The Moorish Wanderer

Budget Bill 2013: Beyond the Figures

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on October 29, 2012

The #twittoma is having fun with the Royal Palace’s and Parliament’s respective budgets. Strange indeed, given the fact that the cumulative variation in the budget of all three (genuine) branches of government in Morocco (Palace, HoG and Parliament) has actually been a cut of 582,000 dirhams. Besides, the cumulative weight of these institutions amounts to less than 1% of the total Budget expense projected for 2013. Way to go on the sense of priorities, comrades. Better worry about the future burden of over-borrowing.

Compiled from the 2012 and 2013 Budget bills

Same goes for the journalists (Nadia Salah wrote the most awful editorial about the deficit, wrapped into bizarre comparison of poverty levels in France and Morocco[pdf]) with the recurring themes: yes, nothing has been done about the various loopholes special interest and lobbies – a total of projected tax exemptions of 36Bn (up 4Bn from 2012) and yet no word about the truly terrifying prospect facing the Moroccan economy 5 years down the road: a glaring failure to address the deficit, and the mounting public debt. A quick look at the balance sheet shows the weak policy decision to levy some additional revenues from a so-called ‘Solidarity Contribution’ (an idea in principle and projected revenues already put into motion by the El Fassi government) has nothing to do with any willingness to deal with the deficit, but rather to cater to the PJD populist streak; the government needs to look as if they are doing something, raising taxes with no sizeable impact is something, therefore we should do it. as Sir Humphrey Appleby so elegantly put it, this is akin to say “all dogs have four legs, my cat has four legs, therefore my cat is a dog“.

A comprehensive deficit-reduction plan in Morocco needs to both cut expenditure and raise revenues; and if anything, there is a whole range of sectors that benefit (hello big wealthy farmers) from exemption that amount to 10% of all Budget expenditure, and there are at least 21Bn worth of food and goods’ subsidies that go to the wrong people. These are the amounts that should be put forward, not some 2-3Bn fiscal revenues that do not make up even for the tax cuts circa 2007-2008. Under this government’s watch, domestic public debt increased 11% in less than one year – in real terms, this means 8,860 dirhams per taxpayer household of taxes to be paid later, on top of existing ones. And the amount of money set for 2013 will keep up the trend. The mainstream media (or the social media, to that matter) did not seem to care for the abnormally low figure for Budget deficit.

November-December 2012 could register levels of domestic debt as high as 360Bn dirhams

Why so? The government is expecting a massive appropriation for public service borrowings, up 20Bn from last year. In fact, the latest September figure from the Treasury’s monthly survey point out to a total borrowed amount of 85Bn. This is what we should be focused on.

Look at the graph on borrowing requirements – these borrowings need to be paid for later – and most of these have maturities between 1 and 5 years, so no that far away from 2016. Strangely enough, the government’s deficit-reduction plan seems to be based on the overly optimistic assumption expenditure will grow at somewhat constant rates – including debt service. Let us not forget this government as a whole (the political coalition as well as the unelected officials) have laid out a plan in our name before the IMF. It hinges on a strong recovery starting from 2013, and going all the way to 2016, allowing them to solve Morocco’s structural weakness on subsidies and trade balance, alongside minimal fiscal consolidation.

One last word perhaps on the preserved fiscal status quo: the Confédération Générale des Entreprises du Maroc (CGEM) has focused on the tax revenues side as though taxes buried businesses, and advocates some sort of supply-side economics.

I would argue a genuine supply-side economics needs to care more about the crowding out effect – that’s dozen of billions of liquidities SMEs will be denied, think about that, Mrs Bensalah.

The Yield Conundrum

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on August 22, 2012

I have been going on and on about Morocco’s public debt for quite some time, and I must confess some degree of bad faith in all devoted blogposts. And then, as usual, twitter-conversations have guided my interest; Nadia Lmlili and Ahmed Benchemsi kindly suggested to devote a simple piece about the public debt, and esteemed fellow blogger, Anas Filali and I clashed over the impact of public debt on households, more specifically on the younger generation: he argued inflation and uncertainty need to be accounted for, I fired back it was a blatant sign of economic illiteracy to suggest so, since interest rates already bear that (coming from an assumed PhD candidate, and an MBA graduate, it is rather hilarious)

I have now the opportunity to address both issues; please bear with me on some details because it may get technical at points, nonetheless, I shall do my best to bring simplicity to bear.

