The Moorish Wanderer

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.

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;

Austerity Measures Ahead… But No One Cares

I’ve enjoyed a good laugh when I found this Bloomberg TV interview with Minister Salaheddine Mezouar.

I might have been saying some mean things about his politics, either as a minister or as a coalition leader, but to be actually invited to an interview with one of the biggest financial data providers and answer questions in French, s’il-vous-plaît, has been the killer: the next Head Of Government-to-be proves to be a shallow person. He was presented as a new kind of technocrat-politician, a corporate manager of sorts; he turned out to lack intellectual depth as well as wordiness.

But these are only a trifle when compared to the hidden truth about future austerity measures and budget adjustments recommended in IMF Article IV findings. To bring back deficit within the 3% GDP threshold is going to take some tough fiscal consolidation measures; not because Morocco’s economy is in a bad shape, but because the outgoing government, and the likely next government do not have what it takes in terms of political courage to venture into deep structural fiscal reforms, including the decision to put an end to a host of fiscal exonerations, breaks, preferential regimes and moratoriums.

The successive political parties in charge of treasury and finance departments always referred back to the King as the source of all executive last-resort decisions, but now the new constitution no longer provides them with this panacea of a cover; whether the King still holds these extra-constitutional powers or no longer does is only relevant to the point that partisan politicians cannot invoke it now: they have repeated, time and again, before and during the referendum campaign that the new constitution was scheduled a long time before Feb20 activists took to the streets, and that it was in His Majesty’s wish to relinquish as much power to the political personnel to manage this country and preside over its destiny.

It is understood therefore that those manifestos each party -or coalition of parties– is releasing, are what they are set on applying once they take office. I suggest citizens interested enough in the affairs of the State should rise up to the challenge and question those pledges; Starting with the Minister’s coalition.

The Alliance For Democracy commits to a lot of spending. Those programs they have priced and evaluated will load up the next couple of Budget Bills with an average of at least 50Bn additional spendings per annum. He has, in short, committed public finances to a net cumulative spending spree of 205Bn over the 6 years. Supposedly these programs are there to make Moroccans feel better, and there is nothing wrong with it. The trouble is, the same Finance Minister has received communication from IMF that he needs to bring back budget deficit to 3% GDP. The draft budget bill predicts a deficit of 22.5Bn, in line with the 3% threshold, but the bill has provisioned for 40Bn, too low a figure, considering the constant intervention to replenish the fund mid-year. And it is even more worrying that the fund starts off with 10Bn more than what was observed in the past couple of years; It means we should be expecting an actual cost of 65-70Bn for compensation, if no reforms (or cuts) are implemented in the mean-time.

But there is two things left out by the profligate M. Mezouar: where will he get the money, and how will he accommodate his spending commitments with the promise to IMF to bring down deficit to 3% GDP? He will have to cut between 20 and 30Bn in spendings to do so, and he is not telling the Moroccan public about it. But why cut spendings? Why not continue borrowing, or better still, let the deficit run beyond 3%? Somehow, that commitment to increase spending at least 50Bn on average over 6 years is in line with the Alliance’s own promised growth rate; there is a betting on a quasi-linear growth in fiscal receipts to match the expenditure increase, approximately 6%. But this recent Radio Interview with Minister Nizar Baraka shows that in the high circles, that 6% growth (let alon 7 and 8% promised by PJD and USFP manifestos) is a charade:

Le ministre istiqlalien chargé des affaires économiques et générales propose un taux de croissance annuel moyen de 5% ainsi que la création de 150 000 emplois par an. Des objectifs bien en-deçà des promesses de l’Istiqlal formulées à la veille des législatives de 2007.[…]

Radio Aswat: La CGEM souhaite un taux de croissance annuel moyen de 6,5 % de croissance, qu’en pensez-vous ?

Nizar Baraka : Cette étude n’est pas du tout réaliste. C’est un modèle économique qu’ils ont souhaité transposé au Maroc. En voulant savoir combien de taux de croissance nous faut-il réaliser pour résorber le chômage. Ce sont des mathématique et moi je suis mathématicien, mais il ne faut pas oublier le contexte international.

