While coronavirus pandemic has affected the economic sectors that provide the most jobs, What kind of recovery policies for tomorrow’s economy?
Since the outbreak of the novel coronavirus, Morocco has taken quick and effective measures to contain the Covid-19 pandemic. These measures included the declaration of the state of health emergency in March 20, increasing the test for the population, and tracking contaminated persons. Moreover, the Business Intelligence Committee (CVE) that is chaired by Morocco’s finance minister and top bureaucrats in finance and health ministry was created with the aim “to anticipate the direct and indirect economic repercussions of the Covid-19 health crisis on the national economy“. As such authorities toke economic measures such as the cash transfer for households operating in the informal sector, the postponement of certain tax deadlines, guaranteeing for certain loans to support company cash flow, and suspension of social security payments.
While, these measures might be effective in mitigating the effects of the pandemic on the short term; it seems that the economic toll might be higher than expected in the medium and long term. Even more, the government response regarding economic recovery has been characterized by a wait and see attitude. It is still too early to clearly measure the impact of this pandemic on the Moroccan economy. Nevertheless, this paper will present the immediate consequences of this crisis on the labor market and economic growth. It also proposes some strategic areas where the government can intervene in order to contain the economic impact of the pandemic on the medium to long term.
Vulnerable populations and Job losses
Forecasts by various UN organizations, based on GDP per capita, indicate that the poverty rate (using a poverty line of USD 3.2 PPP) will increase by at least about 1 percentage point. This means that nearly 300,000 Moroccans are expected to fall into poverty. A small negative shock on this population would be enough to push it into poverty. In 2019, a quarter of the Moroccan population was already living below the expenditure threshold of USD 5.5 in PPP. This population, that is vulnerable or at risk of falling into poverty, is expected to increase from 25% in 2019 to 27% in 2020, almost 10 million people.
For those who are employed, the quality of the job is often mediocre, as most jobs are informal, low-skilled and without social protection: 54,9% of employees do not have a contract that formalizes their relationship with their employer and 75,9% have no health coverage.Only about 1 in 10 of the labour force is employed in the formal private sector. In addition, one in four workers is employed in the informal sector, or nearly 11% of the working-age population.
Only two weeks before the start of the state of health emergency in March 20, the preliminary results of the General Confederation of Moroccan Enterprises (CGEM) Survey reveal a significant drop in economic activity, leading to a reduction in company turnover, resulting from the double contraction of supply and demand, and job losses. Moreover, even if companies expect a recovery from June onwards, their forecast turnover will be down for the rest of the current year. It should be noted, in this regard, that in the absence of visibility for 2020, most companies operating in the export sector foresee a recovery in 2021.
At the level of the labour market, more than 900,000 employees have been declared on temporary work stoppage in more than 134,000 firms affected by the pandemic repercussions, in the 216,000 declared to the National Social Security Fund (CNSS).
Uncertainty in economic growth forecast
Overall, the effect of this pandemic combined with a year of drought is likely to be significant. Initial assessments of Morocco’s economic growth have been revised downwards. They all reveal that it would be in recession by 2020 and that some of its contributing sectors such as tourism, transport, supply chain logistics and the informal sector are showing clear signs of weakness.
Figure: Moroccan Economic Growth Forecast 2020
Source: BAM, HCP, CMC, WBG, IMF
Many national and international institutions have published their GDP growth forecasts for this year, leaving a margin of uncertainty. Considering a deterioration in the agricultural component, the official forecasts published in Mai by the High Commission for Planning (HCP) and Bank Al Maghrib (BAM) agree that the GDP growth would be of 2.3% in 2020, while the Moroccan Center of Conjuncture (CMC) has revised its growth to (-3.2%) against 0.8%, which is considered the lowest since 2000. For their part, the World Bank (WB) and the International Monetary Fund (IMF) forecast negative growth rates in 2020 of (-1.7%) and (-3.7%), respectively.
However, not all sectors have been adversely affected, particularly in activities where face-to-face interaction is limited, such as telecommunications and financial services, or in other key activities such as extractive industries, agribusiness, and chemicals.
The Department of Agriculture’s forecasts show a further decline in the sector’s value added as a result of a significant drop in cereal production, which would have been limited to only 30 million quintals, and 62.3% compared with the average for the last five years.
April’s business survey conducted by Bank Al Maghrib (BAM) shows that the added value of the telecommunications sector grew by 1.9% in the fourth quarter of 2019. Its activity should accelerate, under the effect of a higher demand with the greater use of telecommunication means (telephone, teleworking, etc.) during the lockdown. Regarding the construction sector, cement sales fell by 55.5% year-on-year in April, with the shutdown of several construction sites, bringing the fall in sales to 20.6% at the end of April.
Yet, the touristic sector might be the most affected sector. At the global level, the pandemic is believed to cause a 22% drop in international tourist arrivals in the first quarter of 2020 and could lead to a 60-80% decline in 2020 compared to the previous year.
Morocco’s tourism sector has been deeply affected. According to a recent study by Zouhair Bouhout, Director of the Provincial Tourism Council of Ouarzazate, a deep crisis is affecting the tourism sector: 8.3 million lost arrivals, including 3.89 million Moroccans residing abroad (MRE), 4.45 million arrivals of foreign tourists, and 3.7 million for air transport; losses of foreign exchange earnings amounting to 49.7 billion dirhams, a loss of earnings of 11 billion dirhams for air transport; losses also of 11.1 million overnight stays, including 4.1 million for domestic tourism, i.e. a loss of earnings of MAD 3.58 billion. In total, the loss of non-air revenue is estimated at MAD 53.4 billion, i.e. a total of almost MAD 64.5 billion.
