The Political Economy of Reforms

The political economy of subsidy reforms in Morocco has been driven largely by the global prices of strategic commodities and by the increasing cost of subsidies to the state’s budget. From an equalization fund with own resources sufficient to conduct its mission of stabilizing prices of basic commodities over short periods of time, the CDC transformed over the years into a permanent subsidy fund relying heavily on budget transfers. With rising world prices of basic commodities, especially of fuels, the burden on the budget of the subsidy system has grown increasingly heavy. Particularly burdensome is the cost of fuels, given that Morocco depends totally on imports. The share of fuels in total subsidies was relatively small before the first oil shock in 1974, but it rose steadily over time to reach almost 90% in 2012. With respect to GDP, subsidy outlays rose from less than 0.5% over the first decades after independence to almost 2% by end of the 1990s. As shown in Fig. 3.4, the trend in the amount of subsidies followed rather closely the international price of crude oil.

The first experience with the reform of liquid fuel subsidies implemented in 1995 helped to stabilize subsidies around 1.7% of GDP until 2000, when the systematic use of the indexation system was suspended. The removal of subsidies on cooking oil in 2000 and of jet fuel in 2005, together with the reform of the sugar subsidy system in 2006 and the price increases of liquid fuels, mitigated the impact on the budget between 2001 and 2007, but expenditures on subsidies continued to increase to reach 2.7% of GDP in 2007 because of the continued rise in oil prices over the period.

The 2008 financial crisis had limited direct effects on Morocco’s economy, but the subsequent food and fuel price crisis had more serious repercussions. Subsidies reached a peak of 6.6% of GDP in 2012 when, for the first time, they became higher than budgetary investments. Over this period, subsidies explained most of the deterioration in the budget deficits (Fig. 3.5). Indeed, after two years of surpluses in 2007 and 2008, the budget experienced rising deficits peaking at 7.4% of GDP in 2012, the highest deficit since the early 1980s. The high budget deficits eroded all the fiscal space accumulated over the years. The resulting rapid increase in public debt was worrisome, jeopardizing the stability of the macroeconomic stance. Over the period 2008-12, public debt worsened by 13% points of GDP, reaching 60.3% of GDP in 2012.

It was the sharp fiscal crisis of 2012 that eventually forced the government to reform subsidies. The government reactivated the price indexation mechanism for fuel products, which helped cut subsidies by an impressive 24% (or almost 2% points of GDP) in 2013. This move, in turn, helped to reduce the budget deficit by 1.8% points of GDP. The full implementation of the fuel price-indexation mechanism and the subsidies reforms in 2014 contributed to cut further subsidies by almost 20% (or 1% point of GDP) by the end of the year. In addition, subsidies reforms were complemented by other fiscal consolidation measures. They included freezing higher wages and limits to new hires of civil servants to stop the rise of the

Effects of subsidies changes on budget deficits, percent of GDP. Source Ministry of Economy and Finance 2009-14

Fig. 3.5 Effects of subsidies changes on budget deficits, percent of GDP. Source Ministry of Economy and Finance 2009-14

public wage bill and improvements to the tax collection system through the extension of the tax base, harmonization of tax rates, and an effort to stop tax evasion. As a result, the budget deficit for 2014 was less than 5% of GDP as targeted by the 2014 budget law. The central government debt increased in 2014, but at a slower pace than in earlier years (66.4% of GDP compared to 63.9% of GDP in 2013).

Despite the government’s commitment to deepen the subsidies reforms, addressing the remaining subsidies on LPG and flour seems uncertain over the short term, given the social and political cost. Indeed, unlike gasoline and diesel, which are mostly consumed by the nonpoor, the shares of LPG and flour are important in the consumption baskets of the poor and the low-middle class. Over the medium term, the government might proceed with a progressive reform of LPG subsidies given the weight of these subsidies on the budget. Because subsidies for LPG mostly benefit the nonpoor in absolute terms, the government is trying to find a way to reduce the number of beneficiaries. In this case, the depth of the LPG reform would depend on the size of the targeted population. Until this reform takes place, the government is considering limiting the use of LPG only to households and excluding the agriculture sector. It is also trying to put in place a restitution mechanism like that for sugar to allow recovering the subsidy amounts received by some service activities, such as restaurants and hotels that use LPG. As for flour, the government is trying to further improve its targeting to the poor, especially in rural areas.

The most recent decline in oil prices, which is being followed by price declines in major commodities, is both an opportunity and a constraint to further reforms. It is an opportunity because eliminating subsidies on the remaining subsidized petroleum products (LPG and diesel) results in a reduced impact on consumption prices. It is a constraint because low oil prices reduce the amount of subsidies and the pressure on the budget and therefore the political will to reduce subsidies further.

 
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