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Rabat- The mandatory military service will significantly increase Morocco’s spending over the medium term, according to the latest Fitch Group report.
The report by Fitch Solutions Macro Research, a unit of Fitch Group, forecasts that Morocco’s budget deficit is expected to be 3.4 percent of GDP for 2018, compared to 3.6 percent in 2017.
However, the report anticipates that “the recent re-imposition of mandatory military service poses the greatest upside risk to spending over the medium term,” which will disrupt the country’s fiscal consolidation.
Article 6 of Bill 44.18 on mandatory military service says that conscripts will receive MAD 2,000 each month. Individuals in the military would also be prevented from obtaining work during their service and thus contributing to the economy.
The bill, which has not yet been passed in Parliament, emphasizes that citizens—both men and women (aged 19 to 25)—should contribute to the defense of the country and its territorial integrity.
Morocco reduced the length of mandatory service to 12 months in 1999 and abolished the military service completely in 2006.
The cost of the program has not yet been estimated. However, Fitch noted a drop in government wage spending in 2006, coinciding with the abolition of mandatory service. Fitch explains that the drop “offers clues” that government wage spending would significantly increase with reimplementation, negatively affecting the medium-term fiscal deficit.
A previous BMI research report warned that increased spending will hinder fiscal consolidation and offset wage spending gains. Government spending on wages increased from 18.7 percent of its total spending in 2013 to 24.5 percent in 2017 and will continue at that rate in future years.
Morocco’s spending is expected to increase rapidly with the 2019 Finance Bill which budgeted for increased hiring and boosts to capital expenditures.
Morocco’s fiscal deficit, however, may gradually slim to 3.2 percent of GDP in 2019, owing to external financing, new taxes, and the strong growth of real GDP.
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Morocco’s fuel prices cap scheme fizzles out
The report no longer expects the government to cap fuel prices, as mentioned in its previous report, in which it argued that the “political pressure brought about by rising inflation on the back of higher oil prices, would push the government to cap fuel prices.”
The study believes that in the last three months, pressure has “fizzled out,” since inflation is on the back foot again. “Given that we expected subsidies to account for nearly a third of new spending in 2018, the avoidance of this measure will be positive for consolidation efforts,” it states.
The Moroccan government had reportedly finalized a plan to cap fuel prices in July and was awaiting approval by Head of Government Saad Eddine El Othmani.
The fuel price cap plan came amid growing anger and demonstrations against rising living costs that have fueled a boycott against three companies: Sidi Ali, Afriquia gas, and Centrale Danone.
Morocco lifted fuel subsidies in 2015, deregulating the fuel distribution market. Now prices have reached a five year high as oil prices worldwide have increased.
The public became angrier when a parliamentary report was leaked revealing fuel distributors had increased their profits. As prices increased, distributors’ profit margins widened, but they did not expand Morocco’s storage capacity to the extent they pledged.
Read Also: 2019 Finance Bill Increases Taxes on Vehicle Tax Horsepower
Growing capital expenditure
Increased calls for employment and Morocco’s major regional infrastructure and energy projects, such as the LNG terminal in Jorf Lasfar to import up to 7 billion cubic metres of gas by 2025, will enlarge capital expenditure (CapEx).
CapEX is expected to continue growing rapidly over the next several years.
For the report, the 2019 Finance Bill is “strongly expansionary” with some 15,000 contract positions in education to be hired for 2019 and some 4,000 additional hires to take place in the military.
Minister of Economy and Finance Mohamed Benchaaboun asserted that he hopes to spend the 2019 budget on education, health, employment, and social dialogue.
