27 January 2013

Morocco: Turmoil in the Arab World - How Has Morocco Fared?

Atlantic Council Viewpoint — The Arab Spring has resulted in profound political and economic changes in the Middle East. Yet, while authoritarian regimes in Tunisia, Egypt, and Libya were toppled, Morocco has for the most part withstood the tumult of protests.

So how was Tunisian street vendor Mohammed Bouazizi able to spark a revolution in Tunisia, Egypt, and Libya but more than twenty men who immolated themselves in Morocco did not produce the same outcome? After all Morocco is plagued with economic problems similar to those in Tunisia and Egypt, with one in three youths unemployed, a mounting budget deficit, rising fuel and food prices, and a slowdown in tourism and workers' remittances from Europe. In May last year tens of thousands of people took to the streets in Casablanca to protest the government's failure to tackle the social and economic ills in Morocco. Nonetheless, continuing protests have not culminated in a regime change.

There are two main reasons why Morocco has not faced the same turmoil hitting its North African neighbors. First, unlike the authoritarian rulers in Tunisia, Egypt, and Libya, King Mohammed VI of Morocco is seen to have considerable legitimacy among the population because of his lineage stretching over three centuries. This factor has given him considerable public support even as Moroccans criticize his government for failing to fulfill their political and economic aspirations. Second, the Moroccan ruler and his advisors saw the signs of change very early and speedily embarked on a process of political reform to pacify the protesters who took to the streets in February 2011. While these two factors have prevented an upheaval for now, it cannot be said that Morocco has successfully secured a peaceful political transition. The socioeconomic conditions in the country still constitute a breeding ground for greater political unrest.

King Mohammed VI managed to slow the momentum of the February 20 protest movement, which called for sweeping democratization and clear limits on the broad powers of the King, by offering a series of reforms. On March 9, 2011, the King announced constitutional revisions to be followed by a national referendum on July 1. Following the government's resignation, legislative elections were held on November 25, 2011, and the Islamic Party of Justice and Development (PJD) won 27 percent of the vote. The party's general secretary Abdelilah Benkirane was appointed prime minster. Many were hopeful that the electoral victory of the former opposition and Islamic party would be a prelude to meaningful political and economic reforms. At the same time, King Mohammed VI remains head of the Council of Ministers, the Supreme Security Council, and the Ulama Council; he also controls the military, security forces, and intelligence services.

While Morocco experienced political and social tensions similar to the transitioning Middle East countries, its economy suffered much less from spillover effects of both the recession in Europe and instability in its immediate neighbors.

Unlike the Arab countries in transition, real GDP in Morocco grew by 4.9 percent in 2011 (compared to 3.7 percent in the previous year) in the face of the twin negative shocks of the domestic political upheaval and the Eurozone crisis. Inflation in Morocco remained the lowest in the Middle East and North Africa region at below 1 percent. However, the recession in Europe did impact the country's external balances. Although tourism receipts and workers' remittances continued to grow in 2011, albeit at a slower pace, the sharp increase in imports, particularly of oil, led to a significant increase in the current account deficit from 3.9 percent in 2010 to 8 percent in 2011. As a consequence, international reserves declined over the year by about $3 billion to $20.6 billion.

The economic picture worsened in 2012 as growth fell to 3 percent and external imbalances remained high. The current account deficit was about the same as in 2011, at 8 percent of GDP, and international reserves declined by a further $3 billion. Since the beginning of the Arab Spring the country has lost $6 billion of its international reserves, about a quarter of the stock at the beginning of 2011.

Morocco's future economic development is closely tied to developments in Europe. The European Union accounts for 65 percent of its exports, 70 percent of tourists visiting the country, and 75 percent of workers' remittances. It is estimated that a 1 percent decline in European growth worsens Morocco's balance of payments by 1.2 percent of GDP and lowers its growth rate by 0.6 percent. Therefore, what happens in Europe has a significant impact on Morocco. To compensate for this external shock the government will have to undertake a variety of economic reforms if it is to maintain macroeconomic stability and generate a sustained higher rate of growth.