The yield on public debt is in simple terms the interest paid on the bonds issued by the treasury. Governments everywhere do not fund themselves exclusively with taxes and other duties paid for by taxpayers; they also borrow money, with different maturities: sometimes, ministerial departments need money to pay for routine expenses, such as paywage; when long-term investments are carried out, adequate financing sources are sought. Is it a good or a bad thing? Economists do not always agree on the subject, but there is good evidence to suggest public debt is actually a net wealth; As far as Morocco is concerned, what I find backs the idea that government intervention (through taxation and borrowing) tends to affect favourably investment fluctuation (that is, the mere existence of government expenditure/taxation brings investment volatility to significantly lower levels). Let us therefore posit from now on public debt is, in principle, a good thing. What might then be argued is: “how much public debt is good a thing?”. For emerging economies, the figure of Public Debt/GDP ratio of 60% is considered to be acceptable; for a small, outward-oriented economy that is Morocco, debt, foreign or domestic, cannot be indefinite, and thus the proposed threshold is a good benchmark.

I would argue the public and the mainstream journalists do not bother with such indicators. I mean, from what I read in the newspapers, economic-oriented pieces are either literary comments of official documents, or usually inaccurate interpretations of these figures.the recent PLL deal with the IMF, as well as the eminent new bond issue for 1Bn dollars pushed public finances and debt front and centre. Unfortunately, journalists and bloggers alike were too quick to summon the painful memories of the 1980-era of structural adjustments and hardcore austerity. I wish my voice would carry more weight and say: stop the frenzy, we are not there yet, and the road is long enough to adjust with moderate austerity costs.

I said I was implicitly telling half-truths about the debt in Morocco because I focused only on absolute values, namely the debt stock and annual PSBR (Public Service Borrowing Requirements) and I was too quick to forget the useful teachings of E. Fama and the general equilibrium models. My primary mistake was not to look closely at interest rates paid on these borrowings and the piled debt. In my defence, theses figures are not easy to come by, and their span in time is limited to the 1990s, so I shall make due with what is available – namely the synthetic yield per maturity listed on Bank Al Maghrib website.

Let me describe what I want to do by first describing the Fama-Arrow-Debreu theory applied to interest rates: these are supposed to embed every kind of information pertaining to its class asset; the yield on public debt is supposed to signal, among others, the robustness of Morocco’s public finances, the expected return from the projects the money is spent on, the credibility of the treasury to pay back the debt when it matures, and expected inflation when such time arises. In my argument therefore, I assume the interest rate to be a perfect signal, in what is called the Weak form of Market Equilibrium; weak because it assumes no unforeseen events, and all available information is already taken into account. For those interested in reading about the theoretical argument, you can read this great paper by Fama.

We now proceed with the basic idea in this blogpost: the monthly variations in estimated yields of various maturities reflect agent anticipation of risk and (potential) default; high yields do not mean intrinsic returns increased; in fact, long term interest rates remain very stable, but the risk premium varies following agents risk aversion vis-a-vis sovereign debt. Risk premium is exactly what we are talking about, as this captures all elements mentioned above many agents take into account when they go on the market and buy treasury bonds. That risk premium is difficult to assess, as far as the simple method to determine the yield curve goes – it can be deduced from empirical data, the difficult resides in assigning the proper model specification to it.

Consider two maturities of 1 year and 5 years. On May 2001, their respective yields were 4.99% and 5.84%. You immediately notice the significant difference in yields, with the longer maturity paying off higher interest, precisely because the uncertainty attached to it is higher. After all, it is easier to forecast the state of government finances in the next two years than it is in the next 5 years. Also, inflation expectations are higher because prices will rise anyway.

