Morocco – Continued Fiscal Discipline under New Government


Wednesday, July 05, 2017 13:26 PM / BMI Research

BMI View: The newly-formed Moroccan government will offer strong continuity on fiscal consolidation. Efforts to contain the public sector wage bill and the pension reform adopted in 2016 will cap current spending, although consolidation efforts will be constrained by elevated capital expenditures, limited room to further reduce subsidies and the need to contain the security threats.

The newly-formed Moroccan government led by Justice and Development Party (PJD) Secretary-General Saadeddine el-Othmani will continue fiscal consolidation efforts undertaken by its predecessors.

Under the previous PJD-led ruling coalition directed by Abdelilah Benkirane, Morocco's fiscal deficit declined from 6.8% of GDP in 2012 to an estimated 3.9% of GDP in 2016.

Given the relatively similar composition of the new government coalition, the continued leadership of the PJD, and the commitment of the majority of political actors to reduce the kingdom's vulnerability to external shocks, we expect strong policy continuity on the fiscal front, and we forecast the budget deficit to decline to 3.4% in 2017 and 3.1% in 2018.

Given the heavy reliance of government revenues on strong economic growth and domestic demand, the uptick in activity in 2017 will yield positive results. The government draws close to 80% of its revenues on direct and indirect taxes, which vary substantially according to the economic cycle.

As such, the acceleration of real GDP growth from 0.9% in 2016 to 4.3% in 2017 (see 'Outlook Brightening In 2017 Amid Improving Harvest', April 18) will support government revenues over the coming years.

On the spending side, the Moroccan government will continue to step up efforts to contain current expenditures. The 2017 budget plans to keep the public sector salary bill flat, in line with the recommendations with the IMF.

Given that public sector wages accounted for more than 38% of total spending and close to 11% of GDP over the past five years, it will help containing current spending. Meanwhile, the government adopted a reform on public sector pensions in July 2016, raising the retirement age to 63 from 60 currently and increasing contributions.

Nonetheless, these efforts to cut spending will be constrained by the low potential to further reduce subsidies in the kingdom, elevated security needs and ambitious infrastructure plans.

The Moroccan government has been very successful in reforming its subsidy regime over the past few years, having declined from 6.5% of GDP in 2012 to an estimated 1.0% of GDP in 2016.

We do not expect any further significant gains over the coming years, as it would require cuts in food and butane gas subsidies, which would be smaller in size and be politically sensitive as they would disproportionately hit low-income households.

Meanwhile, the government will increase the Interior and Defence Ministries' budget by 6% y-o-y in 2017, resulting in 25% of total spending being dedicated to the state's security forces.

Morocco will indeed seek to maintain its safe-haven status in the Middle East and North Africa (MENA) region. Lastly, we forecast capital expenditures to expand at a robust pace over the coming years, in a bid to attract investment and turn the kingdom into a manufacturing and exporting hub between Europe and Africa.

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