The Moorish Wanderer

What’s Left in Morocco? The Case For Progressive, Ambitious and Assertive Economic Policies

Posted in Dismal Economics, Moroccan Politics & Economics, Read & Heard, The Wanderer by Zouhair ABH on December 31, 2011

Call me pretentious, effete intellectual, but I deplore the absence of a comparable figure with a narrative close to that of Ed Ball‘s in the Moroccan political discourse: the bare-knuckled, assertive, even aggressive economic message pounded away at the media, the established government and those who tend to disparage the left-wingers as either bleeding-heart liberal unable to go beyond the nice but vague rethoric and principles, or corrupt career politicians driven with an insatiable hunger for power and wealth.

A New Hope For Progressive Economics

The late 1950s were about gaining economic independence: big government was needed to monitor and smooth the transition from a French-controlled economy to a more ‘national’, domestic economy. Abderrahim Bouabid, during his tenure as Finances Minister and then Vice-Head of Cabinet (with Premiers M’barek Bekkaï, Ahmed Balafrej and Abdellah Ibrahim) produced what could well be the most prolific executive legislation, ranging from creation of Dirham Currency to that of the future Bank Al Maghrib Central Bank, and various institutions, among others the modern Office des Changes to monitor flows of foreign capital, and make sure the financial instruments needed to carry out monetary policy are mastered and under domestic control. That gilded age of the Left of sorts needs to be restored, not with the same means, but with the same spirit, in resolution and assertiveness.

Big government, strangely enough, is favoured both by the Left (extending as far as Annahj far-left) and Makhzen traditionalists: a strong centre is needed to insure one or the other’s political and economic agenda is well executed. The core difference in their economics matters very little at the end: whether concentrated with a small nucleus of wealthy individuals (the Right and the ongoing pursued policy higher up are keen on supply-side economics) or a core of activists-bureaucrats (The left) there is very little difference but in the quality of the oligarchy.

Half a century of centralized decision-making and, even worse, centralized way of thinking has made public services in Morocco accountable to no one, with ordinary, median/average citizens at the receiving end of both administrative carelessness and more concentrated income distribution (in 1985, Gini Income Index was 0.36; in 2010, it was 0.46) So the justification by the Left of big government and burdensome regulations is void: it did not prevent private monopolies and special interests from taking a slice of the national cake, an increasing slice on top of it, guaranteed and protected by regulations and legislation.

Perhaps the Moroccan Left and Liberals need to accommodate burdensome and embarrassing allies: the corrupt and shady Unions, the powerful corporatist interests they support and count on (Lawyers, for one) and finally the once-loyal support of lower echelon in the Civil Service. The problem with such coalition is that it lacks the actual strength -never mind the consistency- to impose its supposedly progressive agenda; Regarding unions, their massive and disruptive potential has waned and they can no longer muster enough resources to stage demonstrations, let alone force deals for everyone to benefit from. The same goes for the special interest groups, strong enough to block attempts to force the status-quo, but too weak and divided to formulate and impose clear a coherent set of policies.

A coalition needs to be built around the ideals of progress, economic advancement and social justice – in that order. I cannot claim to produce reliable surveys on that topic, but it seems to me that fellow Moroccans I happen to engage with in discussions still view Socialism (that word really has gone out of fashion, hasn’t it?) and its economic policies as mainly Social, i.e. subsidizing the poor and soothing social resentment from inequalities; In other words, my non-representative sample does not believe Socialism can deliver on the economy: high growth, good jobs and high standards of living. I argue it can, but with unorthodox means. That coalition – Unions, Corporatist Interests and the weakened Middle Classes– is the key to the new progressive economic policies.

Food And Balance Of Trade: Imports of Wheat in Morocco amounted in 2010 to MAD 11.85Bn i.e. about 7.5% of Trade Balance deficit. The value per Imported Tone for Wheat is MAD 2.15 per Kg. More importantly, it has also imported MAD 93.6 Mln in various types of flour, We do import some fish flour; around 3 Tons – For all Morocco. And we export 4kgs (filed under FARINE,POUDRE EN PELLETS DE POISSON PR ALIMENTATION HUMAINE). That’s both laughable and symptomatic of a misguided choice of resources allocations.

As per FAO documents, Fish Flour provides superior nutrition value, because it can, if efficiently implemented, make up for a chronically low meat/protein consumption among Moroccan households, thus providing a cheaper and more popular alternative to traditional sources of meat consumption:

Why is FPC a good protein source?