We could also link both maturities as follows: (1+r_t) = \left(1 + \frac{r_t}{T}\right)^T

this method, when applied to the example at hand, results are remarkably close:

         |  1Y |  2Y |
---------------+------
  Actual |4.99%|5.22%|
---------------+------
Synthetic|5.03%|5.06%|
----------------------

The differences should not arise, since rational investors are basically indifferent between 1-year and 5-years bonds. But, in real life, these investors have certain preferences (the so-called market segmentation theory) and from this simple example, it is obvious in May 2001, investors preferred more liquid debt -that is, short term 1 year yield, hence the lower yield. Conversely, these investors require a higher yield for 5-years bonds because of their preference for immediate liquidity. This is a great example to describe risk aversion.

sudden dips in yields are due to the discrepancies in computations (spreads in risk premium) as many month were missing out.

The dearth in data on standard maturities (say from 1 to 15 years) is a blessing in disguise, because it allows for a practical application of the fancy fairy theory to hard stock reality. As usual, results are ambiguous; we observe indeed the same phenomena described above occurs from time to time, with significant spreads with respect to close levels. For instance, much of 1995 gainsays this because theoretical levels are much lower (with differences as high as 2 percentage points) than those observed for available months. The 10-year bond required a yield of 10% in September 1995 (remember those were the days of post-PAS, fiscal consolidation and low growth) even though theoretical yields computed on the basis of 1-year debt, closer to 8.3%. Why so? As mentioned before, Moroccan investors are quite risk averse, and prefer to invest in more liquid debt, in this case, debt with maturities shorter than 1 year.

Still and all, the constant fiscal conservatism observed over the past 20 years brought all yields down to historically low levels: my preferred benchmark, the 10-year bond yield, was cut down from almost 10.5% early 1995, to a little under 4.5% in 2012, that’s almost 2Bn dirhams saved on interest over the last 5 years. This is also true for other maturities (as shown on the graph); similar levels of high interest rates were observed during the 1980s, close to 8% for prime rates. This is why I do not share the alarmist reports on a new “PAS”: we are not nearly as bankrupt as we were back in the 1980s, inflation is not nearly half that of the past period, and domestic, let alone foreign debt is way below 1980s levels. That is why I confess my failure to report on that bit of news: compared to the 1980s and 1990s, present Morocco is a beacon of fiscal prudence and restraint, and have the yield curve to show for it.

We are not out of the woods yet, unfortunately. The profligate expenditure on food subsidies and the post-Feb 20 generous upgrades in civil service paywage, unmatched with new fiscal receipts, and exacerbated by the 2007-2008 tax cuts, resulted in increased borrowings. The result has been swift: post-2007 10-years yield increased 500bps (or .5 percentage point) the same can be said of shorter maturities, so this is no sunspot easily brushed off. This generalized push on treasury yields upward has been observed in recent treasury surveys, and does not seem to bother that much policy-makers.

In a sense, this was to be expected: the Banking sector is short of close to 50Bn dirhams in the past 18 months, and shrinking liquidities mean investors make choices and require moderately higher yields, including those of the public debt, not to mention the rapid increase in PSBR. In a perverted way, investors are willing to require a moderate increase in required yield for treasury debt to place their dwindling liquidities, rather than invest them back into a morose exchange. This is the conundrum: why would investors do that? I am afraid I cannot provide suitable answer on that one.

Back to the public debt, the upward yield push in all maturities means these investors expect inflation to increase over the immediate and longer term, and their expectations are partly vindicated by the latest HCP and IMF projections. Let us not forget government finances benefited from the 15-years historically low inflation (observed elsewhere in the world but it is particularly true for Morocco) to switch gradually its debt structure to rely almost exclusively on domestic finances. In this particular sense, there is still quite comfortable room of manoeuvre for the government to keep piling the debt on before it even reaches 2002 levels – that is, 10y yields at 6%. But then again, one needs to account for the diminishing risk premium between 2000 and 2007, and its widening ever since.

