MOROCCO ECONOMIC MONITOR From Relief to Recovery Fall 2020 Middle East and North Africa Region Morocco Economic Monitor From Relief to Recovery With a Special Focus on COVID-19 and the Moroccan Formal Private Sector Fall 2020 MOROCCO ECONOM MONITO Middle East and North Africa Region From R © 2020 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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TABLE OF CONTENT Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Resume Synthétique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi ‫ امللخص التنفيذي‬. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii 1.  Recent Economic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Epidemiological Developments: A Tale of Two Waves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A Recession of Historical Proportions Puts an End to more than Two Decades of Sustained Economic Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The COVID-19 Shock is Adding Pressure on Morocco’s Budget Deficit, but the Current Account is Behaving Better than Anticipated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 2.  Outlook and Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Morocco’s Economic Policy Response to the Pandemic: From Relief to Recovery . . . . . . . . . . . . . . . . . . . . . .9 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Special Focus: COVID-19 and the Moroccan Formal Private Sector . . . . . . . . . . . . . . . . . . . . . . . 17 How have Morocco’s Firms Coped with the COVID-19 Crisis? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Maintaining the Reform Momentum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Data Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Selected Recent World Bank Publications on Morocco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 iii List of Figures Figure 1 Epidemiological Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 2 Government Response Stringency Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 3 Morocco Mobility Data (% change from pre-COVID-19 baseline) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 4  GDP: Decreasing Demand (y-o-y %) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Figure 5  GDP: Uneven Impact of the Crisis on the Supply Side (y-o-y %) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Figure 6  Increasing Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Figure 7  Loss of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Figure 8  The Statistical Capacity Indicator (SCI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 9  SCI Sub-components, Morocco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 10 Slow Recovery for Q3 and Q4 2020 (y-o-y %) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 11 Absence of Price Pressures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 12 Decreasing Revenues (y-o-y %) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 13 Rising Central Government Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Figure 14 Current Transactions (y-o-y % changes) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Figure 15 Stable Gross Official Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 16 No Pressure on the Exchange Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 17 Policy Response, Selected Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 18 Bank Credit for Firms (% y-o-y change) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 19 Interest Rate on Corporate Credit (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 20 Cumulative Output Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Figure 21 Percent of Firms Confirmed Permanently Closed since COVID-19 (percent) . . . . . . . . . . . . . . . . . 18 Figure 22 Breakdown of Closed Firms (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Figure 23 Manufacturing Capacity Utilization Loss due to COVID19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Figure 24 Impact of the Pandemic on Firms’ Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Figure 25 Percent of Firms that Received/Expect to Receive National or Local Government Assistance – Breakdown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Figure 26 Coverage Rate of Government Assistance (% out of the total of firms that received government assistance) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Figure 27 Sources of Financing for Cash Flow Shortages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Figure 28 Impact of the Pandemic on Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Figure 29 Merchandise Trade (%of GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Figure 30 Morocco’s Participation in GVCs (% of gross exports) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 List of Tables Table 1 Morocco: Selected Economic Indicators, 2016–2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Table 2 Morocco: Key Fiscal Indicators 2015–2022 (in percent of GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 List of Boxes Box 1 Morocco’s Statistical Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Box 2  Review of the Main Mitigation Measures Adopted during Morocco’s Lockdown . . . . . . . . . . . . . . 10 Box 3 National Policies to Transition to a More Sophisticated Participation in GVCs . . . . . . . . . . . . . . . . 24 iv MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY ACRONYMS BAM Bank Al-Maghrib IMF International Monetary Fund CAB Current Account Balance IOM International Organization for Migration CPI Consumer Price Index LAC Latin America and Caribbean COVID Coronavirus Disease LPI Logistics Performance Index DSA Debt Sustainability Analysis MENA Middle East North Africa DB Doing Business MoF Ministry of Finance ECA Europe and Central Asia MSME Micro Small Medium Enterprises EMDEs Emerging Market Developing Economies NGO Non-Government Organization EAP East Asia and Pacific NPLs Non-Performing Loans EU European Union PP Percentage Point FDI Foreign Direct Investment PPE Personal Protective Equipment FTA Free Trade Agreements PPP Public-Private Partnership GCC Gulf Cooperation Council SA South Asia GDP Gross Domestic Product SME Small Medium Enterprises GoM Government of Morocco SOEs State-Owned Enterprises GVC Global Value chains VAT Value-Added Tax HCP High Comission of Planning WBG World Bank Group HDI Human Development Index WDI World Development Indicators ICT Information and Communications WGI Worldwide Governance Indicators Technology v PREFACE T he Morocco Economic Monitor is a semi- team is very grateful for the helpful inputs received annual report from the World Bank economic from Matina Deen on the impact of the crisis on the team on recent economic developments and corporate sector, from Vasco Molini on Morocco’s economic policies. This report presents our current statistical capacity, and from Gabriel Sensenbrenner outlook for Morocco given the recent COVID-19 (EFI Program Leader, Maghreb), as well as senior developments. Its coverage ranges from the macro- staff from the Ministry of Finance. Special thanks to economy to business environment and private sector Muna Salim (Senior Program Assistant, MTI) for her development. It is intended for a wide audience, administrative support. including policy makers, business leaders, financial The findings, interpretations, and conclusions market participants, and the community of analysts expressed in this Monitor are those of World Bank and professionals engaged in Morocco. staff and do not necessarily reflect the views of the The Morocco Economic Monitor is a product Executive Board of the World Bank or the governments of the Middle East and North Africa (MENA) unit in the they represent. For information about the World Macroeconomics, Trade & Investment (MTI) Global Bank and its activities in Morocco, please visit www. Practice in the World Bank Group. The report was led worldbank.org/en/country/morocco (English), www. by Javier Díaz-Cassou (Senior Economist, MTI) and worldbank.org/ar/country/morocco (Arabic), or www. Amina Iraqi (Economist, MTI). banquemondiale.org/fr/country/morocco (French). The report was prepared under the direction of For questions and comments on the content of this Jesko Hentschel (Country Director for the Maghreb), publication, please contact Javier Díaz-Cassou and Eric Le Borgne (Practice Manager, MTI). The (jdiazcassou@worldbank.org). vii EXECUTIVE SUMMARY T he COVID-19 pandemic has abruptly As in much of the world, the current interrupted more than two decades of crisis will lead to a considerable increase in sustained socio-economic progress in indebtedness. Tax revenues have collapsed, and Morocco. In 2020 the country will suffer its first public spending has been crucial to confront the recession since mid-1990s, and the economic health emergency and to sustain households’ contraction registered in the second quarter income. This has understandably put an end to the (broadly coinciding with the confinement) is the fiscal consolidation efforts of the past few years, and largest on record. This is the result of the combined we now project the public deficit to increase to 7.8 supply, demand and external shocks triggered by percent GDP in 2020 and public debt to reach 76 the pandemic, but also of the effects of adverse percent of GDP. The current account deficit is also weather conditions on agricultural output. The crisis expected to increase to 6 percent of GDP this year. is having a severe impact on jobs and household Despite the severity of the crisis, Morocco is better incomes, generating a spike in unemployment placed than other emerging economies to weather and a deterioration of poverty and vulnerability this storm thanks to the credibility of its macro-fiscal indicators. framework, to its relatively large external buffers and Although the Moroccan economy exhibits to its good access to international financial markets. some signs of recovery, the situation remains The Moroccan authorities have put forward fragile given that epidemiological trends are an ambitious recovery strategy. The government worse now than they were during the first wave intends to mobilize close to 11 percent of GDP in the of contagions. Although the economy is still form of loan guarantees, direct equity injections in contracting, the last few months have witnessed a Moroccan corporates, and to give a new impulse to partial recovery of mobility indicators, and certain infrastructure-related Public-Private-Partnerships. To exports have resumed their pre-pandemic expansion. this end, a new strategic investment fund is being However, after a relatively mild first wave, the number created, and the Central Guarantee Agency is being of contagions began to pick up in the aftermath of the transformed into a limited company. In addition, various confinement, and Morocco is now struggling to flatten important structural reforms have been announced, the curve and reduce the pressure of COVID-19 on including the generalization of health insurance, a its health system. In this uncertain context, we expect revamping of the social protection system around a real GDP to contract by 6.3 percent in 2020, and to universalization of family allowances, the streamlining return to its pre-pandemic level only in 2022. of Morocco’s large network of State-Owned Enterprises ix (SOEs) and a number of measures to especially Going forward, the current crisis provides a support the SME sector in the recovery. window of opportunity to remove the constraints The follow-up Enterprise Survey conducted that in the past have limited the development of by the World Bank in Morocco after the outbreak, a more dynamic private sector. In the short run, provides new evidence on the large and persistent using all available policy space to inject liquidity impact that the COVID-19 pandemic is having on the and equity into the private sector is still essential to formal private sector. Among its most relevant results, prevent liquidity problems from turning into a wave of 6.1 percent of surveyed formal sector firms are reported corporate insolvency. With a longer-term perspective, to have ceased their operations, and as many as 86.9 Morocco could stimulate competition and level the percent report a fall in sales of, on average, 50.4 percent playing field for new entrants in goods and services of their pre-pandemic level. The survey also provides markets, while upgrading its human capital and information about the coping strategies of Moroccan institutional frameworks. In addition, appropriate enterprises, which includes a growing use of the industrial policies would help to consolidate Morocco’s government’s lines of support, a reduction in the number position as a nearshoring destination for multinational of worked hours (but, comparatively, less lay-offs than in companies and thus to take advantage of the strategic other countries), the use of internal funds to meet cash opportunities that could emerge globally in the post- flow shortages, and increasing business activity online. pandemic world. x MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY RESUME SYNTHÉTIQUE L a pandémie du COVID-19 a brusquement qu’un retour au niveau préalable à la pandémie ne interrompu plus de deux décennies de devrait pas intervenir avant 2022. progrès socio-économique soutenus au Comme dans une grande partie du monde, Maroc. En 2020, le pays devrait subir sa première la crise actuelle entraînera une augmentation récession depuis les années 1990, et la contraction considérable de l’endettement. Les recettes économique qui a eu lieu au deuxième trimestre fiscales ont chuté et les dépenses publiques ont (coïncidant largement avec le confinement) est la plus été cruciales pour faire face à l’urgence sanitaire importante jamais enregistrée. C’est le résultat de la et soutenir les revenus des ménages. Cela a combinaison des chocs de l’offre et de la demande naturellement mis fin aux efforts d’assainissement et des chocs externes provoqués par la pandémie, budgétaire des dernières années, et nous prévoyons mais aussi des effets que des conditions climatiques une augmentation du déficit budgétaire à 7,8 pour défavorables ont eu sur la production agricole. La cent du PIB en 2020 et la dette publique devrait crise a eu un impact sévère sur les emplois et les dépasser 76 pour cent du PIB. Le déficit du compte revenus des ménages, générant le pic du chômage courant devrait également augmenter pour atteindre et une détérioration des indicateurs de pauvreté et de 6 pour cent du PIB cette année. Malgré la gravité vulnérabilité. de la crise, le Maroc est mieux placé que d’autres Bien que l’économie marocaine montre économies émergentes pour résister à cette tempête quelques signes de reprise, la situation reste grâce à la crédibilité de son cadre macro-budgétaire, fragile étant donné la dégradation récente de la à ses tampons extérieurs relativement importants et à situation épidémiologique. Bien que l’économie son accès aisé aux marchés financiers internationaux. continue de se contracter, les derniers mois ont connu Les autorités marocaines ont une stratégie une reprise partielle des indicateurs de mobilité, et de relance ambitieuse. Le gouvernement mobiliser certaines exportations ont repris leur expansion pré- près de 11 pour cent du PIB sous forme de prêts pandémique. Cependant, après une première vague garantis, capitaux entreprises marocaines et une relativement modérée, le nombre de contagions a nouvelle impulsion aux partenariats publics-privés commencé à augmenter à la suite du déconfinement, liés aux infrastructures. A cet effet, un nouveau fonds et le Maroc a maintenant du mal à aplanir la courbe et d’investissement stratégique est en cours de création réduire la pression du COVID-19 sur son système de et la Caisse Centrale de Garantie se transformera santé. Dans ce contexte incertain, une contraction du en société anonyme. En outre, diverses réformes PIB réel de 6,3 pour cent est prévue en 2020 tandis structurelles importantes ont été annoncées, xi notamment la généralisation de l’assurance maladie, de