The Moorish Wanderer

Breaking (Old) News: More Details on the IMF-Morocco PLL Deal

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on August 8, 2012

Here’s some exclusive information for the readers. I should say first I am amazed by how the IMF took the trouble to answer my emails (and calls) about the Precautionary Liquidity Line (PLL) deal Morocco has benefited from; I mean, they usually deal with professional journalists. Still and all, it is humbling when the IMF takes the time to lay things out.

The exclusive information isn’t quite so: you can find all the details on the IMF’s website, but as far as I can tell, the Moroccan press corps did not report on the main talking points discussed during that press call conference.

“The program for Morocco is a 24-month PLL as we call it, a precautionary and liquidity line, in the amount of SDR 4,117 million, which is just over $6 billion; $6.2 billion to be precise.  This is a financing buffer, or a sort of insurance against potential external shocks.”

The consensus within the IMF seems to be clear as far as Morocco is concerned: strong macroeconomic fundamentals, low inflation and sound banking system. Our weakness, after all, is exogeneous: Morocco’s main trading partner, the European Union, is experiencing serious economic problems, and these reflect badly on Morocco’s trade balance. As for the PLL scheme itself, this is not some PAS-like conditioned loan/help: it is admittedly the IMF’s first use of that policy tool, and obviously, the conditons attached to it are not necessarily ‘standard issue’ deregulation programs the institution is known for. If anything, Morocco and Jordan are de facto guinea pigs for a new mindset within the IMF; they were at pains to stress its novelty, and in Morocco’s case, it is supposed to act as an insurance. Anyone with an insurance policy knows that whatever the outcome, the insured agent pays its fee and a premium computed on the basis of a risk profile. Is 3% low enough a premium for a country with a proven record of sound macroeconomic policy? I don’t know. Our government seems to think so, and so does the IMF. The expected rebound in 2013 will tell if both have been right or wrong.

Weak correlation in Forex reserves and M3 aggregate. The steady drain since early 2011 of an overall 48Bn dirhams did not affect growth of M3, though it has slowed down a bit.

the institution’s experts believe Morocco does not face a particular dire problem in its balance of payments. The graph shows the sustained drain in BKAM’s foreign reserves did not actually harm the monetary base, and if anything, we are back to levels observed in 2005.

There is only a subtle hint the Moroccan government has pledged some fiscal consolidation (read: austerity measures) and the IMF believes it has proven its bona fide in that respect by increasing the price of gasoline to the pump. Brace yourselves taxpayers and others, there are several measures to be expected in terms of revenue enhancement (tax increases) and spending cuts. It seems MM. Baraka and Azami’s pledge to bring back government budget deficit back below 3% of GDP by 2016 has some credibility, though from my own back-of-the-envelope computations, this is likely to entail as much as 30Bn dirhams in either sides of the balance sheet and/or a mixture of those.

The final point touched upon was the Subsidy Fund. As they see it , the IMF believes it is high time the Moroccan government got rid of it in favour of a more targeted (shall we say discriminate in a positive sense) to those who really need it. Unfortunately for both our government and the institution, there is an unrealistic expectation that a broad consensus is needed to reform the fund. The government pledges to engage with civil society and other economic partners, but really, when a business benefits from a rent-like dominant position, why trade valuable profits for hazardous competition?

This sums it up actually: the PLL is not conditioned on explicit terms. In fact, the IMF wants to promote it as a helping hand to good economies with sound policy-making. But there are, as we shall put it mildly, expectations the Benkirane government has to meet: fiscal consolidation (which we really need at this point)  and a far-reaching reform of subsidies in Morocco. No word however on the likelihood of Morocco’s problem worsening or transforming into a real balance of payment crisis. I guess someone in Washington is really optimistic about our economy.

(the complete transcript of the press conference call is available on this weblink)

IMF Report Could Prove To Be Useful

Lots of bad news are coming with IMF consultations between August and November 2011. But as Jim Hacker in “Yes Prime Minister” quipped about hardships: “every problem is also an opportunity”. A blessing in disguise, but one that is going to take a lot of political courage out of otherwise not very plucky politicians.

Perhaps running on the theme of raising taxes is not a winner in elections time. Those parties who released their manifestos did not seem to price, or cap or indeed provide any measurable indicator of their future fiscal policy. But the overall impression I get is that the net effect of their proposals is a tax cut; not a smart policy, considering the very generous, almost spendthrift commitments to raise expenditure. But nonetheless, we shall roll with it. The IMF conclusions encompass one crucial sentence that goes unnoticed in an otherwise little-publicized document by the mainstream media; the reports warns that:

Although in 2011 the Moroccan government implemented short-term policies to address these constraints, in 2012 the government is expected to consider reorienting public expenditure and achieving a fiscal sustainability while fostering inclusive and sustainable growth in the medium term.