Are investors putting more risk premium on the benchmark maturity, or do they require less with respect to their liquidity preferences?

Let us instead posit the risk premium is only the remaining term from the following equality, for some yield r_t

r_t = R_p + r_0

where R_p is the risk premium and r_0 the long-term, risk-free historical return. Let us also assume this long-term guaranteed return is close to 1% (this is a fairly realistic assumption) then we observe it a good fit: indeed, while required risk premium has declined significantly over the past 20 years or so, the trend weakened and remained more or less flat since 2007, and remained around 4.5% for the benchmark maturity. I would suggest government talking points about the deficit carry little weight in prompting investors to bring bond yields back close to the 4%, because the measures proposed to match the objective of 5.3% deficit relative to GDP in 2013, and 3% by then end of 2016 are two impossible things to reconcile.

The last remaining question, but not the least, is: “are public finances in trouble to warrant strong austerity?” undoubtedly, no. But these are equally unequivocal signs credible measures need to be taken to reduce the deficit amid shrinking liquidities and troubling signs from the current account and the currency reserve. But we are still far away from the so-called ‘cardiopulmonary arrest’.

It is always difficult to convey cautionary tones, or even urge pre-emptive moderate austerity measures (from my own point of view, anyway) when both sides of the pond are screaming Armageddon. But the fact remains levels of debt stock are increasing at high speed, and though these do not translate immediately in increasing yields, it would be then a near impossible task not to pursue hardcore austerity to bring long-term yields back to 4.5%. It is even more disturbing to notice marginal spreads between short and long term maturities (less than 8bps between 1y and 10y yields recorded on July 2012). The matter of concern, in short, is not default risk; it is however that of a government increasingly unable to fund programs and investments because paid interest is higher each year are creeping on in.

When Fiscal Conservatism can Actually Do Better

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on March 11, 2012

The level of prices in Morocco is perhaps the most important economic issue that can rally Moroccans around; Debt doesn’t seem to matter much, nor does the deficit. Even taxes do not seem to matter much. Since no particular (and reliable) polls are being carried out, I take it media coverage of these issues speaks for itself: public opinion does not seem to care about public debt and deficit, and public policy ensures level of prices are low, a good indicator of how priorities are ranked with a relatively popular government: stabilize prices at all costs.

By now, the major aspects of the new 2012 Budget have been made public: a big push in social sectors, education, health, housing and industrial relations, not to mention the appropriation for the Compensation Fund – around 40 Billion dirhams, and the deficit does not seem to be a priority, the trade-off in public debt and fiscal receipts has been pretty clear and favour immediate stabilization. It seems to me – but I might be mistaken- there is no Budget Policy for the next 5 years, only a year-to-year management of public finances. Sure, CST funds and Budget-allocated Public investment do contribute one way or the other to some long-term vision, but I doubt the government has fully endorsed, or even grasped the implications of, the spirit of past investment plans, like Plan Maroc Vert, Haleutis or the High-Speed train.

BKAM Core inflation doesn't take into account some elements that might be blamed for a rise in inflation

Though the government has pledged to spend its way to stabilize prices, it seems they have already overlooked the impact of their policies on future inflation as well as on the prospects of growth itself. Inflation is going to be a problem later on, perhaps sooner than what they might expect; so far, latest reports on inflation (core and total) state the following:

Selon le Haut commissariat au plan (HCP), l’Indice des prix à la consommation (IPC) a enregistré une hausse mensuelle de 0,2% en janvier 2012, après le recul de 0,5% observé en décembre dernier. Cette évolution reflète principalement l’accroissement des prix des produits alimentaires volatils de 0,9% après les baisses successives enregistrées durant les trois mois précédents. La progression des prix de cette catégorie tient à celle des prix des volailles et lapin et des légumes frais de 1,3% et 2,1% respectivement, qui a plus que compensé la baisse des prix des poissons et des fruits. Pour leur part, les prix des produits réglementés ont connu une légère hausse de 0,1%. Abstraction faite des prix des produits volatils et de ceux réglementés, l’inflation sous-jacente de Bank Al-Maghrib (BAM) ressort en hausse de 0,1% après 0,2% le mois précédent.