First, of course, because it is concentrated; untreated and unprocessed foods do not generally contain more than about 20 percent protein, whereas FPC contains about 80 per cent. Secondly, the quality of the protein is high; by this is meant that the amino acids which make up the protein are present in just the right balance for human nutrition. Other foods such as cereals may contain useful amounts of protein but are frequently deficient in one or more of the amino acids that are essential for growth.

And there goes a policy that can win favour with a lot of people: all consumers will welcome a new class of flour that would enhance their consumption and increase their standard of living, producers and fisheries would expand their business to meet the demand, and prices of poultry, beef and lamb would decrease too. The one question remains: does Morocco have enough resources to meet the demand of 32 Mln hungry Moroccans?

According to the Russian Soy-Bean Company “Russoya” , The ratio for production is around 1/6, meaning there is a need for 6 Tons of raw fish to produce 1 Ton of pure fish flour. Morocco exports 222,000 Tons of Fishery at a unitary price value of MAD 29 per exported kilogram. If it switches to integral fish flour, it can produce 37,000 Tons at a unitary price of MAD 75 per exported kilogram, or even match up to 126 kg per imported kilogram. This is a win-win policy: in trade, Morocco saves up on differential traded value (on terms of trade) in domestic consumption, it increases protein consumption to higher levels, and in business, it allows for thriving companies to fish, condition and sell the product.

The 2001 HCP survey on household consumption points out that flour makes up for 55% of all wheat household consumption – and that percentage goes higher with the lower-income deciles: the poorer a household, the higher its consumption of flour – 70% for the bottom 20%. By the same findings, poorer households have a lower meat/protein consumption: there is a 1:64 ratio between the bottom and top 20% in terms of protein consumption. Perhaps the wisest and most straightforward policy to increase protein consumption across the board is simply to stop subsidizing wheat flour, and instead improve storage and distribution facilities for Fish flour. The trade-off is such that any anticipated costs for increasing production capacities -for domestic resources- would still be outweighed by the compensation fund allocation to wheat flour -an international commodity with volatile prices.

The rest is history: improving nutrition improves workforce, productivity, growth and leads to an increase in standards of living.

Small Business vs Big Business: I tried in a post earlier this year to explain that smaller businesses tend to do better in valuation and results. We need to do away with the myth of “National Champions” because they only contribute to accumulate wealth with little or no real investment in the economy. Smaller businesses on the other hand, take risks and try to make something real with positive impact on communities and individuals.

Small Cap Index beats MASI Big Business by comfortable margin during 2011

The admission that capitalism is good does not preclude the reservation on the current economic structure of Moroccan business, which is neither capitalism nor beneficial to the many – only to the very few. MASI index -dominated by juggernauts- systematically did worse when compared to smaller cap-based indexes this year.

Still and all, access to liquidity is heavily skewed towards large businesses; credit rationing, with its adverse effects, turns out to harm smaller and riskier businesses, not because of their inherent risk,  but because all liquidity has been captured by failing, larger companies. Regulations as well as dangerous acquaintances between businesses and banks makes access to liquidity discriminatory.

Parallel to an overhaul in credit allocation, there is a need to take on private monopolies and oligopolies: these harm collective welfare and destroy utility in the process: in Telecommunications, Edible food and other sectors, consumers pay more than they should in a more competitive market. Taking on business special interests means breaking up monopolies and concentrated holdings: SNI (formerly ONA-SNI), for instance goes too far in extending its hold on various business, ranging from Air Travel, Milk and Derivatives, Edible Oils, to the Banking industry. It is only populist in naming and shaming particular businesses, but the positive effects of a less concentrated and more competitive market setting will undoubtedly benefit everyone, from unions to end-users.

Agriculture, Taxation with Representation: tax exemption on agricultural products denotes of an obsolete, neoclassical mind-setting, if not outright narrow political calculations to keep off some lucrative rents going on. Taxation, contrary to a belief only too often held by many Moroccans, is not the modern equivalent of a punitive Harka expedition, a fiscal exaction of sorts; it is a policy instrument, that intervenes either to redistribute social surplus or to provide resources to public authorities so as to help what it perceives to be a potential new frontier. Both elements are designed within a political agenda, whose chief executive implements because they have a popular mandate for it.

