The Moorish Wanderer

Deficits and Cycles in Morocco

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on September 12, 2012

No one needs to be hardcore Keynesian to understand why governments – and Morocco is no exception to that- prefer to go deficit-spending when the economy is in recession, especially when it is a serious one. Indeed, Robert Lucas (a big name from the University of Chicago) quipped:

I guess everyone is a Keynesian in a foxhole.

(TIME, Oct. 23, 2008)

And Morocco has been -and continues to be- a Keynesian-style economy. Unfortunately, it indulges a lot more into Zombie Keynesianism, fiscal and expenditure policies are indeed supposedly designed to stimulate domestic demand, but they do not reach the majority of our citizens (just think of household consumption distribution in Morocco: a third of its aggregate total is controlled by 10% richest households) the same can be said of public investment, although the argument is not as clear-cut as one might think it is.

relatively strong negative correlation might lead to think deficits are there to smooth economic fluctuations (captured by GDP growth volatility)

Look at the graph: deficit as a percentage of GDP opposite GDP growth over the period 1960-2011. correlation seems strong enough to sustain the assumption deficits are there to alleviate deficit. However, beware of confusing correlation with causality; we can also produce equally good evidence that deficits are the ones responsible for GDP volatility.

There is also the question of how much historical volatility is linked to deficits. The choice of 3-years deviation of GDP growth was purely arbitrary, and if anything, the strongest correlation between deficit and volatility in GDP is observed for 6-years periods, and immediate correlation between GDP growth (as it is) and deficit in percentage of GDP is equally significant. Finally, there is relatively weak evidence deficits limit somehow fluctuations in the economy (less than two years). This result seem to be in line with usual assumptions in taking 5-years averages to smooth things over.

We therefore have a glimpse to the double effect of deficits: in the shorter run as well as the longer run, deficits are negatively correlated to GDP volatility and growth.

Why do we care about standard deviation in GDP growth? For many reasons, chiefly because of government targets and growth itself; large deviation in GDP from one year to the other reflects badly on average growth – think about the 5.5% average growth projected for 2012-2016 and the impact of large ups-and-downs in GDP growth; as it stands, 2014-2016 needs to deliver consecutive growth figures close to 6.75% each year.

Second, volatility in growth means higher uncertainty. Last year, Morocco created in 2008 some 72.6Bn dirhams worth of goods and services. But the next year, only 43Bn where created, and the next years after, an average of 36Bn. These differences in expected additional GDP – about 30 Bn from one year to the other that could have benefited to many businesses and individuals, but did not, because GDP growth fluctuated a lot (not as much as the  10-year average).

Let us take a leaf from serious academia from the World Bank about the matter:

This paper examines the relation between fiscal deficits and growth for a panel of 45 developing countries. Based on a consistent treatment of the government budget constraint, it finds evidence of a threshold effect at a level of the deficit around 1.5% of GDP.

While there appears to be a growth payoff to reducing deficits to this level, this effect disappears or reverses itself for further fiscal contraction. The magnitude of this payoff, but not its general character, necessarily depends on how changes in the deficit are financed […] and on how the change in the deficit is accommodated elsewhere in the budget.

Now, this paper (from 2005) shows the optimal level for budget deficit is 1.5% for emerging economies, even as Morocco tends to flaunt the 3% target as an article of faith. A 1.5% deficit today means the government needs to cut about 38.7Bn from its deficit, or enact a net cut of 21.8Bn in the 2012 Budget – a 6.3% reduction in the Budget size. But then again, the figure of 1.5% GDP is not absolute: there are other parameters to take into account, which makes the ‘optimal’ deficit for Morocco a bit higher, and more manageable; in fact, 3% deficit GDP falls within the 95% confidence interval for the estimated, optimal 1.5% deficit. With a 3% deficit target, the Government needs to cut the deficit some 24Bn dirhams, or enact net spending cuts of 14Bn (on the basis of a maximum tax increase of 14.6Bn)

All in all, the past 40 years have been a period of relentless deficit spending policies, that ultimately culminated with the 1970s (8% over the period 1970-1981). Even the Structural Adjustment programs did not do that well; while they did indeed reduce the budget deficit considerably with respect to the spendthrift years of the 70s, the deficit between 1983 and 1992 averaged 6%, while the deficit between 1999 and 2010 was cut in half, close to 2.9%, with two surplus consecutive years.

In many respects, Budget deficits in Morocco are not deficit-spending per say. The ‘Rapport du Cinquantenaire‘ correctly pointed out in this graph that investment lags behind current expenditure (pay-wage and stationary, for instant). The deficit has a lot more to do with weak fiscal structure, that prefers to tax easy aggregates (consumption mainly, and it companies are actually the ones collecting the money) instead of taking on special interests (the supplementary report to the Budget bill estimates 33Bn in tax exemptions and breaks are embedded in the 2012 Budget) and broadening the tax base.