En glissement annuel, l’inflation s’est établie à 0,9% en janvier, inchangée par rapport à décembre 2011. Cette évolution résulte essentiellement de la poursuite de la baisse des prix des produits alimentaires volatils (-1,3% au lieu de -1,4%). Pour sa part, l’inflation sous-jacente est ressortie à 1,6%, après 1,7% en décembre.

The efforts put in stabilizing prices have brought overall inflation down, it is effectively a deflation of sorts: food prices are notoriously volatile, and the methodology makes sure they are not taken into account in core inflation computation. Bank Al Maghrib puts the 2012 trend for core inflation at 1.6%; yet HCP projects:

Concernant l’évolution de l’inflation, l’accélération attendue de la demande intérieure, associée à la persistance de la hausse des prix à l’importation, exercerait, en dépit du niveau élevé des dépenses de compensation, une légère pression sur les prix intérieurs.

L’inflation, mesurée par le prix implicite du PIB, passerait de 1,6% en 2011 à 2,5% en 2012.

that is to say, GDP deflator will rise moderately above BKAM’s core inflation 2%, which will amount to the same thing, since the last decade observed a 1.9% average GDP Deflator inflation rate, and BKAM policy rates haven’t change significantly on that period, and were much more responsive to GDP deflator fluctuations than they have been to regular ICV/IPC inflation rate. And so by postponing inflation shocks with subsidies, the budget only makes it harder to sustain future, compounded inflationary pressures that will come mainly from the crowding-out effect.

Bank Al Maghrib has only two alternatives: either support government policy and intervene a lot more on monetary markets to supplement flailing M3 and make up for the effect of government bond issues on available liquidities: as of late February 2012, the amount of liquidities BKAM serves amounted on average to 29.75 Bn dirhams, up to 238Bn since January 2012. up from 67Bn served last year at the same time by the Central Bank, an average intervention of a little less of 10Bn.

BKAM is more responsive to Deflator than the regular ICV rate. (1998 does not take into account a 50bps hike in policy rates from 5% to 5.5% then back to 5%)

My point is, government expenditure to stabilize prices will backfire, and I argue the price to pay for an inflation freeze on food prices is not worth it, since it also takes deviates liquidities from potential growth, and it pressures the Central Bank in going in with a hike in interest rates to sustain its other equally important target: sustain the Dirham’s value and manage foreign currency reserves.

Since I am getting more and more alarmist about this whole business, how come no major rating agency has produced a document about it so far? How come S&P didn’t change its outlook on Morocco? Last time they published any Moroccan-related news was July 2011, and the Outlook was Stable – and thus unlikely to change. So from a financial standpoint, the debt is manageable, not because Morocco’s economic prospects are going to improve, but because as far as its capabilities to mobilize foreign resources go, Morocco can count on generous creditors. And there goes the historic lesson: Morocco got into trouble in the early 1980s because it has borrowed too much from abroad. Foreign debt now stands at around 20% GDP; perhaps that level is considered to be sustainable; as long as the dices roll, take your chances, domestic debt doesn’t matter, does it?

Why fiscal conservatism, then?

Well, why not? It’s all a matter of trade-off, that is, a political decision that favours delaying deficit reduction and bringing debt under control because it values immediate price stability. I guess a 40Bn expenditure in compensation fund that benefits at least 75% to the top 20% affluent households. A subsidy that is likely to worsen trade deficit and weaken the level of foreign reserves accordingly. It looks as though as long as Morocco is assured of generous foreign financing -from the Gulf or the EU- its public finances aren’t much of a problem. On the other hand, if the assumption the business cycle has reached its peak holds, then it is dangerous to pursue the foreign debt path; it looks as though Real Estate is likely to be the main growth booster, and foreign, ‘hot money’ inflows do not mix well with tangible asset acquisition.