trésorerie et un accroissement de l’activité du une refonte du système de protection sociale autour commerce en ligne. d’une universalisation des allocations familiales, À l›avenir, la crise actuelle ouvre une fenêtre la rationalisation du vaste réseau des entreprises d’opportunité pour éliminer les contraintes qui, publiques et un certain nombre de mesures pour dans le passé, ont limité le développement d’un soutenir le secteur des PME dans la reprise. secteur privé plus dynamique. Dans le court terme, L’enquête auprès des entreprises menée l’utilisation de tout espace politique disponible pour par la Banque mondiale au Maroc fournit de injecter des fonds et des capitaux propres dans le nouveaux éléments sur l’impact important et secteur privé est toujours indispensable afin d’éviter persistant de la pandémie du COVID-19 sur le que les problèmes de liquidité ne se transforment secteur privé formel. Parmi ses résultats les plus en une vague d’insolvabilité des entreprises. Dans pertinents, 6,1 pour cent des entreprises du secteur une perspective à plus long terme, le Maroc pourrait formel auraient cessé leurs activités et 86,9 pour cent stimuler la concurrence et instaurer des conditions signalent une baisse des ventes de 50,4 pour cent en équitables pour les nouveaux entrants sur les moyenne par rapport à leur niveau pré-pandémique. marchés des biens et services, tout en améliorant L’enquête fournit également des informations sur les son capital humain et ses cadres institutionnels. stratégies d’adaptation des entreprises marocaines, En outre, les politiques industrielles appropriées qui incluent une utilisation croissante des lignes de contribueraient à consolider la position du Maroc en soutien du gouvernement, une réduction du nombre tant que destination nearshoring pour les entreprises d’heures travaillées (mais moins de licenciements multinationales et ainsi tirer parti des opportunités en comparaison avec d’autres pays), l’utilisation stratégiques qui pourraient émerger globalement de fonds internes pour faire face aux pénuries dans le monde post-pandémie. xii MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY ‫الملخص التنفيذي‬ ‫قد أدى وباء كوفيد ‪ -19‬إىل توقف بشكل مفاجئ ألكرث من عقدين من‬ ‫وضع أفضل من االقتصادات الناشئة األخرى ملواجهة هذه العاصفة بفضل‬ ‫التقدم االجتامعي واالقتصادي املستمر يف املغرب‪ .‬يف عام ‪ ،٢٠٢٠‬من‬ ‫مصداقية إطاره املايل وآلياته العازلة الخارجية الكبرية نسبيًا و إمكانية‬ ‫املتوقع أن تشهد البالد أول ركود لها منذ منتصف التسعينات‪ ،‬واالنكامش‬ ‫الوصول إىل األسواق املالية الدولية‪.‬‬ ‫االقتصادي املسجل يف الربع الثاين (الذي يتزامن إىل حد كبري مع الحجر‬ ‫صحي) هو األكرب عىل اإلطالق‪ .‬إن هذا ناتج عن مزيج بني صدمات‬ ‫اقرتحت السلطات املغربية اسرتاتيجية إنعاش طموحة‪ .‬تعتزم الحكومة‬ ‫العرض والطلب والصدمات الخارجية التي سببها الوباء ‪ ،‬ولكن أيضً ا‬ ‫تخصيص ما يقرب من ‪ ١١‬يف املائة من الناتج املحيل اإلجاميل يف شكل‬ ‫نتيجة تأثري الظروف املناخية غري املواتية عىل اإلنتاج الزراعي‪ .‬كان لألزمة‬ ‫قروض مضمونة‪ ،‬وضخ رأس املال املبارش يف الرشكات املغربية‪ ،‬وتعزيز‬ ‫تأثري كبريعىل الوظائف ودخل األرسة‪ ،‬مام أدى إىل ارتفاع معدل البطالة‬ ‫الرشاكة بني القطاعني العام والخاص املرتبطة بالبنية التحتية‪ .‬ولهذه‬ ‫إىل الذروة وتفاقم مؤرشات الفقر والضعف‪.‬‬ ‫الغاية‪ ،‬يتم إنشاء صندوق استثامر اسرتاتيجي جديد وتحويل صندوق‬ ‫الضامن املركزي إىل رشكة عامة محدودة‪ .‬باإلضافة إىل ذلك‪ ،‬تم اإلعالن‬ ‫عىل الرغم من أن االقتصاد املغريب أظهر بعض بوادر االنتعاش‪ ،‬إال أن‬ ‫عن العديد من اإلصالحات الهيكلية الهامة‪ ،‬مبا يف ذلك بذل تعميم‬ ‫الوضع ال يزال هشً ا حيث أن االتجاهات الوبائية األخرية أسوأ مقارنة‬ ‫التأمني الصحي‪ ،‬إصالح نظام الحامية االجتامعية حول تعميم التعويضات‬ ‫باملوجة األوىل من العدوى‪ .‬عىل الرغم من استمرار االقتصاد يف االنكامش ‪،‬‬ ‫العائلية‪ ،‬وترشيد الشبكة الواسعة من الرشكات العامة املغربية‪.‬‬ ‫يا يف مؤرشات التنقل‪ ،‬واستأنفت‬ ‫شهدت األشهر القليلة املاضية انتعاشً ا جزئ ً‬ ‫بعض الصادرات توسعها قبل انتشار الوباء‪ .‬ومع ذلك‪ ،‬بعد املوجة األوىل‬ ‫تقدم الدراسة االستقصائية لدى الرشكات التي أجراها البنك الدويل‬ ‫يا‪ ،‬بدأ عدد اإلصابات يف االزدياد مبارشة بعد رفع تدابري‬ ‫املعتدلة نسب ً‬ ‫يف املغرب رؤى جديدة حول التأثري الكبري واملستمر لوباء كوفيد ‪-19‬‬ ‫تدابري الحجر الصحي‪ ،‬ويكافح املغرب اآلن لتسوية املنحنى وتقليل ضغط‬ ‫عىل القطاع الخاص‪ .‬من بني أكرث النتائج األكرث أهمية‪ ١ ،٦ ،‬يف املائة‬ ‫كوفيد ‪ -19‬عىل نظامه الصحي‪ .‬يف ظل هذه الخلفية غري املؤكدة ‪ ،‬نتوقع‬ ‫من الرشكات التي شملها االستطالع قد توقفت عن العمل و ‪ ٩، ٨٦‬يف‬ ‫أن ينكمش إجاميل الناتج املحيل الحقيقي بنسبة ‪ ٣، ٦‬يف املائة يف عام‬ ‫املائة أبلغت عن انخفاض بنسبة ‪ ٤ ،٠ ٥‬يف املائة يف املتوسط يف املبيعات‬ ‫‪ ٢٠٢٠‬وأن يعود إىل مستويات ما قبل الجائحة حتى عام ‪.٢٠٢٢‬‬ ‫مقارنة‪ ‬مع مستوى ما قبل الوباء‪ .‬يوفر االستطالع أيضً ا معلومات عن‬ ‫اسرتاتيجيات التكيف للرشكات املغربية ‪ ،‬والتي تشمل زيادة استخدام‬ ‫كام هو الحال يف كثري من أنحاء العامل ‪ ،‬ستؤدي األزمة الحالية إىل زيادة‬ ‫خطوط الدعم الحكومية ‪ ،‬تقليل عدد ساعات العمل (ولكن عدد ترسيح‬ ‫كبرية يف الديون‪ .‬انخفضت اإليرادات الرضيبية وكان اإلنفاق العام حاسامً‬ ‫العامل أقل مقارنة بالدول األخرى) ‪ ،‬استخدام املوارد الداخلية للتعامل‬ ‫يف معالجة الطوارئ الصحية ودعم دخول األرس‪ .‬و قد أنهى هذا جهود‬ ‫مع النقص النقدي وزيادة نشاط التجارة اإللكرتونية‪.‬‬ ‫ضبط أوضاع املالية العامة يف السنوات القليلة املاضية‪ ،‬ونتوقع أن يرتفع‬ ‫عجز املوازنة إىل ‪ ٨، ٧‬يف املائة من إجاميل الناتج املحيل يف عام ‪٢٠٢٠‬‬ ‫يف املستقبل‪ ،‬تفتح األزمة الحالية فرصة إلزالة القيود التي تحد من‬ ‫‪ ،‬ومن املتوقع أن يتجاوز الدين العام ‪ ٦ ٧‬يف املائة من إجاميل الناتج‬ ‫تنمية قطاع خاص أكرث حيوية‪ .‬وعىل املدى القصري‪ ،‬ال يزال من الرضوري‬ ‫املحيل‪ .‬ومن املتوقع أيضً ا أن يرتفع عجز الحساب الجاري إىل ‪ ٦‬يف املائة‬ ‫استخدام كل املساحة السياسية املتاحة لضخ السيولة واألسهم يف‬ ‫من إجاميل الناتج املحيل‪ .‬عىل الرغم من شدة األزمة ‪ ،‬فإن املغرب يف‬ ‫القطاع الخاص ملنع مشاكل السيولة من التحول إىل موجة من إفالس‬ ‫‪xiii‬‬ ‫الرشكات‪ .‬عىل املدى الطويل ‪ ،‬ميكن للمغرب أن يحفز املنافسة ويخلق‬ ‫الصناعية املناسبة تساعد ترسيخ مكانة املغرب كوجهة قريبة للرشكات‬ ‫ً‬ ‫مجال متكافئًا للوافدين الجدد يف أسواق السلع والخدمات ‪ ،‬مع تحسني‬ ‫متعددة الجنسيات‪ ،‬وبالتايل االستفادة من الفرص االسرتاتيجية التي ميكن‬ ‫رأس املال البرشي واألطر املؤسسية‪ .‬وباإلضافة إىل ذلك‪ ،‬فإن السياسات‬ ‫أن تنشأ عامليا يف ما بعد الجائحة‪.‬‬ ‫‪xiv‬‬ ‫‪MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY‬‬ 1 RECENT ECONOMIC DEVELOPMENTS A s in much of the world, the COVID-19 Morocco did not experience the exponential growth pandemic has simultaneously triggered in infections and fatalities that affected much of the a supply and a demand shock on the world. After a peak of 137 in April, the number of daily Moroccan economy. This is causing a severe fatalities from COVID-19 fell to 35 in May and to only recession, and Q2-2020 (which broadly coincides 20 in June. with the lockdown) witnessed the largest economic This successful containment of the first contraction on record. After the most stringent social wave of contagions was made possible by the distancing restrictions were lifted in June, economic stringent measures adopted early on by the activity began exhibiting some encouraging signs. Moroccan authorities. By March 15, all international However, the epidemiological situation is worse flights and ferry crossings had been suspended, now than it was during the first wave of contagions, schools had been shut down, and a strict confinement which cast doubts on the pace of the recovery. The took effect on March 20. The stringency of the social COVID-19 shocks are resulting in an expansion of distancing response adopted by the authorities is Morocco’s budget deficit and the debt to GDP ratio illustrated in Figure 2, which shows how quickly is on the rise. Morocco became one of the countries of the world with the stricter measures in place. In fact, between March 25 and June 10, Morocco was on average the Epidemiological Developments: eighth country of the world with the highest stringency A Tale of Two Waves index (compiled by Oxford University, measured from 0 to 100): 94, against 73 in the MENA region, 84 in The first wave of contagions from the COVID-19 Tunisia, 82 in France, 81 in Algeria, 79 