The Middle Class, The Median Class: Growth Did Not Benefit Everyone

And we are back with the Median/Middle class tantrum. I sketched in a hasty post describing the “Middle Class Rip-off” perhaps It would be nicer -and more transparent- to describe the process by which I reached the conclusion our Median Class has lagged behind growth and has actually lost purchasing power over the last decade or so.

The Top 10% skimmed a large chunk off National Income growth in the past 12 years

The data is public and easily accessible on the World Bank’s Open Data website, more precisely on Morocco’s matrix of indicators with the following references :









(All of which are related to Income Share per Decile and GNI in Current Local Currency).

For more up-to-date data (2007 and onwards) HCP Annual Social Indicators for 2009 was processed so as to get a complete picture of how incomes evolved over time. Since the data is computed in terms of decile/quintile households, I use the HCP table data 1960-2030 and make up for the missing years by computing an average proxy for demographic growth. When all these numbers are crunched together, we get that the average GNI growth between 1999 and 2010 was 6% in current terms. This means the Gross National Income doubled in 12years; Good news for the wealthiest 10%, their income quadrupled to peak at an average of MAD 430,000.

Now let us put things into context: the Median families -to my recollection the best available proxy for Middle Class households- have increased their income over the last 12 years. This is good news and should be noted. But on the other hand, they have lagged behind the artificially constructed average household; One explanation might be that averages are inherently biased toward individual occurrences scoring high values; there is a weight favouring those way more wealthy than the others that increases the average, as well as the measure of dispersion around it.

But increasing the average, or for the Median household to increase their own income is not a goal on its own. Indeed, every household has increased their income since 1999, but what about inequality? The ratio between the top 20% and bottom 20% went up from 1:7 in 1999, to 1:9 in 2010. In other terms, for every additional dirham the bottom 20% made between 1999 and 2010, the wealthiest 20% made 20. And the median household made 3 during the same period. If anything, the observed growth for the whole decade has benefited more to a tiny 20% minority (if not less) than it did to the rest of the population. Eliminating poverty is good; squeezing inequality is even better.

A Household from the top 20% has a annual income higher than that of the 80% households combined - in 2010

On the other hand, the Median-income households have lost pace with GNI growth both per capita and aggregate levels: it their income grown at an average of 2.63% in current terms between 1999 and 2010, while GNI per capita increased 2.9% on average over the same period. By contrast, the top 20% scored an annual increase of 4.8% -and since the top 10% increased their own income a 5.3% a year, the Super-Über-rich must have made a lot more.

But this is beside the point. We focus on the Median Class, who increased their wealth but did so at a level below the nationwide mean, and certainly lagged way behind the wealthiest. In relative terms, they have lost some of their purchasing power because of this; their social standing, for one.There is a social cost to the marginalization of the middle class: they increased their wealth, to be sure, but they are stuck and could not increase their income and wealth. It is as if a glass ceiling has been put above the Middle Class, an unbreakable and unseen obstacle that prevents hard-working Moroccan households from achieving a higher status. And there goes the argument: if the middle class cannot feel empowered, and their status envied or at least considered to be the norm, then the very seeds of class warfare are sown: a small, effete nucleus has reached upon and confiscated an increasing share of GNI: the 10% wealthiest concentrated National Income from 31% to 38%, while the Median Class saw their own share decrease from 15% to 13.2% of GNI between 1999 and 2010.

In terms of real purchasing power, the effect of inflation has been crippling: considering Consumer Price Index with base year set at 1999, prices have increased 40%, or an overall annual inflation 3.1% rate -CPI inflation is preferred to GDP deflator because it focuses on items that affect consumption and real incomes. Also, since comparison takes place on the 1999-2010 period, the 2005 CPI is re-computed so as to fit the base year.

So unless some household have increased their nominal income by a higher percentage in the meantime, they would have lost some of their purchasing power. And unfortunately, not everyone have increased their income by more than 40%: Over the last 12 years, the Median class have lost an average of 0.5% of their nominal income to inflation. In monetary terms, this means since 1999 the Middle Class have lost, on average, inflation-discounted value of MAD 1,201, that is MAD 14,400. This number is higher than what I posted earlier on because between 2007 and 2010, the income share decreased 1.3 basis points. The accrued effect of inflation takes up the loss in real income to the level mentioned above; so it goes from 11,000 in 2007 to 14,400 in 2010.

The only people pulling it off are the top 20%; net of inflation, their income increased 31% since 1999, and at annual rate of 2.3%. The top 10% did even better: 42% increase since 1999 net of inflation. That’s a MAD 140,000, almost double the gross returns for the remaining 90%.

The Median class, who saw their income go down while GDP and GNI went up during the last decade are only a prelude, a preview of what other classes are ailing from; they are both representatives of the increasing inequalities we live in our society and the key to bring together all classes around a granite-solid middle class that brings affluence to the economy. And for political parties to gain support (and votes) their policies should be designed toward the median, not the mean. Otherwise, their manifestos become meaningless.

The Price Of Debt

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

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

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

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

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

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

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

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

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

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

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

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

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

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