Budget rebalancing means the following: yes, overall inflation will rise moderately within the 2% BKAM target rate, and probably so would unemployment, but not above the 9% limit; but capping PSBR and spending would allow available liquidities to be channelled into private expenditure, thus boosting economic growth. Simultaneously, fiscal policy has to be rebalanced in favour of less indirect taxes and broader tax base; this means many of the existing loopholes, temporary and permanent exemptions and moratorium would be closed or ended, or at least directed in favour of actual contributors to growth: small and innovative businesses, agricultural cooperatives, higher education and research. What this government is doing is basically the worse of two worlds: social spending with no immediate repercussions on growth (domestic expenditure has a lower contribution to growth when heavily subsidized, and improving the livelihoods of 400,000 public servants out of a workforce of 11,8 Million people isn’t really going to make it happen) rolling up large deficits and mounting debt that crowd out liquidities.

What Debt and Deficit mean for All of Us?

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on March 4, 2012

As much as I care about Debt and Deficit, I fear these subjects do not catch on with the mainstream media in Morocco.

There is some kind of fatality attached to it: “Deficit? Can’t be helped.” “Taxes? Debt? Can’t be helped either, as long as taxes are not high, who cares?” But the fact of the matter is, to care about deficits is essential. First off because abstract issues related to public finances have, sooner or later, a direct impact on our lives: the mortgage, the basic public services, even the level of prices are affected by government finances.

I wish there was some official report to vindicate my prediction the expansionary cycle reported by a 2009 paper from MINEFI on Moroccan business cycles, has, in fact, been put to an end:

Phase d’expansion entamée en 2000T4 et non encore achevée Les huit cycles d’affaires enregistrés durant les décennies 80 et 90 ont été marqués par la comptabilisation de 13 années de sécheresse entrainant de fortes oscillations de la production agricole et des secteurs de l’activité économique qui lui sont associés à l’amont et à l’aval. Toutefois, à partir du 4ème trimestre de l’année 2001, deux caractéristiques qualitatives ont particularisé l’économie marocaine et portent essentiellement sur :

* La baisse notable de la volatilité, mesurée par l’écart type de la variation du PIB trimestriel, pour atteindre 1,38 contre 4,2 dans les années 90 et 2,9 dans les années 80.

* La rupture avec les cycles d’affaires courts par l’amorcement d’une longue phase expansionniste record de 31 trimestres.

La phase expansionniste que connait aujourd’hui l’économie marocaine se démarque clairement de l’expérience des décennies précédentes puisqu’elle est réalisée dans une conjoncture difficile et instable, marquée essentiellement par des aléas climatiques défavorables (2001, 2005 et 2007), par l’instabilité des marchés financiers internationaux, par la flambée des cours du pétrole et par l’essoufflement de l’activité économique chez les principaux partenaires du Maroc. Ce contexte d’évolution démontre distinctement dans quelle mesure l’économie nationale a réussi à amorcer un changement positif de structures économiques et à développer une grande capacité d’adaptation et d’amortissement des chocs.

what follows might be either a mild depression or a long, painful recession, it is up to the appropriate public policy to smooth business cycles over the troubled path ahead. And increasing debt when available liquidity dries up and upward pressure is exerted on the level of interest rates.

Better operate modest and harmless cuts today than deep and unpopular cuts tomorrow

1/ High Deficit means an increase in taxes/decrease in spendings are coming fast: a deficit doesn’t usually go on for ever, especially a 6% deficit to GDP. Simple: high deficits need to be paid for, and at a premium, usually paid for by the taxpayer, one way or the other.

The operating logic is quite simple: government spending keeps on rising -save for two fateful years, 1965 and 1983- and is usually matched with taxation, debt and… the deficit. The deficit is a convenient way to finance government policy, but it is so when the deficit is created because of a precise set of government agenda, not because a government wants to spend itself into social stability or just to sustain its administrative lifestyle. in fact, the very existence of CST treasury funds contradicts the idea that ministerial departments conduct a policy of their own.