First off, Moroccan officials and policy-makers have prided themselves to follow IMF instructions to the letter ever since the Structural Adjustment Program of 1983. Back then, Debt to GDP ratio was 110%, the war down South was taking its toll, large economies were in recession, and the Moroccan households were reaping the rewards of a decade of budget mismanagement. Save for the nameless Sahara war, we are in the process of replicating the 1970s-1980s scenario not before long.The finance ministry and Bank Al Maghrib have been scrupulously deflating the debt, battling away inflation -to the price of a recession during the 1990s and relatively high unemployment- so as to fit orthodox financial targets. And it did: Morocco has halved its CPI inflation rate from 7% in the early 1990s, to 1% in 2010. It has done so much that at every occasion, IMF officials have always praised our officials for their commitment to stabilizing and balancing macro-economic indicators:

November 2011

Thanks to several years of sound macroeconomic policies and political reforms, Morocco was well equipped to address the 2008 international crisis and to respond to the social demands that have emerged during the Arab Spring.

March 1998

Executive Directors commended the Moroccan authorities for the progress made over the past two years in macroeconomic stabilization and in liberalizing the economy, despite the economic and social impact of the recurring droughts.

So there is little reason for the next government -who will almost certainly return with some of the incumbent government officials- to deviate from their policy; if IMF asks for a deficit contained within 3%, they will. So this means that either these pledges for infrastructure, scholarships for students, apprenticeships for labour market insertion and the like promised in Mezouar’s manifesto might not be funded and dropped altogether; or some or all of these policies will be implemented but at the cost of borrowing money on domestic and international markets. Let’s have some fun with it, shall we?

– Scenario 1: Borrow ’till the next election

We are now standing at more than 400Bn public debt stock. That’s almost 54% of GDP. It seems Moncef Belkhayat (bless him) has it in good confidence that as long as we don’t get anywhere near 60% GDP, we are doing just fine. Not so much, no. I suspect The Minister has been skipping economics classes at ISCAE business school (presumably to smoke a cigarette and sketch a business plan to make money out of it in the process)

While the government can borrow as many billions as it possibly can on domestic markets with no immediate danger on its solvency, it drains liquidity away from other economic actors. This means inflation will be pushing beyond the 2% limit observed by Bank Al Maghrib, perhaps even beyond IMF projections of 2.7%; and at the current state of things, a real increase in main interest rates will cripple the economy more than anything else. Not only will borrowing be more expensive for the government to fund its projects, but a host of households will see their mortgages go up and their consumer’s loans repayments turning more and more expensive. At this point, scenario 2 takes place, with the government slashing its spendings and putting a freeze on the compensation fund, civil service pay-wage and many other items.

– Scenario 2: Freeze and stop spending

Smarter officials and ministers will anticipate all of this and abide by BAM and IMF projections on growth, inflation and government debt. A 5% growth with a 2% inflation rate call for government spending freeze, a lull that can be used to reform the tax code, discuss the opportunity of re-introducing the Agricultural Tax and reform the Compensation Fund. But the evidence so far suggests none of this will happen, save for the spending freeze.A 10% cut means 30Bn will have to be saved somewhere, and all departmental hands are at the pump.

But then, these austerity measures do not find favours with electorate; in fact, they are likely to get irate demonstrators, unemployed, poor working class individuals to take to the streets and riot violently, as they have in 1984. This scenario recalls the context in which the late King Hassan II castigated violently the demonstrators.

(On the plus side, the austerity package will bring debt to GDP ration below 50%, it will bring budget deficit below 3%, and inflation (core inflation to be precise) will be in line with target rates).

I am expecting Istiqlal Party to release their own manifesto to make a final judgement on how the political personnel is handling the economic issues; but so far, they have been -PJD included- grossly optimistic about figures they know well will not fit their spending commitments.

Whatever it takes to get elected. Even if it means endangering public finances.