in Spain and pandemic was relatively mild in Morocco. The 76 in Italy. first case of COVID-19 was confirmed on March 02, However, following the relaxation of the 2020, after which the number of contagions began to lockdown in July, COVID-19 cases began to pick increase steadily: by the end of March 617 cases had up, and the second wave of contagions is taking been confirmed, against 3,806 new cases in April, a heavier toll than the first one, as is the case in 3,384 in May and 4,726 in June (Figure 1). However, many countries. On June 11, the authorities eased 1 FIGURE 1 • Epidemiological Situation Daily contagions and deaths in Morocco Cumulative cases, Morocco vs. the world 300,000 60,000,000 7,000 90 6,000 80 250,000 50,000,000 70 5,000 60 200,000 40,000,000 4,000 50 150,000 30,000,000 3,000 40 30 100,000 20,000,000 2,000 20 50,000 10,000,000 1,000 10 0 0 0 0 11–Mar 25–Mar 8–Apr 22–Apr 6–May 20–May 3–Jun 17–Jun 1–Jul 15–Jul 29–Jul 12–Aug 26–Aug 9–Sep 23–Sep 7–Oct 21–Oct 4–Nov 11–May 11–Aug 11–Mar 11–Sep 11–Jun 11–Apr 11–Oct 11–Jul Daily contagions (LHS) Daily deaths (RHS) Morocco (LHS) World (RHS) Source: Ministry of health Morocco-Our world in Data . the lockdown in the regions and cities that had been of writing Morocco finds itself in an intermediate less severely hit by the pandemic, and by June 24, situation, with on average 130 reported new cases per the confinement came to an end in the entire country. million inhabitants in the first 20 days of November, During the first four weeks of the post-confinement against a world average of 73, but well below most period, the pandemic remained under control, with advanced economies and in a 60th position globally.1 an average of 252 daily new cases between June The authorities have so far responded 24 and July 22. However, in late July contagions with more targeted social distancing measures began to pick up, and have remained on an upward to the second wave of contagions. In late July, the trend until recently: on average 570 new daily cases government re-imposed restrictions to internal mobility between July 22 and July 31; 1,230 in August; 1,993 in September; 3,029 in October. The number of deaths followed suit, with an average of 25 COVID-19 1 However, it is important to note that such international related fatalities in August, 35 in September and 47 comparisons have serious limitations because of sharp in October. If compared internationally, at the time differences in countries’ testing capacities. FIGURE 2 • Government Response Stringency Index 100 90 80 70 60 50 40 30 20 10 0 01 jan 2020 08 jan 2020 15 jan 2020 22 jan 2020 29 jan 2020 05 feb 2020 12 feb 2020 19 feb 2020 26 feb 2020 04 mar 2020 11 mar 2020 18 mar 2020 25 mar 2020 01 apr 2020 08 apr 2020 15 apr 2020 22 apr 2020 29 apr 2020 06 may 2020 13 may 2020 20 may 2020 27 may 2020 03 jun 2020 10 jun 2020 17 jun 2020 24 jun 2020 01 jul 2020 08 jul 2020 15 jul 2020 22 jul 2020 29 jul 2020 05 aug 2020 12 aug 2020 19 aug 2020 26 aug 2020 02 sep 2020 09 sep 2020 16 sep 2020 23 sep 2020 30 sep 2020 07 oct 2020 14 oct 2020 MENA Average Morocco Algeria Spain France Italy Tunisia Source: own calculations based on the Coronavirus Government Response Tracker Database (Oxford University). 2 MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY FIGURE 3 • Morocco Mobility Data (% change from pre-COVID-19 baseline) 40 20 0 –20 –40 –60 –80 –100 Feb–20 Mar–20 Apr–20 May–20 Jun–20 Jul–20 Aug–20 Sep–20 Oct–20 Retail and recreation Grocery and pharmacy Parks Transit stations Workplaces Source: Google mobility data. in response to the spike in contagions. In addition, the lockdown was gradually eased in June, these mobility most affected cities, including Casablanca, Marrakesh, indicators began to pick up, but have only reached the and some areas of Rabat and Tangier, have been placed pre- COVID baseline in the case of the visits to grocery under partial lockdown and imposed nighttime curfews, and pharmacy. In this context, it is not surprising that among other restrictions. However, as suggested by the after a lackluster first quarter, GDP growth collapsed evolution of the stringency index displayed in Figure 2, during the second quarter, registering a 14.9 percent these measures are nowhere near the strict response y-o-y contraction, the worst data point ever to be found to the first wave of contagions, reflecting the fact that in that series. the government is now much more aware about their An unusually dry weather has contributed potential economic, social and psychological impacts. to aggravate the crisis. An estimated 16 percent Instead, the authorities intend to move forward with the decline in rainfall in the 2019–20 season has vaccinations program as fast as possible, although H.M. resulted in a sharp drop in certain crop yields, and the King himself has warned about the possibility of a especially of rainfed wheat, the production of which new confinement should the pressure on the Moroccan has halved. As a result of persistently adverse climatic health system continue to mount. conditions, agricultural value added has registered six consecutive quarters of negative y-o-y growth, which reached –6.8 percent between April and June A Recession of Historical Proportions 2020. With even more intensity than the pandemic Puts an End to more than Two itself, the draught is having a severe social impact in Decades of Sustained Economic rural areas given that, although the agricultural sector Expansion only represents 12 percent of GDP, it still employs 38 percent of Morocco’s labor force. The Moroccan economy has entered its first Although few sectors have been spared, the recession since 1995. The lockdown imposed by impact of the shock on the various components the authorities to confront the pandemic brought of supply and demand has been uneven. On economic activity to a sudden stop. A commonly the production side, manufacturing industries used proxy to illustrate that trend is Google’s mobility underwent a 22 percent y-o-y decline during the data, which exhibited an 80 percent decline in retail second quarter, and the automobile, aeronautics and recreation visits or a 60 percent fall in visits to and electronics sectors suffered the most as a result workplaces during the confinement (Figure 3). As the of the disruptions in Global Value Chains (GVCs) Recent Economic Developments 3 FIGURE 4 • GDP: Decreasing Demand (y-o-y %) FIGURE 5 • GDP: Uneven Impact of the Crisis on the Supply Side (y-o-y %) 15 10 50 5 0 0 –5 % –10 % –15 –50 –20 –25 –100 –30 2020Q1 2020Q2 –35 Agricultural Fishing 2019 2019 2019 2019 2020 2020 2020 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Mining Manufacturing industries Electricity and water Construction Private Consumption Government Consumption Trade Hotels and restaurants Gross Capital formation Exports Transportation Post and telecommunications Imports Financial activities and insurance Source: HCP. Source: HCP. caused by the pandemic. The services sector, which The sudden stop in economic activity is has been the main engine of economic growth over having a severe impact on jobs and household the past 20 years, dropped by 14.9 percent in Q2- incomes. It is estimated that close to 581,000 2020.Therefore non-agricultural growth declined by jobs have been lost between September 2019 and –15.5 percent. During this economic crisis, just a few September 2020, 258,000 in the primary sector, sectors have continued to grow in Q2-2020: fisheries, 61,000 in the secondary sector and 260,000 in the extractive industries, and the chemical, health and tertiary sector (Source: HCP). During the second financial sectors. By contrast, the hardest hit sectors quarter, which broadly coincides with the lockdown, have been hotels and restaurants (–90 percent) and the average number of worked hours more than halved transportation (–55.7 percent). On the demand side, (from 45 to 22 per person per week). Furthermore, private consumption dropped by 21.2 percent and the surveys conducted by HCP indicate that about