And so an unjustified high deficit cannot sustain itself for a long time -and 5 years is a short time in politics; sooner or later, deficits have to be halved, and from past experience, Moroccan officials tend to favour lower government spendings instead of increasing taxation: In fact, during the 1980s, during which the Structural Adjustment Program was implemented, the total increase in fiscal receipts was scaled back, and was kept well below 16% of total GDP. The rest is pure budget accounting: the government has to freeze or cut spending (which it did 30 years ago), including pay-wage, basic services like Health, Public order, Education and, most worrying to the government, Compensation and Subsidies.

2/ Expansionary spending at the end of an expansionary cycle are hazardous: the figures disclosed ahead of the new 2012 Budget clearly point out to a moderate expansion in government spending in the hope to allay the backlash induced by pessimistic projections in growth figures: the government was gunning for an average of 5.5% GDP growth all the way to 2016, they start off on a low 4.2%, which puts the pressure to come up with a higher growth figures for 2013-2016, an average of 6%, actually. One has to agree that in these trying times, with huger economic uncertainty from the EU, there is very little chance the economy can pull off a straight 6% growth all the way to 2016, whatever tax cuts, generous subsidies and mani pulite this government can indulge in.

In fact, the government has got itself caught in what is usually a weakness in left-leaning styles of government: generous social programs with no immediate focus on growth, pro-business agenda of sorts. (By pro-business, I mean businesses that generate growth, innovation and jobs, not the rent-seeking, oligopolistic type of businesses that rule Morocco) and I suspect they get a free ride from the press for a host of reasons: a gutless Finance Minister who is more interested in wrestling control of key Finance departments from his sidekick generates more news headlines than anything else, in addition to a convenient, almost opportunistic government timetable to deflect public scrutiny to more superficial matters (Grima-Gate, Choubani‘s and Hakkaoui’s controversial statements respectively on culture and abortion)

3/ An unbalanced fiscal base means no harm done to the Economy if taxes are raised: just look at the average fiscal pressure on GDP: we are far from the net average of 19.4%. Now this is always a touchy subject: increasing taxes isn’t really a popular subject, unless the discourse is directed to the various fiscal exemptions and breaks a privileged few benefit from; the 2012 Budget makes room for about 33 Billion, 2/3 of which benefits to big, profitable business and wealthy individuals; the scrapped 42% marginal rate on Income Tax, and, last but not least, the discretionary, unjustified, uncalled for moratorium on the agricultural tax, an actual tax cut that benefits a tiny, urban and wealthy group of farmers whose profit margins are high enough and aren’t usually invested back into the agricultural economy. This is a 120Bn business with untapped fiscal receipts and large tax subsidies. The least one can do is to tax agriculture, then allocate the money back to smaller farmers to help them expand and improve their output, and thus extract themselves from poverty into middle-class affluence.

And there goes the argument on taxes: it is better to operate now a fiscal consolidation with moderate and fair tax increases, so as to sustain growth and redistribute wealth, instead of dodging the issue until it is no longer possible, and then carry on with a fiscal consolidation that taxes the middle class, with proceeds used to pay off the debt instead of spurring growth, and that what might very well happen if the next couple of budget bills do not get their fiscal house in order.

4/ the Political choice has not resolved anything, and the price for it is Debt: the government self-proclaimed ‘virtue’ doesn’t provide an adequate plan to bring spending under control. In fact, I suspect total public borrowings will grow to some 500Bn by the end of 2012. The public debt has a direct impact on everyone’s livelihoods: high debt, especially when one consider shrinking available liquidities, put pressure on interest rates across the board; high interest rates mean fewer households can manage to buy their house, and those with a mortgage will be faced with higher rates. Businesses with tight financing capabilities will have to close down. In expansionary times, a relatively important deficit doesn’t matter a lot: liquidities are available for everyone, banks, individuals and businesses alike to dispose of, even government finances.

