leur structure. En effet, les dépenses de compensation ont plus que doublé d’une année à l’autre, sous l’effet du renchérissement des matières premières, portant à 7% le taux de progression des dépenses ordinaires, contre une baisse de 3,5% en 2009. En revanche, dans un contexte de consolidation de la croissance non agricole, les dépenses d’investissement du Trésor ont marqué une quasi-stabilité après quatre années de hausse rapide.” (pages 5 & 87)

Not that we are back to the dark years of 1980s, but he has worried that compensation expenses and the increase in public sector manpower might further the strain on public finances, and subsequently, the economy as a whole. More interesting though, the report introduces a new tool in its motley of charts, a tool I believe might give us  good indications on what we might not know. (I recommend a great read on the model, as delineated in the 2007 annual Monetary Report, pages 27-29)

The fan-chart computes expected levels of inflation over a pre-specified time frame. Because these projections are not fixed, the modernised variables are randomized such that expected inflation has such and such confidence probability to be within the boundaries of specific levels. Now, I trust BAM economists to be highly competent and dedicated to their tasks, but I would very much like to know the effective impact of government debt on their computations; it is a given to consider government debt -especially domestic debt market- to push inflation upwards. The intuitive argument being,the Moroccan government has to pay back its debt with some nominal (face-value) interest rate. But, they can get away with it by “printing money”, or even if they don’t, the expenditure would take care of it, for instance by increasing public service payroll at a rate higher than, say, GDP Growth, the famous “Too Much Money Chasing Too Few Goods” line. But expected inflation remains very stable around 2%. I would argue that no inflation rate at such (low) level can be achieved without a drastic halving of public deficits (as Debt-to-GDP ratio remains within acceptable limits)

A left-wing government would go “tax & spend”: close tax loopholes, re-institute -if they can- the agricultural tax and the 42% marginal income tax, institute a wealth tax on millionaires, cut VAT and Corporate tax deductions for real-estate developers, etc. all of which can expand considerably government receipts for 2-3years, enough to payback debt and bring it within acceptable limits, while avoiding unnecessary social unrest. A right-wing government would go “slash & burn”: keep the tax loopholes or go further in alleviating the tax burden on corporates and individuals, while cutting public expenditure, compensation fund or other. Government pay-check could also be balanced, but to the risk of social unrest, food riots, and social resentment going berserk. The next finance minister will have to be a bold wizard to conciliate seemingly contradictory economics.

Stable inflation rate of 2%. More interestingly, projected growth over next decade is 5%, a close figure to my own projection for potential growth.

And so, the need for a strong government coalition is not only in the interest of Haves, but the Have-nots would also benefit from clear-cut decisions: either their last safety net will fall and they shall stand up to a fairer income distribution (a message the Feb20 movement can carry on pretty well) or benefit from a change from within designed to bridge income and wealth gaps. In any case, a weak coalition will just keep on postponing the inevitable: on minimum wage, on income inequality, on healthcare coverage, on employment, pussyfooting is not in the interest of anyone. I would welcome a homogeneous right-wing government coalition -very similar to that of the Mâati Bouabid government in 1979- as long as they have a free hand to implement their policies, because we will then engage in a policy debate. With a weak coalition, disharmonious voices within a fragile ship would deflect public awareness from what the government does, to what petty politics goes inside it. Grown up politics, and genuine care for those who will bear the brunt of any economic crisis do dictate embracing the idea of strong government, so as to level up both the playing field and civic awareness.

More than ever, “it’s the Economy, Stupid” rules all, and parties with convincing messages across the economic topics can carry sympathy and votes with the electorate.

The Price Of Debt

The times of thrift and fiscal prudence are long gone. In its effort to defuse social discontentment, the government spent billions of Dirhams either by subsidizing further strategic commodities, or by increasing dramatically wages in the public sector.

The result of these unexpected expenses led to further borrowings, and the time might come very soon when the unfortunate government of the day will be compelled to implement austerity plan measures, to slash some -if not all- of these subsidies, or to privatize more assets to pay up for interest on this unexpected debt, all of which would have been the result of unsound economic policies no one will be ultimately responsible for. Parallel to these public spending cuts, the social cost in terms of purchasing power losses and unemployment will exacerbate further existing social tensions.