investment by 17.4 percent, a decline that was only two thirds of workers had to stop their activity during partially compensated by an increase in government confinement while 62 percent have experienced consumption. Net exports also weighed negatively an income loss during that period. In this context, on growth, with the drop in exports (–28.7 percent) poverty and vulnerability rates are expected to spike exceeding that of imports (–25.7 percent). this year, putting an abrupt end to the uninterrupted FIGURE 6 • Increasing Unemployment FIGURE 7 • Loss of Income 14 46.5 72 70 12 46.0 70 68.2 45.5 68 66.2 10 45.0 66 8 64 63.1 44.5 62 62 % % % 6 44.0 60 59 4 43.5 58 43.0 56 10.2 10.5 12.3 12.7 11.6 2 42.5 54 9.1 9.7 8.1 9.4 9.1 9.3 8.8 13 9 0 42.0 52 2019 2019 2019 2019 2020 2020 2020 Percentage of workers on Income loss Q1 Q2 Q3 Q4 Q1 Q2 Q3 temporary work stoppage during confinement Unemployment rate Underemployment rate Participation rate Urban Rural National Source: HCP. Source: HCP. 4 MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY BOX 1. MOROCCO’S STATISTICAL CAPACITY Among its other unexpected consequences, the global spread of the COVID-19 has generated increased public attention to the relevance, timeliness and accuracy of statistics. Indeed, data analyses quantifying the socio-economic impact of COVID are of high demand all over the world, including information on the proportion and characteristics of laid-off workers and firms which exited the market. Morocco’s Statistical Capacity Indicator (a composite score ranging from 0 to 100) is above the average of the MENA region, and slightly below that registered on average in Latin America and the Caribbean (LAC) (Figure 8). However, and in line with the MENA as well as the LAC regions, Morocco’s SCI has tended to decline between 2005 and 2019. Moreover, the index has declined in each of the three statistical sub indicators that are used to compute the SCI: methodological consistency with international standards, timeliness and accessibility (Figure 9). Stepping up the country’s efforts to cover existing gaps in the capacity of Morocco’s National Statistical System is particularly critical in the context of Covid-19, given the importance of good quality, up to date, and accessible data to mount an effective response to the pandemic. FIGURE 8 • The Statistical Capacity Indicator (SCI) FIGURE 9 • SCI Sub-Components, Morocco 100 100 80 80 60 60 40 40 20 20 0 0 Methodological Timeliness Accessibility Morocco MENA LAC EAP SA ECA consistency 2005 2019 2005 2019 Source: World Development Indicators. Source: World Development Indicators. improvement in social indicators achieved by Morocco HCP’s most recent nowcasts, the y-o-y decline in since the turn of the century (HCP, UN and WB, GDP did continue during the third quarter mainly 2020).2 Nonetheless, assessing the socio-economic driven by the drop in non-agricultural value added (–9 impact of the COVID crisis in Morocco is a complex percent). Kickstarting investment is proving especially task given the country’s still relatively weak statistical challenging, as gross capital formation still contracted capacity (Box 1). by 17.4 percent y-o-y during the third quarter. Also Although economic activity picked up in the contributing to explain the weak recovery, HCP still aftermath of the Spring-Summer confinement, expects a 10.8 percent contraction in households’ the recovery is still fragile, despite sustained consumption in the third quarter. efforts to mitigate economic disruptions. The data In this context of depressed economic displayed in Figure 3 evidences that, although still activity, price pressures remain subdued. Headline below its pre- COVID baseline, mobility has increased inflation on year-on-year basis averaged 0.7 percent substantially after the most stringent social distancing restrictions were lifted. Among the green shoots that can already be discerned are the evolution of certain 2 Note stratégique: Impact social et économique de la exports, such as automobiles and agro-industrial crise du COVID-19 au Maroc (2020) https://www.hcp. products, which have already posted positive y-o-y ma/Note-strategique-Impact-social-et-economique-de-la- growth rates on Q3-2020. However, according to crise-du- COVID-19-au-Maroc_a2582.html. Recent Economic Developments 5 FIGURE 10 • Slow Recovery for Q3 and Q4 2020 FIGURE 11 • Absence of Price Pressures (y-o-y %) 2.5 10 2.0 5 2.8 2.4 2.4 2.3 0.1 0 1.5 –5 % –5.5 1.0 % –10 –8.7 –15 0 –14.9 –20 2019 Q1 2019 Q2 2019 Q3 2019 Q4 2020 Q1 2020 Q2 2020 Q35 (project.) 2020 Q4 (project.) –1.0 –1.5 Jan–20 Feb–20 Mar–20 Apr–20 May–20 Jun–20 Jul–20 Aug–20 Sep–20 Non-agricultural Value added Agricultural Value added RGDP Headline inflation Core inflation Source: HCP. Source: HCP. during the first nine months of 2020, although it This process included the liberalization of gasoline increased to 1.4 percent in September-20, probably and diesel prices, the containment of the wage bill, reflecting the partial recovery of economic activity in a pension reform, as well as measures to improve the aftermath of the confinement. Food prices have tax collection through broadening the tax base, been the major driver of headline inflation, as core harmonizing tax rates, and fighting tax evasion. With inflation remains close to 0 (0.2 percent y-o-y). At its the onset of the pandemic, the fiscal consolidation most recent meeting, in September, the central bank efforts have, understandably, been discontinued left its policy rate unchanged at 1.5 percent, after two to allow for additional expenditures, mainly driven consecutive rate cuts in March and June, when the by the budgetary support of the COVID-19 fund policy rate was cut by a cumulative 75 basis points (Government contributed 1 percent of GDP), and to (see section 2 for more details on the monetary accommodate the impact of the collapse in economic response to the crisis). activity on tax revenues collection (which contracted by 8.4 percent during Jan–Aug 2020 compared with Jan–Aug 2019)—Figure 12. As a result, during The COVID-19 Shock is Adding the first eight months of 2020, the overall budget Pressure on Morocco’s Budget deficit increased by 32 percent to 46.5 billion MAD Deficit, but the Current Account is (4.3 percent of GDP) and the Treasury’s debt has Behaving Better than Anticipated increased by 53.7 billion MAD between December 2019 and July 2020, from to 65.4 percent to 73.7 The COVID-19 pandemic has put an end to percent of GDP, respectively (Figure 13).3 The total Morocco’s fiscal consolidation efforts. The debt of SOEs stood at 25.4 percent of GDP at the end countercyclical fiscal policies deployed in 2008 by of 2019. Almost 60 percent of that amount is external the authorities to mitigate the impact of the global debt (16.6 percent of GDP in mid-2020) guaranteed financial crisis and subsequently the EU debt crisis led by the state, most of which is denominated in foreign to a sharp deterioration in Morocco’s fiscal balance. In 2013, as the impact of the above crisis waned, 3 Note that these debt statistics include only the Treasury’s Morocco initiated a process of fiscal consolidation obligations, and not the public sector’s overall debt (e.g, that allowed it to reduce its fiscal deficit from 7.2 they exclude state owned enterprises, public financial percent of GDP in 2012 to 3.7 percent in 2018. institutions and subnational governments’ debt). 