Agricultural taxation will help overcome its biggest problem: estate domains; because Agrarian Reform still has not gone out of style, the progressive policy seeks to clarify, to introduce transparency on who owns what, on how collective ownership is defined. Because as long as no proper and serious tax proposal is introduced, as long as the tax moratorium is decreed -until 2013, that is- only big, urban-dwellers, export-oriented wealthy farmers will benefit from the opaque estate regulations. The point made earlier on breaking up monopolies fully applies to Agriculture as well.

Breaking the ceiling of Potential Growth: this topic is less obvious to policy-makers because it outlives their short political lifespan; it is about the general trend of education, research, finding ways to improve production and productivity, in short, the institutional elements fit to guarantee a solid base for growth and wealth creation. These are the issues where politics, the rule of law and economic, practical policies meet: the challenge to lay ahead is to produce adequate legislative framework to guarantee the rule of law and minimize administrative discretion over private ventures, to provide efficient and talented skilled workforce with good education and stable prospects, for both labour and business, and finally to find by ourselves, the perpetual ways to improve output and ensure growth does not do away.

Invest and Growth – If Only…

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on December 9, 2011

The story is quite simple when it comes to levelling up growth with the Moroccan economy: investment to expand production and improve productivity, spending resources to create more resources for everyone to share. Is that so? Not really.

Who carries out investment in Morocco? The evidence shows only central government does; For sure companies do their bit as well, but their investment is not up to scratch. I am referring explicitly to those larger “national champions” who enjoy monopoly (or oligopoly) rents because they are supposedly our only chance to deal with an ever more threatening globalization; the story goes, let these conglomerates (a private and Moroccan version of Kombinats) concentrate resources, enjoy generous government subsidies and exemptions to grow and go on to get Morocco some business abroad. Their newly acquired resources are then reinvested at home to the benefit of everyone: Maroc Telecom, CDG, ONA-SNI and a few other companies portraying Corporate Morocco have been allowed to practise a large-scale version of trickle-down economics: their powerful economic and political connections prevent any serious threat from regulatory bodies or potential competitor to even ever exist.

But fine, let us roll with that argument for a while: suppose that trickle-down economics is doing fine; that these companies over the past decade have had enough time and resources and profits to build themselves niches and comfortable lead on their respective markets; we should be now expecting some large spending on asset acquisition, we should have a look at these companies’ balance sheets and observe a noticeable increase in their tangible assets, perhaps their inventories, definitely some increase in capital size. But the trouble is, we don’t.

The first thing to record is the significant difference between crony, rent-oriented capitalism, and productive, value-creation capitalism: the former is based on political patronage, corruption and investment in safe but non-productive sectors, the latter is riskier, but tends to generate more activity and more jobs. The last three years recorded an annual average Gross Capital Formation of 270 Bn. That’s 36% of GDP, and as IMF reports:

Although investment rates to GDP have increased significantly over the last decade in Morocco, this has not translated into higher economic growth.

While during 1999-2010 Morocco’s investment rate was the second largest in the sample below, its growth rate is relatively lower. The quality and efficiency of investment projects may contribute to explain these differences. (IMF report, p.14)

So Morocco is investing quite a lot -relative to its GDP- but this constant effort does not translate into growth, insofar other emerging countries manage to perform higher growth rate – perhaps Moroccan investments aren’t as profitable to growth as one might think – or, alternatively, these are profitable, but only in terms of monetary, and not real, returns.

If significant sectors all plummeted over the last three years, how come dividends performed a solid 10% annual increase?

In addition to that, it is also worth investigating the precise investment share shouldered by private and public operators: it is no use to let the budget bear the brunt of essential investments (whose effects on growth are more of a long-term nature) and let private businesses just get away with it; From a pure financial point of view, companies would not commit resources to buy assets unless there’s some optimistic appraisal of future cash-flows; as far as paid dividends go, there is a healthy 10% annual return cashed in during the last three years, an average of 31Bn over 2008-2011, even though significant sectors -save for banking- took a hit over the same period of time. That’s a 100Bn right into the pockets of a nucleus of shareholders who do not get to invest it in tangible assets.

Levels of dividends are therefore high enough to consider investing assets in whatever company MASI subsumes and able to yield as high a profit as the composite index itself. If a company does manage such high a dividend, surely it can provide enough resources to invest in assets. But instead, they keep on spending them to keep shareholders happy, too happy, perhaps.

But what about public investments? Over the considered last three years, public expenditure (including Hassan II fund and SEGMAs) allocated to investment reached 154 Bn on average (51Bn of it attached to central government) that is 60% of gross capital formation, with the entire private sector providing for the remaining 120Bn average per year. Strangely enough, it seems the entire private sector -those companies large enough to afford equally large spendings in asset acquisition- saw fit not to add some 30Bn every year, or 4 basis points in investments that could well be directed to profitable and productive assets.