“Inclusive”. If I were a party strategist, I’d suggest the manifesto be geared toward that. PJD tried to focus on it, but they lacked metrics precise enough to impress and sway urban, middle-class voters to vote for them. A8 Alliance does not care about it that much, since their focus is to strengthen corporate Morocco first, bringing deficit to a 3% threshold and revive exports. So fiscal sustainability in Morocco basically means taking a serious look a the 32Bn boondoggle of tax incentives, tax deductions, tax exemptions and tax credits that do not seem to benefit those who need it the most. This includes high tax breaks for real-estate developers, a fiat moratorium on Agricultural taxes and the disastrous policy of scrapping the 42% marginal income tax rate.

To my best recollection, none of the three parties with publicly available manifestos (PPS, PJD and the RNI-led Alliance) have made commitments one way or the other on these tax handouts. No one dares to challenge the moratorium on Agriculture exemption even though a simple article introduced in the 2012 Bill can do it: abrogate Art.45 Alinea II on the 2009 Budget bill right away and not wait until December 2013. The mainstream political personnel would not dare do it because the King decided to extend the moratorium in 2008.

Hurrying the agricultural tax may prove to be a double blessing: first it increases budget receipts (which is always better than keeping on borrowing) and second, tax policy will influence estate property structure, as too much agricultural soil is under-used because of archaic regimes going on for too long, and no political power has an interest in reforming them; PJD won’t touch it, first because their core constituency doesn’t live there, and the other parties hope for a strong showing to beat PJD candidates in rural districts, so nothing will be done to even compromise their relationship with the farmers. And yet, we cannot afford to go on any longer with Habous, Guich, Joumou3 status, because productivity is at stakes, while other larger, well-funded and well-managed properties export products and yield good profits. Because of the ongoing soil status mess, the tax exemption goes on as a buffer to prepare for a reform that has yet to come.

Casablanca Stock Exchange created good value of its shareholders. Especially those investing in Real Estate. (Source: CSE)

Ending the 5.5Bn tax deductions in favour of RE developers as these go right into their pockets: the levels of profits the sector generates to its (few) shareholders are further fuelled by tax incentives. In the mean time, a pittance is given to households to buy a decent home they are longing for. RE companies listed on Casablanca Stock Exchange consistently beat the overall index, which means more dividends, more profits and an additional 5.5Bn gift from the state – by comparison, total dividends paid for by MASI was about 30Bn, that gives an idea of how much the tax break actually benefits real estate tycoons.

Scrapping the exemption on households subject of the defunct 42% marginal tax rate is also another meaningful policy that would alleviate the burden on the median classes households, as well as embody the principle of fiscal fairness: those fortunate enough should pay commensurately more. The great news is that our tycoons and wealthy 1% will not leave for a tax exile, nor would it hurt the economy; quite the contrary, imports of new luxury cars would decrease, at least. For the moment, the median class pays the highest effective rate across the board; those tax loopholes included in the tax code should be closed so as to bridge the gap in effective tax rates and thus both expand budget and households revenues, as well as insure that every category is paying at least commensurate to its income.

Scrapping special funds and wasteful programs in the Budget bill: though this is an ideologically-motivated policy, many autonomous funds need to be scrapped or privatized, simply because these are blatant examples of how special interests and lobbies get away with the taxpayers’ money; the 2012 Budget Bill provides funding for a motley of bizarre bureaucratic projects:

– Insurance companies get MAD 932Mln,

– Fez city gets a special fund, the only Imperial city to benefit from what could well be the hallmark of patronage, or worse, nepotism.

– A special SEGMA unit attached to the Finance Ministry top “supervise” privatization endowed with a 8Mln budget.

– 45Mln to the Alcohol centre at the Industry & Commerce Ministry (supposedly to spend it on drinks)

– The entire Habous Ministry swallows a 2Bn budget and it is almost impossible to check whether they are doing a good job – just have faith they do.

– Dar Es-Salam Golf Resort spends 18Mln out of the taxpayer’s money -who cannot afford to play golf- to subsidise the über-wealthy hosts and their posh hobby.

– Special Fund for Sports. Since the Sports Minister boasts about the excellent job he is doing, perhaps he does not mind taking 800Mln off his budget? After all, Moncef Belkhayat can find a way to deliver the same result with less money.

– Dar Al Nakhil Prints is endowed with a 2.3Mln budget even though the government has an official print at its disposal (with a budget of 13Mln)

(And these alone save up to 4Bn in taxpayer’s money, that is 18% of total budget deficit)

Do not take my word for it, just have a look at the late 1970s budget bills: on paper, everything seem to be alright. But in practise, careless management of public finances at the time got Morocco into a debt crisis and a 2 decades-long recession we are still paying the price for. This is a new case of mismanaged public finances through ideologically-biased fiscal policy with no immediate or tangible results on growth or even budget receipts.

I understand my railings about this hidden piece of news go unnoticed because I write in English. And because as long as mainstream media and other politicians do not get hold of this, those in charge of Morocco’s economy and its public finances will go on piling on the debt, serving generous tax cuts to those who do not need them and still get away with. there is a disaster in the making because no one seem to care about it;

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.