6 MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY FIGURE 12 • Decreasing Revenues (y-o-y %) FIGURE 13 • Rising Central Government Debt 100 80 73.8 80 70 64.9 65.1 65.2 65.0 61.7 63.4 63.7 60 60 40 50 % of GDP 20 57.8 % 40 47.1 47.9 49.2 50.4 50.6 51.7 50.8 0 –20 30 –40 20 –60 10 15.5 16.0 14.6 14.5 14.5 14.5 13.5 14.2 Jan–20 Feb–20 Mar–20 Apr–20 May–20 Jun–20 Jul–20 Aug–20 Sep–20 0 2013 2014 2015 2016 2017 2018 2019 2020 (end july) Tax revenues Non-tax revenues Current spending Investment spending Central government debt Domestic (net) External (net) currency, exposing borrowers that lack a natural FIGURE 14 • Current Transactions (y-o-y % hedge to currency risk. Morocco’s consolidated debt changes) at the end of 2019 stood at 56.4 percent of GDP (56 30 60 percent of GDP in 2018 and 54.1 percent of GDP in 20 40 2017), almost 10 percentage points lower than the 10 20 central government debt-to-GDP ratio.4 0 0 –10 –20 The crisis is having a stronger effect % –20 –40 on imports than on exports, and the current –30 –60 account deficit fell during the first semester. –40 –80 Plummeting external demand adversely impacted –50 –100 export performance, which declined by 11.8 percent –60 –120 Jan–20 Feb–20 Mar–20 Apr–20 May–20 Jun–20 Jul–20 Aug–20 Sep–20 between January and September 2020 and the same period in 2019. The contraction of exports was Exports Imports particularly severe in the automotive (–16.1 percent), Tourism receipts Workers remittances aeronautics (–24.7 percent) and textile (–22.13 Source: Morocco office des changes. percent) sectors. However, the fall in imports was even larger (–16.2 percent), implying that Morocco’s merchandise trade balance has improved (Figure 14). bond issuance in September (Figure 15). On the other Another component of the current account that has hand, net FDI flows have contracted by close to 28 deteriorated is tourism receipts (–55.3 percent), while percent between January and August 2020 and the workers’ remittances have been resilient, especially in same period a year before. recent months. The current account deficit reached The Dirham has appreciated vis-à-vis the 3.5 percent of GDP during the first semester of 2020, US dollar. Morocco’s exchange rate peg to the Euro against 5.1 percent of GDP during the same period of 2019. After an initial decline in the weeks that followed the onset of the pandemic, international 4 The consolidation of public debt involves the netting out reserves have edged upwards, primarily as a result of of inter-governmental obligations. The government has the decision to draw the entire amount of Morocco’s began only recently to publish that information, as part Precautionary Liquidity Line with the IMF (close to of a broader effort to increase the transparency of debt US$3 bn) in March and a successful €1bn sovereign statistics. Recent Economic Developments 7 FIGURE 15 • Stable Gross Official Reserves No Pressure on the Exchange Market FIGURE 16 •  MAD/$ market 35 7.5 7.3 7.5 8 10.5 15 7.0 6.4 6.7 6.7 30 7 10.0 5.4 5.4 6 25 9.5 10 Months of imports 5 20 Billion $ 9.0 4 15 8.5 5 3 10 8.0 2 5 1 7.5 0 Mid–Feb Mid–Mar Mid–Apr Mid–May Mid–June Mid–Jul 28–Jul Mid–Aug 1–Sep 22–Sep 25–Sep 8–Oct 13–Oct 27–Oct 10–Nov 0 0 Jan–20 Feb–20 Mar–20 Apr–20 May–20 Jun–20 Jul–20 Aug–20 Sep–20 Banks' net FX (MAD bn, rh) Mid–day fixing (MAD/$) Gross officila reserves Months of imports Min band (MAD/$) MAX band (MAD/$) Source: Morocco office des changes. Source: Bank-Al-Maghrib. and the US dollar has been partially relaxed with the vis-à-vis the Euro while appreciating against the widening of the band. This move has been aimed at dollar (7.1 percent between April and October). The increasing the external shock absorbing capacity of appreciation of the real effective exchange rate has the Moroccan economy and was put to the test during been primarily the result of a basket effect that reflects the COVID-19 crisis. In fact, as expected, during the the weakening of the US dollar, itself the product of weeks that followed the onset of the pandemic, the broader forces in the world economy (Figure 16). dirham depreciated against both the Euro and the However, this trend can also be interpreted as a sign US dollar. From April onwards, however, this trend of confidence on the resilience of the Moroccan was reversed, and the Moroccan dirham stabilized economy. 8 MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY 2 OUTLOOK AND CHALLENGES T he government of Morocco has taken a primarily through direct subsidies and the deferment pro-active approach to mitigate the effects of certain payments, together with a series of monetary of the pandemic on the economy through and financial measures aimed at preventing the a combination of tax and other payments deferrals, emerging liquidity pressures from turning into a wave wage subsidies, credit guarantees, public investment of corporate insolvencies. Subsequently, as most and structural reform. However, activity will probably businesses were allowed to resume their activities in remain subdued until health risks abate. We project June, the authorities transitioned towards a longer- real GDP to contract by 6.3 percent in 2020 and term more strategic approach aimed at supporting to return to its pre-pandemic level only in 2022. In the recovery and at adapting Morocco’s development the meanwhile, Morocco’s twin deficits will expand model to the new normal that is expected to emerge in the short-term, generating additional external in the post-pandemic world. financing needs in a global context that remains The government’s response was initially highly uncertain. Unchaining the growth potential of focused on partially compensating households the Moroccan economy, which disappointed even and firms for the loss of income associated before the onset of the pandemic, continues to be a with the lockdown, for which a special fund was central challenge. created. The extrabudgetary special COVID-19 fund was endowed with contributions from the central government and other public entities (primarily Morocco’s Economic Policy Response SOEs), banks and private companies, wealthy to the Pandemic: From Relief to individuals and foreign donations, for a total amount Recovery of 33.7 billion DH (US$3.6 billion, close to 3.1 percent of GDP). These resources were used to fund the Morocco’s response can be broadly categorized public health response to the pandemic, but also to into two stages: emergency management and finance the distribution of approximately 22.4 billion recovery support. As was the case in most countries, MAD (2.1 percent of GDP) in direct transfers to formal the authorities focused initially on the mitigation of the and informal workers affected by the interruption of immediate effects of the lockdown, which was done economic activities (Box 2). Another element of the 9 REVIEW OF THE MAIN MITIGATION MEASURES ADOPTED DURING MOROCCO’S LOCKDOWN BOX 2.  Crisis management governance. A Committee (the so-called Comité de Veille Économique) was created to monitor and mitigate the impact of the pandemic on the Moroccan economy. This committee brings together senior officials from the government and the central bank with representatives from the financial and the corporate sectors. It has met on 10 occasions between March and October. Fiscal stimulus. On April 6, a decree was passed to authorize the government to surpass the external borrowing ceiling originally contemplated in the 2020 Budget Law. One day later, the authorities purchased all available resources under the IMF’s Precautionary and Liquidity Line (about US$3 billion). Apart from the direct 10 billion MAD (0.9 percent of GDP) contribution of the central government to the COVID-19 fund, the public response to the pandemic has resulted in an increase in certain expenditures, which will contribute to a substantial expansion of the budget deficit. In July, the government passed a revised Budget Law for 2020 that incorporated the effects of the measures adopted to confront the pandemic and updated macroeconomic projections. Payment deferrals. Formal companies with an annual turnover below 20 million MAD were allowed to defer the declaration and payment of corporate income tax corresponding to fiscal year 2019; companies with an annual turnover above 20 million MAD were allowed to request for a deferral of corporate income tax payments; firms with less than 500 employees were allowed to postpone social contributions until the end of June (or through September for hard-hit sectors, such as tourism). In addition, firms and individuals could postpone the amortization of certain