World Bank: Emergency Subsidies Are Worsening Morocco’s Deficit

Rabat – Morocco’s increased subsidiaries on the heels of rising commodities prices are negatively affecting the country’s external balances and foreign exchange balance, says a recent report from the World Bank (WB).

In its semi-annual assessment of Morocco’s economic conditions, the WB notes that the country’s numerous attempts at mitigating the effects of rising energy prices are weighing down on its foreign exchange reserves and pushing up its budget deficit.

Morocco has enacted a number of measures to cushion the ongoing increase in food and energy commodity prices on the national purchasing power, the report recalls, arguing that this has put extra pressure on the country’s budget deficit.

While the country boasts relatively better fiscal indicators than most emerging nations, the fallout from the adverse international geopolitical conditions is causing a significant rise in the national budget deficit.

The WB projects that Morocco’s budget deficit would average 6.4% of the country’s Gross Domestic Product (GDP).

The North African country’s reliance on energy imports — Morocco currently imports close to 90% of its energy needs — and food imports in the face of an unprecedented drought season, make it especially vulnerable to the risks cited above, argues the WB report.

Despite such relatively downbeat economic prospects, Morocco’s “comfortable” stock of foreign currency reserves, its “solid” structure of public debt, and adequate access to international financing options could offset the risks associated with the rising deficit, the report explains.

Noting the rise in prices, the WB also points out that while the Moroccan government has stepped in to subsidize basic commodity prices, Morocco’s central bank has notably opted out of taking the default measure of taming inflation by raising interest rates.

The Moroccan central bank justified its stance by arguing that raising interest rates would stifle economic growth, and that the inflationary pressure the Moroccan economy has been facing is temporary and caused by external factors.

Commenting on the central bank’s decision, the World Bank’s report makes the case that Morocco’s economic watchdog may eventually “be forced” to raise interest rates should inflation not recede.

Raising interest rates could result in slower economic growth, leading to devastating effects on the national economy, the bank says, concluding that this would in turn potentially result in stagflation, a condition where the economy is slowing so that unemployment is high, but not slow enough to bring inflation down.