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AfricaJune 24 2021

Morocco bounces back from 2020’s perfect storm

A drought and Covid-19 dealt Morocco a double-whammy blow, yet projections for recovery are positive and have much to do with government plans for economic reform. 
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Morocco bounces back from 2020’s perfect storm

Like many other countries, Morocco’s economy suffered a significant setback in 2020. A crippling drought, combined with the impact of Covid-19, brought about the country’s worst recession on record. Yet Morocco’s fortunes have already seen an improvement in 2021, even as key sectors such as tourism remain hard pressed.

The economy had been under pressure even before the pandemic, with real gross domestic product (GDP) falling from 4.2% in 2017 to 3.1% in 2018 and 2.5% in 2019. Morocco’s High Commission for Planning reported a GDP contraction of 6.3% in 2020, against International Monetary Fund (IMF) projections of a 7.2% decline, as a dramatic drop in agricultural output combined with successive hits to the services and industrial sectors to create the perfect economic storm.

“Agricultural GDP collapsed last year; it fell by 8% due to the drought more than the pandemic,” says Javier Diaz Cassou, a World Bank economist. “In this sense, Morocco is an exception. In many other countries, we saw the crisis was not so bad for agriculture because the sector can adapt. That was not the case in Morocco.”

Hit by drought

The impact of this drought on the economy is hard to overstate. As a GDP contributor, agriculture pales in comparison to industry and services, accounting for slightly more than 11% of the country’s GDP in 2019, but it is a major employer and economic mainstay for the country’s rural population, which was already suffering by the time the pandemic hit.

The High Commission for Planning reported that 70% of the rural population and 77% of farmers saw a drop in income in 2020, against 59% living in cities. Job losses were significant at around 500,000 in the first half of 2020 alone.

Agricultural GDP collapsed last year; it fell by 8% due to the drought more than the pandemic

Javier Diaz Cassou, World Bank

The pandemic significantly impacted the country’s tourism sector, one of the largest in the region. Tourist arrivals were down 78.5% in 2020, and 79.8% in the fourth quarter alone, including a 92% drop in foreign tourist arrivals, and a 59% decline in arrivals of Moroccans living abroad. Between April and December 2020, tourism earnings collapsed by 70%. Like agriculture, the sector is a critical source of employment, accounting for nearly 550,000 direct jobs and 7% of GDP in 2019.

The country’s fledgling manufacturing sector — most notably in automotive and aeronautics — was hit by a near-total lockdown and plummeting global demand. Manufacturing industries declined by 6% in the first half of 2020, and non-agricultural activity by 5.8% full-year, against 3.9% growth in 2019.

Despite such challenges, however, Morocco’s economy is projected to bounce back this year, after the country acted swiftly to establish economic support measures in the early stages of the crisis. The IMF predicts GDP growth will hit 4.5% before easing to 3.9% in 2022 and 3.6% in 2023. With a nominal GDP of $124bn, Morocco will be Africa’s fifth-largest economy in 2021.

Strict response

The Moroccan government’s efforts to restrict the spread of the virus have been among the world’s most stringent, and included lockdowns, border closures, curfews and strict enforcement measures that saw more than 1.5 million people arrested for breaching the rules between July 2020 and April 2021.

While criticised as being too heavy-handed, the measures have paid off: less than 10,000 people in a country of more than 36 million had died of the virus as of June 2021. This compares favourably with the country’s northern neighbour Spain, for example, which recorded more than 80,000 deaths among a population of almost 47 million over the same period.

In April 2020, the government announced the creation of a special solidarity fund to manage the pandemic. King Mohammed VI originally called for $1bn of financing, but individuals and the private sector were also encouraged to contribute, and many did, with the end result being $3bn for upgrades to health infrastructure, acquisition of medical equipment, and social funds to support at-risk citizens.

“Morocco was able to cushion that impact with guaranteed loans for the corporate sector and direct transfers to households,” says Cedric Berry, an analyst at Fitch Ratings. “What they did was interesting. They offered direct transfers, even to people in the informal sector. It was about 1.5% of GDP, which still helps, given the beneficiaries tend to be lower earners. That’s contributed to cushioning the blow.”

The country is now looking to fresh stimulus to support a gradual recovery, including through the $1.7bn Mohammed VI Investment Fund. Launched in November 2020, the fund is an ambitious initiative that was also undertaken with the support of private sector contributors, including banks. It will take the legal form of a limited liability company, or société anonyme, and aims to finance major industrial, infrastructure, tourism and agricultural projects.