types of loans. Emergency cash transfer for formal and informal workers (March–July). A monthly 2,000 MAD transfer (net of family and health benefits) was approved for workers affiliated to the social security scheme (CNSS) affected by the lockdown (for firms that completely interrupted their activity, or whose turnover decreased by at least 25 percent). It is estimated that close to 900,000 workers have been eligible for this benefit in April and May, and almost 600,000 in June. For informal workers, an 800 MAD monthly transfer was put in place for households of two people or less; 1,000 MAD for households of three to four people; 1,200 MAD for households of more than four people. This component was targeted at the beneficiaries of the non-contributory health insurance scheme—the Medical Assistance Regime (RAMED)— and an online application process was set up for households not benefiting from RAMED. It is estimated that this component of the emergency cash transfer program benefited approximately 5.5 million households, at a cost of close to 15 billion MAD. Monetary and liquidity measures. The central bank reduced its policy rate by 75 bp and the foreign exchange band was widened to +/-5 percent. To increase its ability to inject liquidity into the financial system, the BAM also expanded the types of collateral that it accepts in its Repos, it lengthened the maturity of its refinancing operations, and began providing foreign exchange swaps to Moroccan banks. To stimulate credit, the BAM allowed banks to reduce their liquidity cover ratios below 100 percent and to suspend their provisioning requirements, while reserve requirements were lowered from 2 percent to 0 percent and the capital conservation buffer was reduced by 0.5 percent. Guarantees. The Damane Oxygene program was launched on March 26 to support firms’ working capital. It provided a 95 percent guarantee for credits to firms with a yearly turnover of less than 200 million MAD but was also made available for larger companies (turnover between 200 and 500 million MAD). It covered credits for up to 3 months of beneficiary firms’ operating expenditures, with a ceiling of 20 million MAD. A few weeks later, the government launched another guarantee program for self-entrepreneurs covering 85 percent of credits up to 15,000 MAD. authorities’ approach to mitigate the impact of the At a second stage, a longer-term approach shock was to carry over social security contributions was taken to support the economic recovery and defer taxes for both firms and individuals expected to take place in the aftermath of the during the lockdown period, as well as a temporary lockdown. The key elements of this strategy were postponement of debt servicing obligations. outlined in the National Pact for Economic Recovery In addition, various measures were taken and Employment (Pacte National pour la Relance to inject liquidity into the economy, support Économique et l’Emploi)—henceforth the Pact— firms’ cash position and keep credit flowing, thus signed in early August between the government, the preventing corporate bankruptcies. This mitigation General Confederation of Moroccan Enterprises and strategy was built on four pillars: an expansionary the Banking Association. It set four major medium- monetary policy; liquidity injections into the banking term objectives to be jointly pursued by the public system; relaxation of microprudential norms to and the private sector: accelerating the recovery, stimulate credit; loan guarantees. safeguarding jobs, fostering the formalization of 10 MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY the economy and improving governance.5 The Pact Morocco’s recovery plan envisages the also announced that, to meet these objectives, 120 mobilization of 75 billion MAD (6.5 percent of billion MAD (11 percent of GDP) would be mobilized GDP) in guaranteed credit, part of which will through State guarantees to corporate credits, and be earmarked to mitigate payment delays. This through a strategic investment fund. In addition, it includes the upgrading of the guarantee program was established that more targeted plans would be that was used to support firms during the lockdown developed to mitigate the impact of the pandemic (Damane Oxygene), and two new programs with on the most affected sectors of the economy. An longer maturity structures and grace periods.6 In important feature of the Pact is that it is based on addition, the plan includes a guarantee for public the principle of co-responsibility, implying that, in companies aimed at supporting the repayment of exchange for the government’s support, the private their obligations with other private companies. In fact, sector accepts a commitment to respect sanitary mitigating the late payments problem that structurally protocols, preserve jobs, combat informality and prioritize the acquisition of intermediate goods with a high local content (among others). 5 Ensuring that the State would assign enough resources The scale of the resources that will be to implement the recovery plan, the budget law that mobilized by Morocco’s recovery plan compares was passed in November 2020 reaffirmed its main objectives. In addition, the Law identified the reform of favorably with other middle-income economies. the social protection system and of the administration The fiscal stimulus program that has been announced (in particular, SOEs) as its main priorities for 2021–2023. in Morocco amounts to 4.1 percent of GDP, against 6 These are: (i) “Relance TPE”, a 95% guarantee for small an average of 3.4 percent of GDP in emerging and firms (yearly turnover under 1 million DH) covering credits developing economies (and 9.3 percent of GDP for up to 10% of yearly turnover; (ii) “Damane Relance”, in advanced economies)—Figure 17. In turn, the an 80–90% guarantee for larger firms, covering credits for up to 1.5 months of yearly turnover in the case of guarantees programs amount to almost 6.9 percent industrial companies, and 1 month for firms operating in of GDP, against 2.5 percent of GDP in Morocco’s other sectors; (iii) “Intelak”, to support micro-enterprises, comparison group (11 percent of GDP in advanced self-employed workers and young entrepreneurs both economies). through guarantees and direct public financing. FIGURE 17 • Policy Response, Selected Countries 45 40 35 30 Percent of GDP 25 20.2 20 11 15 5.9 10 5 0 MEX PAK TUN SAU RUS GEO COL EMMIEs ARG IND ZAF SWE MOR NOR THA TUR USA DNK BEL ESP AEs FRA GBR JPN DEU Fiscal stimulus Equity, loans and guarantees Source: WBG and IMF, Fiscal Monitor, 2020. EMMIEs: Emerging Markets and Middle-Income Economies; AES: Advanced Economies. Note 1: as in the 2021 Budget Law, the figure considers the entire resources that the government intends to mobilize through the Mohammed VI Fund as public investment, even though a yet unspecified portion of it will be used to inject equity. Note 2: the timeframe of the measures that are captured in Figure 15 may not coincide, which limits the comparability of the policy responses. Outlook and challenges 11 Bank Credit for Firms (% y-o-y change) FIGURE 18 •  FIGURE 19 • Interest Rate on Corporate Credit (%) 20% Bank credit to non Liquidity Equipment financial firms credits credits 15% 5.4 5.2 10% 5.0 5% 4.8 0% 4.6 –5% 4.4 1–Jan 1–Mar 1–May 1–Jul 1–Sep 1–Nov 1–Jan 1–Mar 1–May 1–Jul 1–Sep 1–Nov 1–Jan 1–Mar 1–May 1–Jul 1–Sep 1–Nov 1–Jan 1–Mar 1–May 1–Jul 4.2 Bank credit to non financial firms Liquidity credits 4.0 19Q1 19Q2 19Q3 19Q4 20Q1 20Q2 19Q1 19Q2 19Q3 19Q4 20Q1 20Q2 19Q1 19Q2 19Q3 19Q4 20Q1 20Q2 Equipment credits Source: World Bank staff calculations based on BAM data. Source: World Bank staff calculations based on BAM data. pervades the Moroccan economy, and which has (named the Mohamed VI Fund) endowed with 45 been aggravated as a result of COVID-19, is one of billion MAD (4.1 percent of GDP). The resources of the objectives pursued by the guarantee programs, the Fund will come from the central government (15 which is why the Pact included a