Morocco has come a long way: the IMF-led painful structural adjustments plan the country submitted to in 1983 because of its abysmal deficit and debt record left economic decision-makers from then on very adverse to any debt-financing scheme, or at least to be adverse to any foreign borrowings; There were even times when relatively high domestic public debt was a sound economic policy that prevented inflationary pressures from getting out of control, and thus preventing ‘hot money’ foreign currency flowing in, with all its subsequent disastrous implications witnessed during the Singapore ’97 crisis for instance. That explains a successful policy in bringing down the size of public debt, but at the expense of any real economic growth, as the World Bank itself recognized:

“Toward the end of the 1980s, the Bank was excessively bullish it its assessments of Morocco’s economic future. Progress in public enterprise and financial sector reforms was considered excellent. [...] The Bank’s overoptimism continued through 1993, despite the fact that there had been hardly any economic growth since 1990. Growth slowed from almost 5 percent a year in the second half of the 1980s to 2 percent in the early 1990s”.

And though great efforts have been made in upgrading the Moroccan economic structure, a potential austerity plan applied to the economy is most likely to finish off these sectors that have not been entirely reformed, namely private investment, rural areas, health and education. Furthermore, the economic growth -our official panacea for all structural economic growth hardships- has been too low to sustain real wealth creation. The consensus around Morocco’s economic growth potential is estimated around 5-6%. The 2011 Budget estimate for nominal growth is 5% with a 2% inflation, that is about 3% real growth. A poor showing indeed, considering how other comparable emerging countries manage to score higher growth figures. An austerity plan will most likely bring us into depression, an economic outcome too gloomy to contemplate, and yet very likely if the government continues in their folly trying to buy off loyalties and peace of mind.

Is the austerity plan likely in Morocco? Haven’t we managed to borrow the whooping sum of € 1 Billion a year ago? Aren’t the financial markets confident in our sound economic policies? not quite.

In 2010, total public debt increased by 5%, topped by an 11% increase in foreign debt, while the latter was going down at an annual average of 10% over the last decade

Consider the level of public debt in Morocco: According to the Finance Ministry’s debt figures, total public debt represents 49.3% of GDP (late 2010) much less than the 80.5% level recorded two decades ago. The foreign-held public debt -our subject of interest- accounts for about half of it i.e. 22.4% of GDP, an 8% increase compared to the 2009 period, an increase in total contradiction with the decade-long average trend of a 9% annual decrease. Now, these figures are nothing like those recorded in the early 1980s (when foreign-held debt was 110.9% of GDP in 1983) and the potential danger is certainly not that of a debt crisis where the Moroccan government would be unable to honour its debt. The danger looms domestically, because of the constraint national foreign currency holdings represent, economic authorities will be obliged to halve many public spendings; and because much of the budget is about non-productive expenses, the axe will primarily fall on the subsidies.

One of the reasons why Morocco’s rating is not Investment-Grade across all rating agencies is due to its weakness on foreign currency. The latest Bank Al Maghrib figures on that matter testify on our economy’s inability to field enough foreign currency to sustain economic resilience. Foreign holdings as of June 2011 are about MAD 182.8 Bn, a 6% dent compared to the MAD 194 Bn reserves held on December 2010. Already the effect of these policies can be felt on these reserves; the pressure on the foreign reserves can be linked to the public debt: indeed, as the graph shows, Morocco resorts more and more often to foreign debt, and so since 2005: even though domestic debt remains the preferred debt vehicle for government spendings, foreign-held debt stock have increased 33% over the last 5 years, compared to the 12% for domestic stock over the same period.

This, of course, is due to the gluttonous borrowings the Finance Ministry has engaged in to pay for many expenses: the new military acquisitions, the various “Grand Design” workshops, the subsidies, etc. have taken the annual domestic public borrowings from MAD 42 Bn in 2005 to MAD 54.2 Bn in 2011 an average of 4.34% annual increase, a commensurate variation to nominal GDP growth’s, about 4.84%. On the other hand, the budget circa 2005 records an additional MAD 7 Bn of foreign borrowings, compared to the MAD 18.05 Bn in 2011, a far larger annual increase of 17.1% a year. This is evidence that government spending resorts more and more to foreign borrowing, thus building on an increasing stock of foreign debt.

Interest relative to principle jumped from 24% to 50% from 2007 to 2011

The debt is also getting more expensive to pay back: even though the ‘super-borrowing’ of June-September carried only a 4.57% coupon interest, the overall foreign debt paid since 2007 has steadily gone up with an increasing interest/principal ratio, while the economy does not grow fast enough to create enough exports and attract foreign investments, in order to match the required payments.