An initial raw indicator: correlation increases over time

And it is not like financial products were supposed to yield higher returns: Bank Al Maghrib‘s main rates over the last 3 years were historically low: it was 3.5% in 2008, it is now 3.25%, the lowest level for decades indeed. Investors should, in view of very lenient interest rate constraints, opt in for asset acquisition; as a matter of fact, long-term investments are even better suited at times when liquidity is quite scarce: there is no need to hold cash in order to expand capacity production, network platform or other expenditure needed to increase production of goods and services.

The question might seem trivial, but it would be great to know exactly if investment does help expand growth, if it does indeed; first off, there is a clear correlation between GDP and Gross Capital Formation (the nearest indicator to domestic investment) and not only that, but it tends to increase over time (as the table shows indeed) and computations on annual data shows also a certain ‘pull effect’: while investment surely does not determine growth wholly, it certainly contributes a great deal, perhaps between a third and 40% of it, depending on the number of lags and how one arranges them, and again under certain circumstances, it is safe to say that over the last decade, investment has contributed, on average, 2.2 basis points of GDP growth.

Considering the computations on Morocco’s potential GDP growth, Capital contributes -on average- 43% of potential output, the numbers seem to make sense, and following, could yield good predictions, in the event these annual 30Bn of dividends were spent in asset acquisition rather than going into the pockets of Corporate Morocco’s shareholders: an additional 4 basis points in gross capital formation would have almost no impact on the initial year’s GDP growth, but that nonetheless carry its effect over the next couple of years, and it is safe to believe that future effects on growth are underestimated.

all in all, a constant 4% increase over 3 years, from 2008 to 2011 would have increased average GDP growth from 4.6% to 5.5%, with a potential (residual) residual of 0.3 basis points to gain for the next coming years. Increasing growth to 5.5% would have meant a GDP gain of 120Bn instead of the record 80Bn. Now, ceteris paribus, investing money back would have brought more than the cashed in 100Bn in dividends, a discounted value of 103Bn – an additional 3 Bn that would have generated growth, jobs, income and wealth to these shareholders as well as many others.

The only cost they would have incurred was to wait – no opportunity cost, just the waiting time. But greed it seems, as got the better of sound economic computations, a greed fueled by easy rent-oriented business and a fiscal policy complacent about these activities.

Middle Of the Road: Morocco and the Rest of The World

The great thing about growth that it sometimes give the illusion of development. in Morocco’s case, it serves well the mantra of “Morocco is Changing”: things are no longer the same. Things are improving; slowly, yes, but improving nonetheless. As a matter of fact, and save for the hardened nihilist, there is little to discuss over the occurring “change”, meaning that on absolute terms, we are improving standards of living and structural investments are being carried out. The real debate is over whether it is “too little too late” and “not enough” on the one hand, and “sureness of touch” and “prudence” on the other; Between a thrust for more rapid change, and the contentment with the current pace of change.

My claim here is to prove, with a set of figures, that Morocco is behind the global trend of growth in income, wealth, productivity and other indicators, and perhaps even so relative to comparable countries and synthetic benchmarks. Along other pieces of evidence, we might as well conclude that since we are going to slowly, there must be something wrong, and considering the discrepancies with comparable countries, that is imputable to some sort of cost, a cost to development, so to speak, that might be multifarious, perhaps mainly institutional. But that, of course, remains to be proven. In any case, the evidence is there to prove that even if we are increasing wealth per capita -among other indicators- we are either slightly behind, or the increasing process is not full mastered; too much ‘noise’ in the economy’s progression hinders that very progress.

The proposed methodology, without a significant loss of generality, considers Moroccan economic indicators with respect to synthetic indexes, the World Index and various “Morocco counterparts” Indexes – as provided by the World Bank Database (the World Index for instance, is going to be a much-used benchmark)

The one basis point advantage to Morocco did not make the difference

Morocco vs the World: Respective countries are given weights commensurate to their GDPs across time so as to obtain the World index. These are.We then consider 1980 as a base year – a 30 years time scale can be considered to be long enough so as to deliver meaningful results. We then run these weights on the following constant variables:

– GDP Per Capita: in 1980, Moroccan GDP made up for 0.17% of World GDP– in 2010, it was only 0.14%, even though Moroccan GDP grew on average 3.8%, while global average growth, on the other hand, was 2.86%. So over the last three decades, Morocco grew 1 basis point a little bit above the whole world, and yet manages to grow smaller in relative size… It has to do with a higher growth volatility, which tends to have a negative impact on the cumulative benefits of growth (and development, if some extrapolation might be allowed here) the stated policy of growth as a mean of development, officially endorsed by the government (as well as the IMF and Morocco’s significant partners) seems to overlook the other, equally essential feature for this to succeed: stability in growth.

