MOROCCO ECONOMIC MONITOR Responding to Supply Shocks Winter 2022/23 EXECUTIVE SUMMARY A fter a strong post-COVID rebound, the due to the drought, more than two hundred thousand Moroccan economy is undergoing the jobs have been lost in rural areas, where most of impact of a string of overlapping supply Moroccan poor households reside. By contrast, labor shocks, both domestic and imported. First, the markets have been more resilient in urban centers. agricultural campaign was extraordinarily dry, leading Poor, vulnerable, and rural households are to the collapse of rainfed crops and to a worrisomely disproportionately suffering from the impact of low volume of water stored in reservoirs that poses a the inflationary surge. Together with the general threat to irrigated agriculture, and potentially to other inflation level, the dispersion in the evolution of the sectors of the economy. Second, as in much of the prices that compose the CPI basket has increased world, the war in Ukraine, rising geopolitical tensions markedly in recent months, implying that the and the reordering of global supply chains have inflationary surge is having heterogenous welfare triggered a supply-side driven inflationary surge, with impacts on households depending on the goods and CPI annual growth peaking at 8.3 percent towards services that they consume. Indeed, the calculations the end of 2022. Lastly, despite the resilience of presented in this report show that annual inflation remittances and merchandise exports, and a rapid may be 30 percent higher for the poorer decile of improvement in tourism receipts, the commodity price the income distribution than for the wealthier one. shock has affected external balances. Moreover, inflationary pressures may be more intense Overall, this has led to a rapid deceleration in rural environments, where poverty levels are also of economic activity, with important welfare higher. These inflation differentials are mostly due to impacts. Real GDP growth dropped from 7.9 percent the impact of food price increases, which represent in 2021 to an estimated 1.2 percent in 2022, a higher share of poorer households’ consumption while the current account deficit increased from baskets. 2.3 to 4.1 percent of GDP. The extreme volatility of The government has responded to ongo- agricultural output due to increasingly frequent climate ing supply shocks with a costly policy package shocks explains about half of that deceleration. HCP focused on preserving households’ purchasing confidence surveys show that the subjective well- power through price subsidies. Morocco’s coun- being of the population has dropped markedly, falling tercyclical response has been articulated primar- below the levels observed even during the worst ily around the maintenance of pre-existing regulated months of the pandemic crisis. In addition, and mostly prices and, to a lesser extent, through the provision Executive Summary 1 of ad hoc financial support to various sectors of the its estimated neutral level. In other words, monetary economy including transport, tourism, agriculture, policy remains accommodative. As many other central and livestock rearing. Overall, this policy package has banks, BAM currently confronts a complex trade-off. shielded almost one quarter of the consumption bas- On the one hand, recent shocks have their origin ket from the inflationary surge, requiring the mobiliza- primarily on the supply side, could be temporary, and tion of additional public spending for an amount of have unfolded in the context of a negative output gap, almost 2 percent of GDP, mostly in the form of price undermining the logic of monetary policy as an anti- subsidies. This approach cushioned what would have inflationary tool. On the other hand, price pressures otherwise been a more pronounced increase in pov- have gradually widened and now go well beyond the erty and vulnerability. products that were most affected the supply shocks. In the future, though, better targeted Hence, there is a risk that inflation expectations could social protection instruments (such as cash become de-anchored, which could justify a more transfers) will constitute a more cost-effective forceful monetary policy tightening. Going forward, tool to mitigate the impacts of these supply Morocco’s optimal monetary policy response will shocks. A disproportionate share of the public depend on the persistence of inflation and on whether resources needed to sustain Morocco’s untargeted second round effects become more likely as prices price subsidy schemes end up flowing to wealthier pressures continue to propagate across the economy. households, which in absolute terms consume more In this complex setting, the authorities could consider of the subsidized goods. From an equity perspective, complementing the anti-inflationary effort with structural this provides a solid justification for the substitution policies to ease supply constraints, particularly for food of current price subsidies by family allowances as items, where the large divergence between farmgate part of the ongoing health and social protection and retail prices are partly due to market disfunctions. reform. Indeed, such a targeted scheme will allow Economic growth is expected to accelerate the government to protect poorer households more to 3.1 percent in 2023, but risks are tilted to effectively and efficiently from the impacts of the the downside. In 2023 the Moroccan economy deteriorating economic environment. It will also avoid will continue to confront an adverse international another potentially adverse consequence of coping environment as its main trading partners in the with supply shocks through price subsidies: muting the Eurozone undergo a deceleration, potentially a price signal, which can slow consumers’ adjustment recession in the first months of the year. This is to the shock, undermine allocative efficiency, and expected to reduce non-agricultural growth which possibly add pressure on the balance of payments. should be more than compensated by the rebound of Calibrating the monetary policy response the primary sector that would materialize if Morocco’s to current shocks is far from easy, and BAM has main crops bounce back to average levels. However, so far opted for prudence, raising policy rates although the beginning of the agricultural campaign while maintaining an accommodative stance. has been relatively humid, nothing guarantees that BAM has raised interest rates twice since September the drought has come to an end, and a repetition of by a cumulative 100 basis points. However, the policy last year’s poor crops could lower our overall growth rate remains negative in real terms and is still below projections by almost one percentage point. 2 MOROCCO ECONOMIC UPDATE – RESPONDING TO SUPPLY SHOCKS 1818 H Street, NW Washington, DC 20433