The Maghreb and the Global Economic Crisis: When Does the Tunnel End?

LAHCEN ACHY

09/29/09

A Diverse Group, Dependent on Europe

Following an average economic growth rate of 5 percent in 2008, the Maghreb countries have seen an economic slowdown since early 2009. However, the Maghreb is far from homogeneous, and prospects for each country differ. Algeria is an oil exporter with a weakly diversified economy, a large public sector and a relatively strong external position. Morocco and Tunisia, on the other hand, are oil importers with more diversified economies that are nonetheless excessively dependent on the European business cycle.

The Maghreb escaped the first wave of the global crisis, unlike most developing regions.

All three countries, however, are trapped in a murky tunnel with no clear end in sight. The timid recovery of their main partner, Europe, is unlikely to have an immediate impact on their economies. Furthermore, there are fears—founded or not—that the financial crisis may have durably affected European growth and pushed the region toward protectionism.

The Good News: Public Investment and Agriculture Help

Despite these concerns, there is some encouraging news for the Maghreb countries:  all three are projected to grow in 2009.

An increase in government investment programs has catalyzed Algeria’s growth. The country had successfully reduced its external debt to 3 percent of GDP prior to the crisis, putting it in a better fiscal position to finance infrastructure and boost economic diversification now. In addition, it had accumulated large foreign exchange reserves, totaling nearly $140 billion at the end of 2008, from high hydrocarbon prices, and can now use them.

Agriculture, which benefitted from this year’s generous rainfall, drove positive growth in both Morocco and Tunisia. The sector’s contribution to domestic production is high—16 percent in Morocco and 11 percent in Tunisia—and it provides employment to 40 percent and 20 percent of their labor forces, respectively. As a result, household consumption in rural areas has risen and food imports have declined.

The Bad News: Trade Shock

However, non-agricultural activities have slowed in Morocco and Tunisia in 2009. Manufacturing, which represents 17 percent of GDP in both countries and employs 12 percent and 20 percent of the labor force in Morocco and Tunisia, respectively, is contracting. Due to the countries’ high dependence on European markets—80 percent of Tunisia’s total exports and 70 percent of Morocco’s end up there—Europe’s severe recession translated into lower demand for their manufacturing sectors.

All three countries, however, are trapped in a murky tunnel with no clear end in sight.

Authorities in both countries reacted swiftly in early 2009 with rescue packages focused on preserving employment, easing banking credit and supporting marketing initiatives. However, due to their ineffective implementation and narrow scope, the packages apparently failed to have a significant impact. Both Morocco and Tunisia recorded significant job losses in manufacturing over the first six months of 2009 and failed to stop the decline in their exports.

As a consequence, Morocco’s trade deficit has worsened, and its import coverage sharply contracted to 44 percent at the end of June 2009 from 54 percent one year earlier. Its foreign reserves, which now cover about seven months of imports, have also been affected by the deterioration of foreign direct investment inflows (-34.5 percent) and the significant drop in remittances (-12.5 percent).

Although Tunisia’s foreign exchange reserves can only cover five months of imports, the country’s external position remains relatively sound. First, its import-coverage ratio amounted to 79 percent at the end of June 2009, down only 3 percent from one year earlier.  Second, although foreign direct investment dropped 36 percent in the first half of 2009, tourism revenues increased almost 5 percent and remittances improved by 8 percent over that same period. Tunisians working abroad are generally more qualified and thus have been less affected by the downturn than their Moroccan counterparts.

However, both Morocco and Tunisia face the risk of a burgeoning external deficit in the face of a sluggish international recovery. In 2008, the current account deficit stood at 5.2 percent and 4.2 percent of GDP in Morocco and Tunisia, respectively, and both are expected to worsen significantly by the end of 2009. The risk is higher for Morocco, given its existing, large trade deficit and the fact that oil prices are rising. However, Morocco is also reaping the benefits of its external debt reduction efforts, with its debt now estimated at 20 percent of GDP compared to 50 percent in Tunisia.

Due to the countries’ high dependence on European markets, Europe’s severe recession translated into lower demand for the Maghreb.

While Algeria boasted the Maghreb’s best fiscal position before the crisis, its economy has still suffered due to the large declines in oil prices since their peak. Hydrocarbons account for 97 percent of Algeria’s exports and 70 percent of its fiscal revenues. As a result, its external and fiscal revenues both declined sharply (-43 and -22 percent, respectively) in the first half of 2009.