A Change is Coming Your Way

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

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

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

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

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

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

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

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

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

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

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

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

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

Budget: Tightening Of the Screw

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco by Zouhair ABH on August 17, 2011

About a week ago, Morocco received it’s Article IV report from the IMF. Though the gist of it does not shed great concerns about Morocco’s economy, but it has doubts over the government’s fiscal responsibility; given the political creed of our Finance Minister, an austerity package is likely to be bundled together and sent up to parliament. Instead of going for structural reforms, budget cuts are preferred to deal with a deeper problem than just a temporary imbalance in receipts and expenses.

I'm Lovin' it ©

But then again, with an official timetable for general elections on November 5th, Finance Minister Salaheddine Mezouar is not worried about the next half a decade, or even the decade laying ahead: he managed to land that $ 1.2 Billion Euro-bond deal June last year, but he does not have to answer for the subsequent coupons, or whether that precious hard currency stock is well spent. He might not return as minister after all, and wasn’t elected in the first place, so why would he answer to anyone if the appointing power does not hold him to account? But that is petty politics, His legacy, the unsoundness of many decisions theoretically under his watch will be, for the better or the worse (and I am sadly betting on the latter) is going to be more than a burden on the future generations, a potential danger indeed.

But first off, let us consider what IMF analysts had in store for Morocco; the report published on August 11th stated:

“Morocco has successfully met major challenges in the past two years. Thanks to sound macroeconomic policy and political reforms, Morocco was well-equipped to address the 2009 international crisis and to respond to the social unrest which has emerged in many countries in the Middle East and North Africa (MENA) region since early 2011. In this challenging environment, Morocco has performed well economically and has seen its social indicators improve”.

And there is evidence to buttress that claim, even though it was mainly a ping-back on strengthening domestic consumption, not something the economy usually relies on, and that barely averted disaster, considering how low our exports sunk in during the early quarters of 2009. Because domestic consumption sustained growth early 2009, social indicators improved, with of course a help from that raise in public servants’ pay wage. The report goes on:

“…driven by the strong performance in the manufacturing sector, nonagricultural GDP grew by 4.5 % in 2010 offsetting the contraction in the primary sector. […] Average inflation in 2010 remained at the very moderate level of 1 percent. In 2011, a good agricultural year and the fact that prices of certain foodstuffs and petroleum products held steady despite rising international prices, are expected to help limit the increase in the average inflation to around 1½ percent. […] Morocco is expected to continue recording sound economic performance. Growth in nonagricultural GDP is expected to reach about 5 percent and to contribute to overall GDP growth, which is forecasted to attain 4½-5 percent in 2011″.

But, and that’s where budget policy comes in, the government’s showing on budget management is the challenge. Simply because both the IMF and the goverment are set on pursuing a very simple, almost simplistic policy: create growth. As much as the economy can, in the hope of:

“…achieving a GDP growth rate that will help reduce unemployment and improve living standards, while ensuring medium-term macroeconomic stability. […]”

and that recommendation does seem sound, though it skips the important fact that economic growth only profits marginally to the poorer households.

George Osborne: "Mezouar's plan exceeds my expectations. Jolly good show" (

Same story goes for unemployment, as there is only a weak tie between the former and growth – under assumption of linear correlation, growth does not affect significantly unemployment. As for macroeconomic stability, it is up to the growth’s stability itself. Now, these objectives need to be completed by sound budget policy, and that’s where the packages of pay rise’s and further subsidizations come into effect: because central government is not willing to increase receipts (for instance, by ending the moratorium on farmers’ tax exemption) they are more likely to cut departmental expenditure, and that, it seems, is the IMF opinion as well:

Revenue efforts were intensified and higher than budgeted revenue were collected at end June 2011 –mainly from indirect taxes. These efforts should continue in the second half of the year and should enhance revenue collection by 1 percent of GDP compared to the 2011 budget. Consequently, total revenues are expected to remain almost unchanged compared to 2010, at around 25 percent of GDP. […] Given the importance of demonstrating the government’s determination to maintain fiscal sustainability, the mission believes that there is little room for further measures to increase government expenditure”.

