Fitch Ratings: Morocco’s Fiscal Deficit to Narrow to 3.4% by 2026

Rabat – Morocco is set to make limited but noteworthy progress in reducing its fiscal deficit over the next few years, according to a new report from Fitch Ratings.

The credit rating agency projects the North African country’s fiscal deficit to fall to 3.4% of its GDP by 2026, down from 4.3% in 2023.

A fiscal deficit occurs when a government’s total expenditures outpace its total revenues, excluding borrowings, within a specific fiscal year. It indicates that the government is spending more money than it is earning from taxes and other revenue sources.

This projected reduction comes amidst a backdrop of fiscal consolidation efforts by the Moroccan government, aiming to achieve more sustainable financial management, the Fitch report explains.

However, Fitch Ratings cautions that significant long-term fiscal improvements will be challenging without substantial tax reforms and better revenue mobilization.

Decrease in government spending

One of the key drivers behind the projected fiscal deficit reduction is a planned decrease in government spending.

Total expenditure is expected to average 25.7% of GDP from 2024 to 2026, compared to 26.4% in 2023.

The drop in deficit will be partly due to lower capital expenditures as Morocco moves past the immediate reconstruction costs from the devastating 2023 earthquake.

In addition, subsidy spending is forecasted to drop by about 1.2 percentage points of GDP as the country scales back on subsidizing gas canisters.

In May 2024, the Moroccan government took a significant step by raising prices for subsidized butane gas cylinders by 25%. The move is part of a broader strategy to roll back subsidies on gas, sugar, and wheat.

However, Fitch notes that the success of this plan hinges on avoiding further external shocks that could pressure the government to maintain or increase subsidies, potentially derailing fiscal consolidation efforts.

While expenditure on subsidies is set to fall, spending on social benefits is projected to rise by approximately 1.4 percentage points of GDP on average over the next three years.

The increase reflects the government’s initiatives to expand social safety nets, including unemployment benefits for self-employed and non-salaried workers.

The government equally introduced a new family allowance scheme in late 2023, and the broadening of the compulsory basic health insurance system was initiated in 2022.

Government revenues

Fitch expects Morocco’s total revenue to average 21.9% of GDP between 2024 and 2026, slightly down from 22.2% in 2023.

Tax revenue, in particular, is anticipated to fall by around 0.5 percentage points of GDP from 2023 levels.

Planned reforms to streamline corporate income tax and value-added tax rates are not expected to significantly boost revenue in the short term, as higher rates in some areas will be counterbalanced by lower rates in others.

To mitigate revenue shortfalls, Morocco plans to increase its reliance on innovative financing mechanisms, which include the sale and lease-back of state assets.

These methods are projected to contribute around 2.1% of GDP to government revenues from 2024 to 2026, up from an average of 1.0% between 2019 and 2023.

However, Fitch warns that these mechanisms are generally one-off in nature and may not provide a sustainable long-term solution.

Fitch Ratings suggests that a significant and sustained reduction in Morocco’s general government debt-to-GDP ratio could lead to positive rating actions.

The agency’s current baseline scenario sees this ratio falling marginally to 69.7% by 2026, from 70.2% in 2024. This remains higher than the median of 55% for countries in the ‘BB’ rating category.

The Moroccan government has set more ambitious targets than Fitch’s projections, aiming to reduce the fiscal deficit to 3% of GDP by 2026.

Achieving this goal could accelerate positive outcomes if social spending is lower than expected, tax reforms enhance revenue or economic growth surpasses the projected average of 3.3% for 2024-2026.