Due to its oil-dependence and weak governance, Algeria’s concerns are largely structural. The country’s business environment is still lagging behind, with poor infrastructure, inefficient administration and unpredictable legal and regulatory frameworks. The government did recently adopt a supplementary finance act to accelerate economic diversification through incentives to non-hydrocarbon sectors and to support public infrastructure. At the same time, it also imposed restrictions on imports, foreign investment, and credits to consumers, all of which are likely to hinder economic transformation by impeding product-diversification and technological progress.

Policy Confronts Macro and Social Challenges

Both Morocco and Tunisia face the challenge of maintaining sustainable macroeconomic balances while temporarily supporting their economies through public investment and incentives to boost household consumption. Both countries have increased their minimum wages to satisfy rising social demands, and Morocco has reduced its income taxes.  As a result of their improved fiscal positions over the last few years, both have the option of increasing public investment without threatening macroeconomic stability in the short term. Additional debt is inescapable; however, as export debt service ratios in both countries are under 10 percent, it remains affordable for now.

In the absence of any safety nets in the region, unemployed individuals rely on informal networks and poorly-paid occasional jobs.

In addition, both need to ease their monetary policy and cut interest rates. So far, interest rate cuts, along with reduced reserve requirement ratios, have had only a limited impact. However, there is room to further cut the cost of credit—which has held at 3.25 percent in Morocco since March and 4.5 percent in Tunisia since February—without risking inflation. In Morocco, the cost of living index and the underlying inflation indicator both decreased in June 2009 (y.o.y) by 0.9 percent and 0.5 percent, respectively. Similarly, inflation in Tunisia in 2009 is expected to be less than 3 percent according to the Central Bank of Tunisia, down from 5 percent in 2008. However, non-performing loans in Tunisia, estimated at 17 percent, may constrain monetary policy in that country.

The Maghreb countries also face high unemployment rates. Though unemployment insurance did exist in Algeria, it has been suspended since 2005. Now, in the absence of any safety net schemes in the region, unemployed individuals rely instead on informal networks and poorly-paid occasional jobs. Increased minimum wages and reduced income taxes will not trickle down to these working poor. Currently, there are huge regional inequalities and large gaps between urban and rural areas in the three countries. Public investments need to target all social classes, rural and urban alike, for a more inclusive growth process. Failure to do so will provide fertile ground for destabilizing social tensions.

_{^{International Economic Bulletin, September 2009}}

^{_{Author: Lahcen Achy is a resident scholar at the Carnegie Middle East Center . He is an economist with expertise in development and institutional economics, as well as trade and labor, with a focus on the Middle East and North Africa.
From 2004 to 2009 he was a professor at Morocco’s National Institute of Statistics and Applied Economics, where he taught development economics and international economics. In September 2008, he was a visiting professor at the Gambian University of Banjul. Prior to that, he was a research associate at the Free University of Brussels and a visiting professor in the international master’s program jointly organized by the Free University and the University of Namur.
Achy is a research fellow in the Economic Reform Forum and the Moroccan Academic Liaison for the Researchers’ Alliance for Development. In this capacity he works to increase interaction between the academic development community and the World Bank. He has consulted for the World Bank, the UN Development Programme, the Organization for Economic Cooperation and Development, and the Economic Commission for Africa.}}

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Comments (7)  

 

0 #1 Where's the beef? — Moroccan Patriot 2009-09-29 11:30

Instead of looking at what is said in the article, we should look at what is not said....

The economic situation in Morocco is particularly dire. Unemployment in Morocco, lower remittances, dropping real estate values, high levels of corruption in all area's of governance, look for the anticipated 5% growth rate projected for next year to become a 5% decline by years end. You heard it here first folks...

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0 #2 COMMENT_TITLE_R E The Maghreb and the Global Economic Crisis: When Does the Tunnel End? — Fatima lqlalesh 2009-09-29 22:28

Patriot,
I don't know what you are talking about . Morocco thanks to M6 is a lot better.
During hassan II ere, all we knew is zarwata and the tazmamart.