More specifically, the Moroccan government has to tackle 3 main issues. First, creating jobs must be among its highest priorities. With official unemployment at nearly 9 percent and about 30 percent among people 34 years and younger conditions are ripe for a political explosion. Where these jobs will come from is still an open question. Promoting private business through infra-structure development and reducing regulations that constrain business is a long-run proposition. Furthermore, transforming the educational system to produce graduates with the requisite skills demanded by the private sector will also take considerable time. In the short-run the government is limited in its job-creation options. One danger is that to appease the population demanding employment, the government will itself provide the jobs. Expanding government employment is a pattern that is evident in the transitioning Arab countries.

Second, external imbalances need to be tackled. While international reserves are adequate at present, amounting to about 4-5 percent of imports of goods and services, they have been declining steadily. This process of falling reserves could be arrested through attracting additional external financing, preferably foreign direct investment from non-European countries, and by adopting a more flexible exchange rate regime. The Moroccan dirham has been closely tied to the euro and introducing more flexibility would help in managing the external trade account and attracting larger capital inflows.

Finally, the government has to reform the system of subsidies because of the costs it imposes on the budget. The current subsidy system, referred to as the "compensation" system that benefits the entire population, covers basic items in the consumption basket, such as flour, sugar, fuel, and gas. In 2011 subsidies amounted to 6.1 percent of GDP, doubling from the previous year on account of the increase in world oil prices. Energy subsidies alone were 5.1 percent of GDP in 2011. The fiscal deficit reflected this increase in spending on subsidies, increasing from 4.4 percent of GDP in 2010 to nearly 7 percent in 2011.

Aside from direct budgetary consequences these generalized subsidies benefit higher income groups disproportionately. It has been estimated through household surveys that 45 percent of food and fuel subsidies go to the top quintile of the population, while the lowest quintile receives only 9 percent of all subsidies. The picture is even worse in the case of diesel and fuel subsidies where only 1 percent of payments go to the poorest groups, while 75 percent benefit the highest income groups.

The government recognized the problem with subsidies and in an attempt to reform the system last year raised the price of fuel by 20 percent and alcoholic beverages by 43 percent. The government also announced that a wholesale reform of the system would be undertaken in June 2013, replacing the current subsidy system with monthly cash transfers of 1000 dirhams ($117) to as many as 2 million of the neediest families. Once this reform is implemented in full (in 4 years) the annual subsidy bill will be half of what it is now. This will of course have an impact on inflation but Morocco is fortunate that the current rate of inflation is very low; an increase in prices as a result of eliminating subsidies would not push inflation too high. However, it is unclear whether the transformation of the subsidy system and the resulting increase in prices will be possible in an environment where the population is looking to the government to improve economic conditions.

In order to create jobs through increased growth, attract capital and investments, and provide benefits to the poorest segments of the population, Morocco will need substantial international support. Recognizing this need Morocco negotiated an IMF program last year, the first country in North Africa to do so. On August 3, 2012, the IMF Executive Board approved a $6.21 billion (700 percent of quota) Precautionary and Liquidity Line (PLL) of credit for Morocco for two years. The purpose of this precautionary arrangement is to provide insurance for the country to meet its immediate financing needs and to strengthen market confidence. Although Morocco has solid economic fundamentals and a track record of implementing sound policies it has been affected by the deteriorating world economy, especially exposure to the Eurozone and oil price increases.

Since the PLL is precautionary Morocco has said that it does not intend to draw on the IMF loan in the absence of exogenous shocks. It is beneficial for Morocco to have the PLL because the availability of credit should give comfort to foreign lenders, investors and rating agencies, and allow it to tap international capital markets at favorable borrowing terms. Indeed, this has already proven to be the case with the successful floating of $1.5 billion in dollar bonds in December 2012.

Until now Morocco has managed to keep its economy on track. Whether it will be entirely successful will depend on how the politics play out. If the government can simultaneously provide political empowerment and economic stability it is likely that Morocco will fare well; but these are big "ifs". At present, however, Morocco has managed to balance political change with economic stability. It could well be the example that other countries in the region would wish to emulate.

Mohsin Khan is a senior fellow at the Atlantic Council's Rafik Hariri Center for the Middle East focusing on the economic dimensions of transition in the Middle East and North Africa. Svetlana Milbert is assistant director of the Atlantic Council's Rafik Hariri Center for the Middle East.

Atlantic Council Viewpoint, by Mohsin Khan & Svetlana Milbert (Washington, DC, Jan. 25, 2013)

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