The graph shows the high volatility that prevents consolidating cumulative output – for the record, world growth volatility (i.e. standard deviation) amounted to 1.41 over the considered period, while Morocco’s was much larger -4.6- which means, among others, that Morocco experienced more recessions (or negative growth)

Because the economy is unable to stabilize its dynamics across time, we end up with a lower relative GDP, but also, lagging behind wealth creation as well: Morocco almost tripled its GDP per capita between 1980 and 2010, but that is not enough, since global wealth almost quadrupled in the meantime, thus rendering the one-point advantage in average growth pointless.

Morocco GDP conditioned by its agricultural output.

All is not gloomy however: the strategic choice of agriculture, made very early on, pays indeed: when compared to the global trend, Moroccan agricultural output per worker is way above, both in average returns and computed trends; Then again, the global trend is less volatile, but previous observations on GDP do not apply in agricultural output. It is worth pointing out however, the very strong correlation between Agricultural and total GDP shapes up the Moroccan economy’s growth (by contrast, there is little correlation worldwide) and there is evidence that agricultural GDP, whether through its direct contribution to economic growth, or with its influence over macroeconomic variables, tends to condition growth overall.

The discrepancy between Morocco’s growth and the world’s, in effect, can be accounted for by measuring agricultural volatility; Though the choice of this particular economic activity is subject to debate, even this stated policy failed in delivering consistent results; A policy designed to make sure Moroccan agriculture strong, efficient, or, in short, aimed at insuring Morocco’s self-sufficiency, but fails to sustain stable levels of output, fails to fulfil itself as well.

Gross Capital Formation 1980-2009

These odd occurrences are not restricted to agriculture or GDP growth; indeed, on investment, Morocco does better than the rest of the world, yet it does not sustain its commitment to expand output; Indeed, there again volatility in investment spendings is higher than the global average, which squanders the advantage of “doing better”. The indicators, for all their shortcomings (after all, GDP does not capture other items,on which Morocco might be performing exceptionally well…) do deliver a message of inconsistent growth; the structural policies -the strategic choices made by the highest authorities- should address the pressing problem of volatility, and promote stable policies, instead of engaging in bombastic projects.

Morocco vs selected benchmarks: the same applies to Morocco compared to selected benchmarks; First off, Middle-income countries tend to do better compared to Morocco’s performances; Overall, Morocco does better than MENA countries in terms of GDP per capita, even in terms of stability; but if it is indeed the case, that advantage is small enough to doubt any significant gains over our neighbours: after all, a 20-basis points advantage over MENA countries conveys the same message: Morocco increased its GDP per capita 2.90 times,  MENA 2.70, it is, for those who like to denigrate Algeria for instance, a pyrrhic victory indeed.

The good news are rather short: for Morocco was comparable enough to Midde-income countries in the 1990s, but then again, right from 2002, the existing gap grew wider, and Morocco lost its bet to become a Middle-income country. And there is indeed a link between the failure to catch up with these countries (among others, Jordan, Tunisia, Turkey, Cuba(!) Iran, Algeria and Romania) and the irregularity with which the domestic economy grew. And if we were to link that further to the potential GDP (and the failure for the economy to stick with its trend) then priorities in terms of development need to be reversed: high spendings on infrastructure (the “Grand Designs“) are all very well, but as far as the official documentation goes, there is no particular anticipation of long-term implications; Will an additional highway insure a robust basis-point growth, or won’t it? Would these investments insure a stable growth and stable economy?

Morocco versus comparable benchmarks: does well, but loses the catchup bet early 2002.

Since Morocco is indeed freed from the downsides (if there were any of those) of short-lived political governments, those in charge are, in effect, responsible for the recorded volatility over the last 30 years, and the failure to catch-up with Middle-income countries in the early 2000s. Political power does come with economic responsibility, the least of which is to grant decent (and stable) standards of living to all Moroccans, and not just the privileged few.

The inflationist food for thought

Posted in Dismal Economics, Moroccan Politics & Economics by Zouhair ABH 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.