Having risen rapidly in the years to 2012 on the back of high expenditures, Morocco’s budget deficit has fallen in recent years as subsidy reforms and other efforts to reduce spending and raise revenues kick in. Authorities are also on the verge of overhauling the public pension system, after the government was forced to substantially raise pension contributions in order to avert the system’s collapse.
Falling Budget Deficit
Having registered slight surpluses in the years prior to the 2008-09 global financial crisis, the Moroccan government’s fiscal balance plunged into negative territory in the late 2000s and early 2010s, peaking at 6.8% of GDP in 2012. The shortfall was pushed upward by high subsidy spending, partly due to a rise in the price of oil and increased expenditure on items such as government wages in the wake of domestic and regional unrest in 2011.
However, public finances have improved substantially since then, and the deficit fell by Dh2.9bn (€265.9m) to Dh42.7bn (€3.9bn) in 2015, equivalent to 4.3% of GDP. This was down from 4.9% in 2014 and in line with the government’s target for 2015. Public debt stood at an estimated 63.6% of GDP at the end of 2015, with the IMF predicting the figure would peak at 64.4% of GDP in 2016.
The authorities’ success in meeting their deficit target in 2015 was largely due to a larger-than-expected 3.5% fall in current expenditures, on the back of a 57.2% decrease in the cost of subsidies paid by the government’s compensation fund – the value of subsidy payments was down from 3.5% of GDP in 2014 and a peak of 6.5% in 2012 to 1.4% in 2015. The drop comes thanks to subsidy reform – the government eliminated subsidies for diesel in January 2015, having already cut those for petrol and fuel oil a year earlier – as well as lower oil prices, which reduced the costs of subsidies for butane that remain in place.
Current revenues were down 1.8%, although that masks a mixed performance; while tax revenues grew by 4%, non-tax revenues were down 25.6%. Grants from Gulf Cooperation Council (GCC) states fell sharply to Dh3.7bn (€339.2m) in 2015 compared to Dh13.1bn (€1.2bn) in 2014 and the Dh13bn (€1.19bn) budgeted under the 2015 Finance Law, likely due to the fall in energy prices, which has created large deficits in the budgets of major oil-producing countries.
Performance
The government is expecting the fiscal deficit to decline to 3.6% of GDP in 2016. As the budget includes Dh13bn (€1.2bn) of grants from GCC states, and most of the expected aid did not materialise in 2015, the authorities may have to again find additional savings elsewhere to meet their targets if oil prices do not rise substantially.
In the first quarter of 2016 the budget deficit fell by Dh760m (€69.7m) year-on-year (y-o-y) to Dh12.2bn (€1.1bn), thanks in part to a 7.3% increase in tax revenues to Dh57.7bn (€5.3bn). This stemmed from a 14.6% rise in corporate tax revenues to Dh14.9bn (€1.4bn) and a 5.1% increase in personal income tax receipts to Dh9.9bn (€907.7m). Morocco also saw a Dh4.4bn (€403.4m) increase in the kingdom’s special Treasury accounts – which include items such as taxes collected on behalf of local government and the kingdom’s road and housing solidarity funds – to Dh6.5bn (€596m). Expenditure also rose by 6% y-o-y to Dh79.5bn (€7.3bn) during the first quarter of 2016, driven by a 3.5% increase in ordinary expenditure to Dh59.9bn (€5.5bn) and a 14.5% jump in investment spending to Dh19.7bn (€1.8bn).
In March 2016 Bank Al Maghrib, the country’s central bank, forecast that the deficit for the year would stand at 3.7% of GDP, more or less in line with the government’s target, before falling to 3.1% in 2017. Over the longer term, the IMF has predicted the fiscal deficit will come down to around 2% of GDP by 2020, which observers say is roughly the right level for a country like Morocco. “A fiscal deficit of below 3% of GDP is sustainable and would prevent the ratio of debt to GDP from rising,” Karim Gharbi, head of research at Moroccan investment bank CFG, told OBG.
Subsidies
Following major reductions in recent years, subsidies are due to fall further, with the 2016 Finance Law halving the total from Dh31.2bn (€2.9bn) in 2015 to Dh15.5bn (€1.4bn) – although in practice the government spent substantially less than this in 2015 due to lower-than-forecast oil prices.
In November 2015 the government also announced it would start gradually removing sugar subsidies in 2016, and eliminate them entirely within 18 months. However, in February 2016 Prime Minister Abdelilah Benkirane put the plans on hold, saying the time was not yet right for the move, but reiterated his belief that the subsidies should be removed eventually. The subsidy’s impact on government finances is relatively small, with payments for sugar amounting to around Dh3.4bn (€311.7m) in 2014, compared to Dh13.4bn (€1.2bn) for butane subsidies, for example. Furthermore, the state also subsidised flour and soft wheat at a cost of Dh2.2bn (€201.7m) in 2014. The government has maintained its commitment to reducing energy subsidies, but it is unlikely to take place before parliamentary elections scheduled for October 2016. In the meantime, however, lower oil prices since mid-2014 have been reducing the cost of such payments.
Tax Reform
As well as reducing expenditures on items like subsidies, the authorities have also been looking to boost revenues. Since 2013 the government has been working to implement a range of reforms, including measures taken in the 2016 Finance Law. A key focus is adapting tax rates to the ability of businesses to pay, replacing the previous corporate tax system, which had just two tax rates – 10% for firms with revenues below Dh300,000 (€27,500) and 30% for all others – with a system based on a wider graded range of tax bands, a maximum rate of 31% for firms with turnover more than Dh5m (€458,000). “SMEs are a potential source of revenues for the Kingdom of Morocco, in terms of taxation. While they account for 99% of companies, they only contribute to 5% of the revenues of the corporate tax,” Tarik Bouziane, managing partner of the audit, tax and consulting firm RSM Morocco, told OBG.
Pension Changes
Another priority reform with significant implications for public finances is the kingdom’s pension system, which has come under significant financial pressure. This is particularly the case for the Caisse Marocaine des Retraites, the pension fund for permanent government employees, which is set to run a deficit of Dh6bn (€550.1m) in 2016, double that of 2015. The government has said that without reform it would be obliged to more than double contributions to the fund from 2019 onwards to keep it operational. Reforms introduced in 2014 were delayed due to opposition from trade unions; however, in spite of continued protests, the government introduced several draft laws to Parliament to revise the system in January 2016, and in June 2016 the legislation was approved by the upper house.
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