Highlights

After a strong post-COVID rebound, the Moroccan economy is undergoing the impact of a string of overlapping supply shocks, both domestic and imported. First, the agricultural campaign was extraordinarily dry. Second, the war in Ukraine have triggered a supply-side driven inflationary surge, with CPI annual growth peaking at 8.3 percent towards the end of 2022.

Overall, this has led to a rapid deceleration of economic activity, with important welfare impacts. Real GDP growth dropped from 7.9 percent in 2021 to an estimated 1.2 percent in 2022, while the current account deficit increased from 2.3 to 4.1 percent of GDP. The extreme volatility of agricultural output due to increasingly frequent climate shocks explains about half of that deceleration.

Poor, vulnerable, and rural households are disproportionately suffering from the impact of the inflationary surge. Together with the general inflation level, the dispersion in the evolution of the prices that compose the CPI basket has increased markedly in recent months, implying that the inflationary surge is having heterogeneous welfare impacts on households depending on the goods and services that they consume. Indeed, the calculations presented in this report show that annual inflation may be 30 percent higher for the poorer decile of the income distribution than for the wealthier one.

These inflation differentials are mostly due to the impact of food price increases, which represent a higher share of poorer households’ consumption baskets.

The government has responded to ongoing supply shocks with a costly policy package focused on preserving households’ purchasing power through price subsidies. Overall, this policy package has shielded almost one quarter of the consumption basket from the inflationary surge, requiring the mobilization of additional public spending for an amount of almost 2 percent of GDP, mostly in the form of price subsidies. This approach cushioned what would have otherwise been a more pronounced increase in poverty and vulnerability.

The analysis shows that price subsidies tend to disproportionately benefit richer households.

The current explicit price subsidy system, which includes primary food products (sugar and wheat) and LPG, is progressive in terms of relative incidence: the share of expenditure devoted to subsidized products is higher for poorer households. However, most of the benefits go to the top deciles, both in per capita terms and of absolute incidence (share of total consumption of subsidized goods). Indeed, in 2021, the most affluent households received on average about 1.9 times the per capita amount received by the poorest, raising questions about their efficacy and efficiency as a social protection tool (Figure 30).

In the future, though, better targeted social protection instruments (such as cash transfers) will constitute a more cost-effective tool to mitigate the impacts of these supply shocks. A disproportionate share of the public resources needed to sustain Morocco’s untargeted price subsidy schemes end up flowing to wealthier households, which in absolute terms consume more of the subsidized goods. From an equity perspective, this provides a solid justification for the substitution of current price subsidies by family allowances as part of the ongoing health and social protection reform. Indeed, such a targeted scheme will allow the government to protect poorer households more effectively and efficiently from the impacts of the deteriorating economic environment. It will also avoid another potentially adverse consequence of coping with supply shocks through price subsidies: muting the price signal, which can slow consumers’ adjustment to the shock, undermine allocative efficiency, and possibly add pressure on the balance of payments.

Calibrating the monetary policy response to current shocks is far from easy, and BAM has so far opted for prudence, raising policy rates while maintaining an accommodative stance.

Economic growth is expected to accelerate to 3.1 percent in 2023, but risks are tilted to the downside. In 2023 the Moroccan economy will continue to confront an adverse international environment as its main trading partners in the Eurozone undergo a deceleration, potentially a recession in the first months of the year. This is expected to reduce non-agricultural growth which should be more than compensated by the rebound of the primary sector that would materialize if Morocco’s main crops bounce back to average levels. However, although the beginning of the agricultural campaign has been relatively humid, nothing guarantees that the drought has come to an end, and a repetition of last year’s poor crops could lower our overall growth projections by almost one percentage point.