Morocco’s economic outlook improving, say experts

• Debt levels sustainable
• Reforms should help
• Subsidy cuts need accelerating

Morocco’s economic outlook is set to brighten and it could take on more foreign debt as long as it accelerates reforms and reins in existing subsidies, according to industry experts.

Moroccan GDP contracted sharply in the Covid pandemic, while the subsequent war in Ukraine and a severe drought – its worst in 40 years – led to a near-tripling in government “compensation” costs, including subsidies. 

However, London-based economic consultancy Capital Economics said in a note that the country is likely to “turn the corner”. 

“The composition of Morocco’s public debt suggests that fiscal risks are smaller than they appear at first sight,” it said, adding that only around a quarter of the total outstanding central government debt is denominated in foreign currency. 

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The debt-to-GDP ratio jumped by over 10 percent in less than three years to stand at 73 percent in 2022. The budget deficit reached nearly $3 billion in the six months to July, an annual increase of 14.5 percent.

Most of the government’s upcoming debt repayments are in local currency. Foreign debt constituted only 17 percent of GDP while domestic debt was 54 percent, according to a 2022 annual report released last month by the central bank. 

James Swanston, Mena economist at Capital Economics, told AGBI that he was “optimistic that Morocco’s government can undertake the fiscal consolidation required to bring down the debt-to-GDP ratio”.

The government’s reform policies include consolidating VAT rates, introducing a carbon tax, revoking tax exemptions on real estate and state-owned enterprises and squeezing the public wage bill.

A squeeze in spending of just 1.5 percent of GDP is required over the next two years to bring about the consultancy’s forecast that the debt-to-GDP ratio falls to 67 percent by 2027.

By comparison, the pre-pandemic ratio stood at 60 percent. 

“The government has outlined a number of measures to cut back on the public sector wage bill, as well as increasing revenues through tax reforms,” Swanston said.

In April Morocco secured a two-year assistance programme with the International Monetary Fund (IMF) via a flexible credit line of $5 billion, requiring policy makers to implement further structural reforms. 

Reuters/Damir Sagolj

The average maturity of Morocco’s public debt is 6.5 years, which provides a cushion to shield the country’s finances against sudden interest rate rises. 

By comparison, Egypt’s average term to debt maturity is around three years.

François Conradie, lead political economist at Oxford Economics Africa, told AGBI that he was also “generally optimistic” about Morocco’s economic outlook.

“I think Morocco’s debt levels are sustainable and there’s room for them to take on more foreign debt,” he said. 

However, Conradie noted that the country must accelerate its efforts to remove subsidies.

“They are taking too long to really do away with subsidies on a permanent basis and setting up what needs to replace them, such as the targeted transfers and health insurance,” he said, noting that “subsidies are a weak point.”

On September 1 the General Confederation of Moroccan Enterprises held a meeting in which they discussed the government’s proposed reforms to ten of the country’s tax measures.

They comprise five targeted measures and five cross-functional measures.

The targeted measures include encouraging the development of startups, encouraging the energy transition and standardising the 10 percent VAT rate across the tourism industry.

The cross-functional measures include reforming the VAT rate, income tax over a three-year period and accelerating the overhaul of local taxes.

“It does look as though just by taking the first few steps to making the revenue collection more sophisticated, Morocco can boost its tax income quite substantially without actually raising taxes,” said Conradie.