Rebounding in 2021

One important factor supporting Morocco’s return to growth in 2021 is the long-awaited end of the country’s two-year drought. The rains have returned in 2021, and the World Bank foresees a dramatic recovery in the agriculture sector as a result. Combined with a gradual recovery in the services and industrial sectors, which accounted for 50% and 26% of GDP, respectively, in 2019, Morocco is on track to regain its footing.

“The Ministry of Agriculture has projected that cereal production will triple this year. They have also good projections for higher value-added crops, almost a 30% increase in citrus, and a good season for olives dates and other export-oriented cash crops,” says Mr Diaz. “So, we are planning a very high growth of agricultural value added this year, double-digit growth, which will be a factor that helps in the recovery.”

At time of writing, however, the outlook for the tourism sector is less positive, with international travel restrictions from key markets still in place.

Remittances rising

Remittances play an important role in supporting families of Moroccans living abroad, exceeding 5% of GDP every year since 2000. But with the onslaught of the pandemic, a curious trend emerged. The IMF reports that remittances rose by 6.5% year-on-year in 2020 despite the fact that many Moroccans living abroad are based in Europe, which faced equally devastating economic impacts and job losses at the onset of the pandemic.

Growth has continued so far in 2021, with the Moroccan Bureau de Change reporting that remittances from Moroccans residing abroad hitting nearly $3.3bn during the first four months of 2021, up 45.3% year-on-year.

Morocco was able to cushion that impact with guaranteed loans for the corporate sector and direct transfers to household

Cedric Berry, Fitch Ratings

Economists were initially puzzled as to why remittances were so high, but the answer lies in the government’s stringent lockdown measures. “Every summer through the year, hundreds of thousands [of Moroccans] go back home, but this could not happen last year, so there was some sort of substitution effect,” says Mr Diaz. “I think the outlook for remittances will be linked to whether migrants will be able to travel or not. It will depend on whether travel restrictions will be lifted.”

The plunge in global oil prices in the early stage of the pandemic also had a positive impact on Morocco’s current account deficit, which fell to 1.5% of GDP in 2020, against 4.9% in 2019. Lower energy prices explained the drop, with savings amounting to close to 2.5% of GDP. Imports in general declined as a result of the lockdown, and while the budget deficit did rise — from 3.6% of GDP in 2019 to 7.6% in 2020 — this was mainly owing to a large fall in tax revenues.

Reform agenda

As it looks to the post-pandemic future, the Moroccan government is seeking to translate temporary victories into long-term successes. It had already launched plans for an economic overhaul in 2019, with the creation of a special commission to review its current development model. This stemmed from the perception that the country’s model was not inclusive, had failed to reduce inequality and could result in social unrest. 

With the end of the worst of the pandemic appearing to be in sight, authorities in Morocco are returning to that plan. “They are really seizing this opportunity to try to change many things, implement many important reforms. I think they’re trying to rebuild the social contract in Morocco,” says Mr Diaz.

The new model seeks to expand and strengthen the social protection framework with the adoption of universal healthcare, a wider social security net and reforms to existing the cash transfer programme, as well as reforms to pensions and family allowances.

Private sector reforms, including changes to the country’s lumbering state-owned enterprises, are also on the agenda. The goal is to run these companies more like corporations with specific missions, while opening the country to new private sector investment by reducing the dominant and often rent-seeking position of state-owned enterprises.

“A lot of the measures adopted went beyond the immediate loan guarantee schemes and transfers, with additional spending on health and education, which aligns very well with recommendations from multilateral institutions and what can improve medium-term growth prospects. The question at this point is: how will they fund this additional spending?” says Mr Berry at Fitch Ratings.

Increased confidence

Indeed, reforms to the social contract will be expensive, and Morocco’s debt-to-GDP ratio already jumped from 65.2% in 2019 to 77.1% in 2020.

Rating agencies have taken note. In October 2020, Fitch Ratings downgraded Morocco’s long-term currency issuer default rating to one notch below investment grade, and in April 2021, S&P followed suit, citing a growing budget deficit and plans to increase spending on social benefits.

Investors so far remain unfazed. Morocco issued a $1bn Eurobond in September 2020, and returned to US dollar bond markets for the first time in seven years in December, with a $3bn issuance. Both bonds were heavily oversubscribed.

“The country has been able to access markets on very favourable terms, with low coupons and long maturities,” says Mr Diaz. “They’re taking advantage of the perception that the market is quite confident about the policies, measures and approach Morocco has taken to address the crisis. It’s a sign of confidence in Morocco.”

Continue reading: Morocco’s banking sector holds steady

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Read more about:  Africa , Morocco