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0 #3 COMMENT_TITLE_R E The Maghreb and the Global Economic Crisis: When Does the Tunnel End? — Germelou 2009-09-29 23:39

Things are looking up for Morocco and Tunisia. Algeria remains an economize disaster with its over reliance on oil. The issues in both Morocco and Tunisia is the concentration of economic power in the hands of a few and the difficulty for new entrants local or international to set up shop and work in a fluid manner against the established competition. Given the unemployment challenges faced b both countries, the political elite will face a social tsunami if they do not act promptly to "loosen up the established rules of their game". Let people live and prosper is the new mantra the economic elite in both Morocco and Tunisia should full heatedly adopt if they want to be around 20 years from now. Algeria is stuck in the 60s 70s and the only solution for that country would be a peaceful revolution to unseat soviet era so called "moujahidine" and let the young generation take over. An economic Maghreb is light years away with Algeria's insistence on undermining Morocco's territorial integrity.

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0 #4 Impressive facts — marocain residant aux Etats Unis 2009-09-30 01:34

There is no doubt that economic situation is difficult in Morocco. The population is about 32 Million, howvere. Compare that with the few millions in Tunisia and check who stands where. the population of Tunisia is probably the population of Casablanca alone during the summer in Morocco. And this is not to say here that Tunisia is at a better situation because having a bigger population could be a source of wealth and economies of scale potential.
At the same time, unfortunately, the natural resources in Morocco need to be processes and not just sold as is: phosphate and fishing and other sources. In this context, Morocco is very different from Algeria as well: Algeria exports oil and natural gas and the price these two resources have increased about 300% or 400 % over the last three decades or so. Imagine if everything we use in a dialy basis went up this way or even close where the world would stand today.
I think that each of the three countries has different strsnghts they could bank on and weaknesses they need to work hard on overcoming. There is no doubt that diversification is the way to go and that one has to have long term as well as short term goals that are put together with a long term vision.

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0 #5 Impressive facts — marocain residant aux Etats Unis 2009-09-30 01:35

There is no doubt that economic situation is difficult in Morocco. The population is about 32 Million, howvere. Compare that with the few millions in Tunisia and check who stands where. the population of Tunisia is probably the population of Casablanca alone during the summer in Morocco. And this is not to say here that Tunisia is at a better situation because having a bigger population could be a source of wealth and economies of scale potential.
At the same time, unfortunately, the natural resources in Morocco need to be processes and not just sold as is: phosphate and fishing and other sources. In this context, Morocco is very different from Algeria as well: Algeria exports oil and natural gas and the price these two resources have increased about 300% or 400 % over the last three decades or so. Imagine if everything we use in a dialy basis went up this way or even close where the world would stand today.
I think that each of the three countries has different strsnghts they could bank on and weaknesses they need to work hard on overcoming. There is no doubt that diversification is the way to go and that one has to have long term as well as short term goals that are put together with a long term vision.

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0 #6 Great article — marocain residant aux Etats Unis 2009-09-30 01:35

There is no doubt that economic situation is difficult in Morocco. The population is about 32 Million, howvere. Compare that with the few millions in Tunisia and check who stands where. the population of Tunisia is probably the population of Casablanca alone during the summer in Morocco. And this is not to say here that Tunisia is at a better situation because having a bigger population could be a source of wealth and economies of scale potential.
At the same time, unfortunately, the natural resources in Morocco need to be processes and not just sold as is: phosphate and fishing and other sources. In this context, Morocco is very different from Algeria as well: Algeria exports oil and natural gas and the price these two resources have increased about 300% or 400 % over the last three decades or so. Imagine if everything we use in a dialy basis went up this way or even close where the world would stand today.
I think that each of the three countries has different strsnghts they could bank on and weaknesses they need to work hard on overcoming. There is no doubt that diversification is the way to go and that one has to have long term as well as short term goals that are put together with a long term vision.

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0 #7 One thing that might be missing — a guest 2009-09-30 23:38

The biggest concern as far as change and development are concerned in our beloved Morocco is accountability and transparency.
We all heard the story of how certain officials like police or other state employees in Morocco do not get paid enough for what they do. Who does though and what is enough?
What we need is to procecute any one stealing public funds or abusing their authority and make everyone accountable. That way you could move forward and know that when a project is allocated X ammount of money it really did cost it and it would be worth it. Some of tee projects that were done by the municiplaity where I live in Morocco make me think are these people stupid or do they think the rest of us are????? a project is marked up five or ten times its real cost and again where is accountability and control!

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