The government believes there is little room, because it has tied its hands over income taxes and exemptions on various sectors. So while I welcome constructive criticism over what I believe to be sound economic policies, “ideological” and “divisive” do apply more to Mr Mezouar’s decision to cut 10% spendings across departments than my own set of proposal regarding fiscal reforms and the institution of a wealth tax. Contrary to what the press seems to hint to, the 10% cut is not an IMF recommendation, it is a stated governmental policy that has been agreed upon and sanctioned by IMF experts:

“On the expenditure side, all budget entities have been requested to economize 10 percent of their budget allocations for some nonessential current expenditure items”.

in relative terms to the budget, front-line services will be hard-hit by 10% cut.

The budget entities are to economize these 10% at the Finance Ministry’s request and initiative, not to the IMF; That is a clever way of  distancing oneself from an unpopular policy decision;

But that goes beyond pwtty politics. For all the expected communication that “these cuts will not affect the quality of public services, nor would they affect essential public sector services”, under the veneer of equanimity and moderation, a uniform 10% cut across ministerial departments means, among others, the following:

– MAD 4,148,818,260 cut from the Education department. That means the following expenses need to be scrapped:

♣ Annual central investment allowance: MAD 1,401,550,905.

♣ Four major Regional Academies need to cancel their orders for hardware and supplies allowances: Souss-Massa, Marrakesh-Hauz, Grand-Casablanca and Rabat-Sale. A total of MAD 1,584,029,581 of tables, chairs, electric cables, the works pupils will not benefit from next year.

♣ The paychecks of about 10,000 teachers and high-school professors frozen for a year.

– MAD 1,089,555,900 cut from Health means one hospital out of four will have to cancel its investment program, or lose 1/6 of the total expenditure on hardware, equipment and other items essential to keep hospitals going.

MAD 723,124,820 cut from Police & Law enforcement allowances: it means half a billion will be cut from 60,000 policemen and policewomen pay-checks, a measure that is going to affect one law enforcement member out of 6 will be virtually out of job or with a freeze on pay-wage.

– MAD 134,357,600 cut from the Penitential administration, even though the exisiting resources are no match to alleviate the crumbling standards inside overcrowded Moroccan jails. Half of the administration’s investment plan will need to be cancelled.

These few instances -and they can be observed with other items on the budget law- show how difficult, almost impossible to perform a 10% cut across governmental departments by targeting “non-essential current expenditure”. These cuts will inevitably hit essential, front-line jobs, planned investments and essential hardware supplies purchases. As a matter of fact, a 10% cut in current expenditure across departments means a MAD 22.65 Bn package cut, or a MAD 39.95 Bn total expenses package. It would be fun to find out how ministries and autonomous agencies will manage to save up 20 Billion in “non-essential” expenditure.

While it is understood compensation fund reform will be more of a long-run project, there is a need to address these tax loopholes the same minister created in 2007 by decreasing the marginal tax threshold from 42% to 38%, or by caving in and refusing to end tax moratorium over agricultural income, paid dividend at BVC exchange, or indeed the creation of a wealth tax over high-income earners. A moderate 60% tax on millionaires can easily bridge the gap of 10% cuts, a break that allows to think in pondered terms structural reforms, like the 37 to 1 ratio in public sector pay-wage, or the imbalance structure of tax receipts.

That 10% cut is likely to damage the economy more than anything else: a 22 Bn budget cut means 2.7% of GDP. Considering the economic importance of government, and considering the contribution of each item in the domestic and foreign demand in GDP growth, that budget cut of 10% is likely to drag down public GDP contribution from 2% to 0.9%, a contribution in line with the 2003-2008 period, with the noticeable difference that the 2009-2011 years are crisis period, and government intervention is vital to keep the economy going. The Mezouar Doctrine, if indeed it turns out to be on, is a bet that smaller government expenditure will whip up the private sector. That is an audacious bet that, so far, has proven to be a losing one in a couple of countries (like the United Kingdom) not because the cuts are economically bad, but because uniform, indiscriminate cuts in public services will harm domestic demand, including that corporate output the minister seems so keen to promote. (There is a small recovery on CFG25 and FTSE Morocco indexes, but there is no evidence that was a reaction to the budget cut announcement)

Are we really considering this? The public sector is already a shambles, so there is no need to cut funding so abruptly and make it worse. Are we really going down the path of “it’s not real until it hurts”? Really?