The debt problem has also another feature, perhaps more concerning: the short-term debt (exclusively domestic) increases at inflationary proportions. The same Finance Ministry figures attest to that: early 2007, overall short-term debt amounted to MAD 15.3 Bn. Projections for debt service mid 2011 are MAD 18.22 Bn. This is due to the fallacy of low interest paid on short-term debt: 3-months treasury bonds pay a coupon of 3.44% while 5 years bond yield 3.94%. Though it is cheaper for the government to pay for short money, it also compels it to continue to borrow short in order to meet its most urgent expenses, and these have been quite numerous these last days.

Debt on itself is not such a bad thing: it can help public authorities benefit from leverage effect when important investments such as infrastructure upgrade or education and research facilities spendings are involved; They can provide value by expanding potential growth. But when subsidies equate the amount spent on public investment (about MAD 53.85 Bn for investment, about MAD 45 Bn for subsidies) the only outcome is future austerity plan and economic depression. Of course, these can be avoided, provided a deep-range fiscal reform, including an end on amnesty over agricultural taxes (who benefit to those owning more than 10,000 ha) and the tax breaks that benefit annually up to MAD 7 Bn, exclusively to the 10-20% richest individuals and households in Morocco.

The inflationist food for thought

Posted in Dismal Economics, Moroccan Politics & Economics by Zouhair Baghough on June 26, 2010

According to the latest (to date) IMF working paper concerning Morocco, everything is going fine in Morocco; Indeed,

Moroccan banks are stable, profitable, adequately capitalized, and resilient to shocks, but the financial system as a whole will need to adapt to the inherent risks of changing macroeconomic policies and conditions. Major reforms have been achieved since the 2002 FSAP within a policy of actively promoting economic and financial sector opening”.

So in essence, the banking and financial system is stable. It is however, quite fragile, or rather, should develop some more resilient mechanisms. The IMF namely states that:

BAM and other supervisory bodies require the necessary operational independence and resources, supported by accountability structures, to conduct an autonomous monetary policy and effective supervision. The authorities have taken welcome steps in this context, and promulgated the new articles of incorporation of BAM confirming its autonomy, a new banking law, a new anti-money laundering law, and a large number of secondary regulations.

The Moroccan economy is doing well, admittedly because of the sound macroeconomic policy successive governments followed since the late 1990’s. These policies included low inflation-oriented policies, conservative fiscal policy, and shy attempts in implementing a policy rate by conceding more autonomy to the Central Bank. This set of policies is considered to be the standard and sound macroeconomic policy every responsible government should follow.

Let us first tackle the inflation policy. Bank Al Maghrib made an announcement of the ‘target inflationfor 2010, and set it to 1.2%, a rate of historical low of course. It is, however, a figure quite difficult to match, because of the other economic parameters party in ‘shaping’ the inflation rate.

According to the Bank’s own monthly monetary report (Dec.2009), inflation rate set at 1.4% in September 2009, a figure in line with the global inflation (due mainly to the effects of a global recession).

Going back to the inflation policies, the national/total consumption is considered to be of sizable influence on inflation rate (I will come back on that later on). Basically, the report points out:

La consommation finale nationale devrait croître de 7,3% en 2009, rythme moins rapide que celui des trois dernières années mais qui demeure supérieur à la moyenne de la décennie. Concernant plus particulièrement la consommation finale des ménages, elle devrait augmenter de 7,1% après une progression moyenne de 10,9% durant la période 2006-2008.

Globalement, les principaux indicateurs disponibles à fin octobre laissent présager la poursuite de la bonne orientation de la consommation des ménages durant les prochains trimestres.’

(a trend confirmed in the June issue : ‘Au total, la consommation finale nationale devrait croître en 2010 à un rythme situé entre 6 et 7% en termes réels.’)

Now, Olivier Blancard, with other economist colleagues, produced an interesting piece (rather a working paper, really) a couple of months ago for the IMF. Rethinking Macroeconomic Policy; and there was a bit about inflation policy:

Stable and low inflation was presented as the primary, if not exclusive, mandate of central banks. This was the result of a coincidence between the reputational need of central bankers to focus on inflation rather than activity (and their desire, at the start of the period, to decrease inflation from the high levels of the 1970s) and the intellectual support for inflation targeting provided by the New Keynesian model. In the benchmark version of that model, constant inflation is indeed the optimal policy, delivering a zero output gap (defined as the distance from the level of output that would prevail in the absence of nominal rigidities), which turns out to be the best possible outcome for activity given the imperfections present in the economy

What about our own policies on that matter? First off, let us have a look to the Bank’s views on inflation; the latest issue of the Revue de la Conjoncture Monétaire et Financière (May, 2010); They produced a couple of interesting graphs that speak for themselves:

Monthly versus Year-to-Date Inflation (Source: BAM)