From these results, it seems that the shock will persist in the short term after lifting the lockdown dispositions. Indeed, the most affected sectors, notably services, will be those that will have the greatest difficulty in resuming normal activity.
Public debt and balance of payments
It should be noted that the measures taken by the government to address the economic fallouts are temporary, exceptional and respond to an immediate crisis. Overall, macroeconomic balances are approaching critical thresholds, making it difficult to control the budget deficit over the next three years. Central government debt is expected to peak at 73% of GDP in 2020, due to the increase in social and economic expenditure linked to Covid-19 and the fall in tax revenues, in particular corporate tax. The current account of balance is projected to widen to around 7% of GDP this year.The debt is expected to rise, the public deficit, the trade deficit and the balance of payments deficit will also follow the same trend. Indeed, at the end of April, the foreign exchange indicators of the Exchange Officeshow a drop of 19.7% or MAD 20 billion in exports which amounted to MAD 81.49 billion. As for the other components of the balance of payments, travel receipts recorded a drop of 12.8%, i.e. 2.93 billion DH to reach 19.97 billion. For April, the receipts reached 3.1 billion, i.e. a fall of 51%. The sector continued to generate revenue, despite the closure of borders and the nearly total halt of all tourist activity, mainly due to a shift in receipts. These results are likely to worsen at the end of the second quarter of 2020.
In addition, there will be strong pressure on foreign exchange reserves, especially with the slowdown in tourism and theMRE transfers (they were by 10% down at the end of April, i.e. MAD 2 billion).
Supporting the recovery with fiscal tools while managing higher levels of public debt is a delicate balancing act. This pandemic and its economic fallout, as well as policy responses, have contributed to a significant increase in budget deficits and public debt ratios. As the pandemic subsides and the economy recovers, public debt ratios are expected to stabilize, albeit at higher levels. If the recovery takes longer than expected, debt dynamics could be more unfavorable.
Emerging from the crisis: Outlook and Recommendations
To restore economic growth, the government should work on two sides: targeting short-term domestic consumption and investment and, in parallel, restarting production capacity in the sectors that have been affected by the crisis via a plan to support public spending and debt and monetary and prudential policy measures such as bank financing, business support, etc.
On the short term, the government should continue its support to the most vulnerable populations. In this regard, it is important that the government should adopt the law on the unified social register, to allow better targeting of the most disadvantaged people. Also, to boost consumer purchasing power, it is necessary to reduce the value added tax (VAT) on processed food products and reduce domestic consumption tax. It is important to support local production, adjusting imports of processed products to direct consumption towards local products.
Yet, in post-Covid-19 crisis, Moroccan economy should make a structural transformation allowing the transition from sectors with low employment elasticity to sectors with high elasticity and the orientation of public investment towards projects that create the most jobs. This is because in Morocco, the return on investment in terms of wealth creation and employment also remains low compared to other countries that are putting in place a similar investment effort. According to a recent study, the growth of the Moroccan economy does not manage to create enough jobs to reduce unemployment, and even loses jobs in periods of recession. As a result, the argument that “more growth would lead to less unemployment” is no longer valid in the short term.
Moreover, Morocco could be a reliable partner for the co-industrialization of Europe’s eco-responsible industries and an essential hub for trade with the African continent. One of the main challenges for Morocco is to engage quickly and resolutely in the construction of integrated “Multi-Polar Growth Centers” which, from their industrial poles, will have polarizing effects while spreading opportunities and spill-over impacts towards Africa and Europe.
Finally, Morocco could thus become an “industrial corridor”, by building new integrated economic poles on the basis of Strategic Public-Private Partnerships on Value Chains. These partnerships could be linked to other economic poles in Africa. The government could rapidly mobilize to adopt and implement these innovative industrial development and growth strategies supported by a better engagement of the private sector. This could ultimately lead to the development of integrated programs and projects that promote the increased participation of private capacities in productive activities in a variety of sectors, such as infrastructure, health, agriculture, green economy, education, trade, digitalization, etc.
It is essential to strengthen the existing national preference provisions in the regulations, while improving the competition policy framework. These include regulations of managing public procurement, Public Private Partnerships and delegated management of public services, as well as practices that allow for open competition among all public contracting entities (State, local authorities and public enterprises). This is important to provide insurances and guarantees of transparency and to secure that foreign bidders receive fair and equitable treatment when competing for major investment projects or even with domestic companies. In addition, the quotas granted to very small enterprises and SMEs in terms of public procurement should be raised to 25%, currently at 20%, in order to support the Moroccan economic fabric.
Moreover, it is worth of note that it would be advisable to target the construction sector, which not only includes a significant share of informal activities and craftsmen operating directly or indirectly, but also constitutes a gateway to almost half of the investments in the economy. The sector is also a tool for income transfers, a factor of dynamism at the regional level since most construction workers come from poor regions. However, such an investment would indeed only have beneficial effects through the restructuring of the sector by formalizing the operators and by introducing a new program-contract that would revise all the tax niche rents. The priority, therefore, is to overhaul the taxation system for the entire sector. In addition, its multiple effects on other sectors – transport, service activities, industries, etc. – have a significant impact on the economy.
In sum, it seems that there is some light at the end of the tunnel. Confidence in the State and the authorities seems to have increased, which can be an engine for the future and a guarantee of strong leadership and thus of a rapid and orderly recovery.
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