Wednesday, March 08, 2017/ 03.19 PM / Temitope Babalola, Proshare Economy & Politics
The economies of the Maghreb region of Africa have their individual unique dynamics. The nature of such economies is determined by the cultural and social fabric of each individual society.
At the same time, while resources and political structure in such set the tone on how far macro management can go. Thereby, in attempt to identify factors that have retarded economic development in Africa. Proshare uses two different aisle of the Maghreb, to draw a lesson how best growth can be gleaned.
Case Study – MOROCCO
Morocco’s ability to maintain a stable political path has made the nation a haven for foreign direct investment. Foreign direct investment has become a tool to spur real asset growth in Morocco.
Such inflow has been invested across the country, in order to ensure an even break of growth among the regions. While an adoption of policy removal of food and oil subsides has led to a lighter budget deficit. Presently, this has increased the level of investment, as government give up consumption for more investment.
The policy has resulted into a larger production capacity and improved industrial production: Culminating into an average annual growth rate of 3.06% from 2012 to 2016. In addition, Morocco has continued to improve its degree of openness, absorption capacity and strengthen its political integration within the Africa Union.
Unlike most African countries, where domestic prices move in an opposite direction with commodity and oil prices: Morocco, Consumer Price index moves in tandem direction with commodity prices. The resurgence in commodity price has begun to tilt Morocco’s CPI to cave outwards. This has led to a rise in the price of domestic goods, which is responsible for the present cost push inflation.
It is expected that aggregate demand for foreign goods will still increase, which will primarily occur in goods not included in the Moroccan Consumer Price Index basket. The present blistering in the Dollar due to heterogonous factors, will add to the existing strain experienced by the Dirham.
Naturally, an increase in oil price creates an Achilles affect on the Dirham; just like the Rupee and the Turkish Lira which have a negative reaction to upward movement in oil prices. Morocco finds itself up against a double whammy scenario, which is a concurrent of rising oil price and a bolstering Dollar. BMI is of the opinion that the Apex bank of Morocco, which is known as bank Al- Mahgrib will be forced to a policy catapult: As commodity prices and domestic price take on a northward travel.
Thereby the Al-Maghrib bank, sometime in the short run will have to let go its present dovish stance for a tighter one. Presently interest rate stand at 2.25%, BMI forecast rates climbing up to 2.5% before the end of 2017. Proshare is of the opinion that an increase by 25 basis point is not enough to retain a positive real interest rate, as inflation is forecasted to run within the band of 3%-3.5% by the end of 2017.
An intermediate objective of a positive real interest rate in the face of emboldening push drags, will weigh heavily on growth. We are of the opinion that the inverse relationship between oil price and the Dirham will hold and why? Morocco is a negative exporter of oil and a rise in oil price will put the Dirham on a trial go; which will simultaneously affect the Moroccan net foreign flow adversely for a brief period.
Presently, the Dirham stands at 10.13 Dirham to a Dollar, reflecting a dip of 2.3% compare to 2016: which is in contrast to BMI outlook. It is expected that the fiscal side will continue its policy of reducing the rate of debt absorption and budget balancing. We are convinced that morocco will retain the present investment model.
Morocco’s push to be more politically integrated in Africa will bolster demand for its exports. Morocco is spared the basic structural flaws that bedevil most of the other African economies such as weak institutions. Therefore its exports will be more prices completive due to a weak Dirham. It is important to note that, investment model tend to adjust faster to negative pricing compare to consumption; Morocco stand a better chance at been more resilient against shocks.
BMI’s 3.3% growth forecast for Morocco in 2017 could be too optimistic in the face of an ongoing negative shock. Considering, Morocco churned up an annual growth of 0.7% in 2016, as cyclical reversals began to emerge. Such cyclical reverse will continue in 2017. Although a reserve of 26 billion Dollars is lean for an economy of 108 billion Dollars, but the earlier adjustment to its long run path will create the needed resistance. The ability of morocco to maintain a stable political path will continue to endear it to foreign investors.
Case Study -LIBYA
Presently Libya is a country ravaged by political instability, which has put the nation socially and economically mired. Oil revenue accounts for 97.2% and 93.4% of both its export and state revenue. Political instability and fragmented security have depressed the oil exports. Such that the, present production is a fraction compared to its previous level before the Arab spring. Resulting into dwindling finances and a deterioration in it budget.
The external reserve has been eroded by 45% over the last 5 years, given its present role in bridging budget short fall and managing its nominal currency. Although both oil production and oil prices have increased, but the existing fragmented political scenario are headwind; which will go on for some time. Evidently, fiscal policy is hard pressed due to dislocations in the real economy. Libya presents a scenario, where the fiscal end has long reached its point of limitation
Fig 2 Macro Indices of Libya
Although earlier inflationary pressure is receding as oil and commodity prices begin to pick. Regardless projections easily go flunk in a volatile environment like Libya, where there are several hotbeds. The casualty effect of the volatile environment has plunged the average growth over the last 3 years by 24.5%.
The Dinar, which is the Libyan nominal currency, is exchanged at 1.7 to a Dollar at the official window. Presently the rate of 1.7 Dinar to a Dollar cannot be the face value on the official exchange mirror: Libyan exports have declined from 71 billion Dollars in 2012 to a paltry sum of 11.9 billion Dollars at the end of 2016. The huge fall in its nominal gross domestic product coupled with Dollar. Illiquidity has forced the Dinar to be exchanged at 6.13 to a Dollar at the black market.
Fig 3: Amount of Export and Import from 2012 to 2016
Conclusion: Lesson for NIGERIA
Prior to 2012 the value of both the Libyan and Moroccan economy stood neck to neck at each other, but political instability have drown the Libyan economy into a laggard position. While Morocco’s ability to ensure political stability has supported its investment drive and at the same time improve its absorption capacity.
In recent years, Nigeria has not gone through such huge political unrest like that witnessed in Libya but the presence of several hotbeds in Nigeria has bumped down growth. Economic development is illusive in an atmosphere of rising political tensions. It is important that political actors ensure stability and policy clarity at all times.
Morocco’s ability to reduce its consumption and increase the size of its investment has made it better prepared for cyclical shocks. It is imperative that Nigeria begin to shift toward an investment model, in order to improve its macro management. Besides, growth heavily driven by consumption could be malignant on the long run. .
Libya also shows again that currency alignments are inevitable even when the amount of reserve is higher than nominal gross domestic product. Therefore, the reality that cyclical turbulence are more frequent than ever, thereby makes it imperative for a cleaner .float and over time with lesser reliance on heavy intervention.
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