The good news is, core inflation is pretty stable. Economists tend to use the core inflation rather than CPI (Consumer Price Index) fluctuations because they need to capture the relevant data, and oust any volatile random error term (mainly in econometrical techniques)

However, the graph below somewhat confirms a thesis I held to be true: our inflation is heavily correlated to current consumption goods (say, food like edible oil, sugar, wheat, etc…) as shown on the following graph:



Inflation component breakdown





While it is true inflation is gradually beaten down (which, ceteris paribus, is a good thing for the consumer), the Central Bank, as well as the Finance ministry, seem to have failed to address its volatility. In essence, the finance ministry implemented stabilizing inflation policies, succeeded in doing so, but only with the core inflation, and not on the CPI, which is quite critical, for it has a definite impact on the Moroccan consumers’ purchase power.

Blanchard then goes on: There was an increasing consensus that inflation should not only be stable, but very low (most central banks chose a target around 2 percent). […] In a world of small shocks, 2 percent inflation seemed to provide a sufficient cushion to make the zero lower bound unimportant. Thus, the focus was on the importance of commitment and the ability of central banks to affect inflation expectations.

Leaving the neo-Keynesian theoretical background aside, the kind of inflation the Moroccan economy experiences is of the highest interest to me: I believe every sound government and every sensible Central Bank should make inflation control policy on of their top priorities (beside economic growth and addressing inequalities, for the ministry that is).

However, it is quite odd that, while it undeniably preserves purchase power and good public finances, a certain ‘acceptable’ level of inflation is needed to boost businesses and, to some extent, help retail investors as well. In layman’s terms, the ‘good level’ of inflation alleviates the real debt burden a bit on businesses (for they actually pay lower real interest) and allow for retail investors to build up their portfolio on financial markets and exchange. However, the kind of inflation we are discussing here does not benefit to businesses neither household in Morocco.

We have seen earlier on that while core inflation is remarkably stable, the CPI components are much more volatile. And it is recognized to be so : Impactée principalement par des chocs ponctuels, l’inflation demeure modérée au cours des derniers mois. En effet, après s’être établie à 0,1% en février, l’inflation annuelle est passée à 0,9% en mars. L’analyse détaillée des différentes composantes de l’IPC laisse indiquer que cette évolution traduit exclusivement le renchérissement des prix des produits alimentaires volatils, l’inflation sous-jacente n’ayant que légèrement progressé, pour se situer à 0,2% au lieu de 0,1% un mois auparavant.

We are through the looking glasses here: the CPI is definitely what makes the inflation rate goes up, and there are several ways to explain it so:

- CPI underlying commodity prices went up on the period from Q4 2009 to Q2 2010. It is quite possible, for a constant domestic demand, to take on inflation because of a rise in commodity prices. The first idea is to look at future commodities indices. According to the Bloomberg figures, futures prices were quite volatile from October 2009 to May 2010, but were they

Various composite commodities index (Bloomberg)

Let us take an even more systematic approach. The following graphs depict Exchange Traded Commodities tracking benchmark indices, all of which give a fair idea of how likely the commodities’ prices behaved during the past 6 months. The selected commodities benchmark are Oil Brent for Oil (ETF Securities Brent Oil Index), then the UBS CMCI Wheat Index for Crop/Wheat and finally UBS CMCI Sugar Index for Sugar. (All of which are listed on the London Stock Exchange, and for anyone interested in discussing the technicalities of index rebalancing as well as the relevant choices, I would with vivid alacrity)

CPI inflation in Morocco looks quite decorrelated with respect to commodities fluctuations

The result is quite puzzling: there seems to be no noticeable relation (lagging or dynamic) between inflation fluctuations, and the selected commodities, though these are most important in the Moroccan consumption basket. The commodities’ prices are, therefore, not the main explaining factor for the CPI inflation.

- Domestic demand went up on the same period:

‘La consommation finale nationale devrait croître de 7,3% en 2009, rythme moins rapide que celui des trois dernières années mais qui demeure supérieur à la moyenne de la décennie. Concernant plus particulièrement la consommation finale des ménages, elle devrait augmenter de 7,1% après une progression moyenne de 10,9% durant la période 2006-2008′.
Basically, in a moody conjecture, the main variable that pulled our economic growth was the domestic consumption.
My two cents are up. I shall write very soon on the topic of inflation and conumption relation. However, It must be pointed out that the Central Bank and the FInance Ministry, while achieving a relative success in dealing with inflation, the two bodies failed in addressing volatility inflation, and thus, the main objective every policymaker should make theirs: stable long term growth.