But when one considers the latest monetary figures, liquidities have dried up from 962Bn to 900Bn, and there lingers an uncomfortable question: aren’t additional borrowings going to dry up liquidities further? High government debt means fewer liquidities will be available for private markets, a textbook application for the crowding out effect. Furthermore, the money paid back on past public debt bears little value, even with interest rates. The government is set on borrowing 66Bn, it projects a 42Bn payback -including interest- but each payback is valued less than the money taken away from existing liquidities; quite simply, and because of the conjugated effect of opaque government finances and ineffective spending, the net public extraction of liquidities is higher than the mere arithmetic difference of 24Bn. It looks as though government officials observe how ineffective their fiscal policy to boost growth and investment, and try to make up for it by borrowing to finance spending, only to worsen the liquidity and investment problem.

5/ Fiscal Consolidation has just been postponed, a can kicked down the road: we now move to a different time-line, whereby future generations of taxpayers will shoulder the cost of fiscally irresponsible choices. A deficit is justified as long as a tangible assets are put up as collateral; TGV, F16 fighter airplanes and the (future) purchase of M1A1 Abrams Tanks [pdf] are no use for the future generations. And so, any future fiscal consolidation plan will be tougher and more painful, simply because there will be higher spendings to cut, and higher interests to pay back. Available money for education, health, law and order will inevitably be squeezed. When the government commits for a net increase in government balance sheet by 30Bn for a 5% budget deficit, it seems the government has indeed opted in for kicking the can down the next fiscal year. We will therefore have to wait for the 2013 Budget, and there is little we can do about it.

A Dangerous Game: 5% Deficit and Mounting Public Debt

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard, The Wanderer by Zouhair ABH on March 2, 2012

I most certainly will devote a post underlying the inherent dangers of a large public debt on the Moroccan economy, especially when one considers it lives the closing moments of its expansionary cycle. But for now, I can only make the argument that a well-meaning government balks at serious fiscal policy schemes, and subsequently is running this country into uncharted and dangerous territories.

The various disclosed figures every now and then for the past week all point to a relatively high public borrowing requirements to match the unchanged total fiscal pressure – that stands at around 17.5% GDP and pay for the rather large increases in public spendings, in education, health and housing.

Will they make it safely to 2016?

While the government has pursued a commendable agenda in boosting spending in these departments, I fear the hikes in public debt, and the high levels of deficit will soon put a stop to the committed level of spendings.

Le Matin Newspaper reported on the press briefing during which some of the most important Budget figures were unveiled, and one can read:

Le deuxième volet a trait aux politiques sociales. L’enseignement sera doté de 51 milliards de dirhams, la santé de 12 milliards de dirhams, la politique de l’Habitat de 3 milliards de dirhams. […] Côté fiscalité, on n’enregistre aucun changement au niveau des taux déjà appliqués que ce soit au niveau de l’IS ou de la TVA.

That explains how the deficit first went from an initial projected 22 Billion deficit (around 3.2% GDP) to the 5% projected for 2012, that is 41 Billion – or almost 20 Bn of net additional spending. The previous Budget Bill projected 144Bn in fiscal receipts. The new deficit compounds the following:

* +4 Billion in education

* +2 Billion for Health

* +3 Billion for Housing

* +13 Billion for collective bargaining

I have some doubts about the last two items, given the high spending commitments relative to the budget allocated to departments in charge, and these might as well be part of the bombastic 188 Billion public investment target (most likely 64 Billion of Investment Budget) as for the other spending pledges, the 1Bn support scheme for private employment already exists -the net increase is a modest 360 Million dirham, up from the initial 640 Million. Moreover, the budget bill seems to provide for an additional 470 new public service jobs (up from the initial 25,734) the only new alternative -but not exclusive- policy to the Compensation Fund quagmire is a meagre 1Bn for the so-called solidarity fund – 50% less from what was talked about before the Election.

Overall, that means, ceteris paribus, the total Public Borrowings Requirements for 2012 will go up to *drum rolls* 66 Billion dirhams. For 2012, the government has to borrow that amount of money, which equates 1.6 receipts from the corporate tax, 2.3 receipts from the income tax, and most worryingly, one-fourth of total receipts for the Budget.