commitment on the billion MAD) and domestic and foreign institutional part of the private sector to use at least 50 percent of investors (30 billion MAD). Although limited the resources mobilized through guaranteed credits information has been released so far about how the to service inter corporate loans. Fund will function in practice, one of its priorities will The authorities’ strategy has helped be to support Public-Private Partnerships (PPPs) as an increase corporate credits and reduce the cost investment modality for large infrastructure projects. of finance. The various guarantee programs put In addition, the Fund will be used to channel direct forward by the authorities have had a significant equity injections into public and private companies. effect (Figures 18 and 19).7 Indeed, banks’ credit to More targeted recovery plans are also non-financial firms increased by 9.6 percent between being put forward to support some of the sectors March and August 2020 and the same period in 2019. that are being most affected by the pandemic. This is mostly due to the evolution of liquidity credits, Following the model of the Pact, the authorities are which increased by 12.2 percent in that same period. signing sectoral agreements with various business Equipment loans also increased, although much more associations. These mostly consist of maintaining tepidly (+5.6 percent y-o-y) and with a decelerating trend, which suggests that Moroccan firms have 7 According to the authorities: (i) “Damane Oxygene” has mainly used the guarantee programs for cashflow benefited almost 50,000 firms, mobilizing close to 17 management purposes, and not so much to engage billion MAD in credit; (ii) “Autoentrepreneurs COVID-19” in new investment endeavors, as one would expect benefited more than 3,000 self-employed entrepreneurs, during a crisis where sales dropped precipitously mobilizing credit for 32 million MAD; (iii) “Relance TPE” and for an uncertain duration. The cost of credit has has benefited 18,000 firms, mobilizing 3.6 billion MAD; also fallen by 42bp between the last quarter of 2020 (iv) “Damane Relance” has supported almost 6,000 firm, mobilizing 21 billion MAD. and the second quarter of 2020 (29bp in the case of 8 Although no public information has been disclosed yet, liquidity loans and 40bp for equipment loans).8 the reduction in the BAM’s policy rate in June is likely The second pillar of the recovery plan is to have reduced further the average interest rate of the creation of a Strategic Investment Fund (SIF) corporate loans during the third quarter. 12 MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY some of the direct lines of support that were used processes, and the 2021 draft Budget Law envisages during the lockdown for workers and companies, an increase in the import tariffs of certain consumption while emphasizing an element of co-responsibility products.11 Along the same line, the Ministry of on private firms to limit the social impact of the crisis. Industry has unveiled a plan that intends to substitute The first of these was signed with the tourism sector imports for a total amount of up to 34 billion MAD, for in August, which according to the government’s which specific investment projects that have already estimates represented 7 percent of GDP (close to been identified will be supported through grants and 12 percent if the activities indirectly linked to the advisory services. On the other hand, the authorities tourism sector are accounted for) before the crisis, intend to consolidate Morocco’s positioning as a employed close to 550,000 workers and generated nearshoring destination for European firms seeking an inflow of about 80 billion MAD in hard currency.9 to reduce their supply chain risks. For that purpose, Subsequently, other agreements have been reached the country’s industrial policy will continue prioritizing for sectors such as real estate (with new guarantees international competitiveness, especially in strategic designed for construction projects), caterers and sectors such as the automotive industry and other events’ managers, or amusement parks. new potential niches. The authorities’ recovery plan envisages The government’s strategy also includes further improvements in the business climate and a broad-based plan to reform Morocco’s social an integral reform of State-Owned Enterprises protection framework. This reform will be carried (SOEs). A central pillar of Morocco’s public policies out in two phases. During the first stage (2021–2022), during the past decades has been the progressive the authorities will concentrate on the universalization upgrading of the regulatory framework to enhance business activities, which brought about a marked improvement in the country’s position in international 9 Among the more salient elements of the agreement reached for the tourism sector, the following stand out in rankings.10 The authorities intend to continue particular: (i) the extension of the 2,000 MAD per month deepening this reform effort, and the Pact envisages direct subsidy to the employees of tourism companies measures to simplify and digitize firms’ registration that have seen their turnover decline by at least 50%; (ii) a and other administrative formalities, as well as actions commitment on the part of the private sector to maintain a aimed at fostering financial inclusion and mobile stable employment relationship with at least 80% of their payments. In addition, the authorities have initiated pre-crisis workforce; (iii) the extension until December 31, 2020 of the deferral of taxes, social contributions and a reform of the Regional Investment Centers, which debt service payments; (iv) a commitment on the part provide services to entrepreneurs, with a focus on of the recipients of the government’s support to register small and medium enterprises at the local level. their informal employees in the social security system (to Finally, the government is creating a new agency self-register, in the case of independent guides); (v) the (Agence Nationale de Gestion Stratégique des introduction of credit guarantees specifically designed Participations de l’État) that will centralize the State’s for the needs of the tourism industry; (vi) other cross- cutting measures such as the introduction of a health ownership in public enterprises, some of which will be certificate for operators, support to human capital merged into homogeneous holdings and transformed formation in the tourism sector, or the promotion of into limited companies, while others will be eliminated internal tourism. if their existence is deemed no longer justified. 10 Between 2010 and 2020 Morocco climbed 55 positions As part of an ongoing reconsideration of in the Doing Business ranking (from 128th to 53rd). Morocco’s development model, the government 11 The amended budget law for 2020 had already increased tariffs. These measures exclude imports intends both to foster a certain degree of from countries and blocs with whom Morocco has import substitution industrialization and to a free trade agreement, and affect a heterogeneous take advantage of the restructuring of GVCs. group of products the domestic production of which at The recovery plan included a commitment to give could presumably increase, including toner cartridges, preference to local suppliers in public procurement polyester, certain fabrics, chocolates or umbrellas. Outlook and challenges 13 of health insurance and the unification of the various Cumulative Output Loss FIGURE 20 •  existing schemes, a reform that should integrate 113 more than 10 million Moroccans currently covered 110 Cumulative output loss Pre-Covid by the non-contributory basic scheme (RAMED) into 31% of GDP, 2019 growth outlook the contributory health insurance scheme (AMO). 107 In addition, access to family allowances will be 104 expanded to include self-employed and non-salaried 101 employees. In turn, the second stage (2023–2024) will concentrate on the old age pension scheme and on 98 the expansion of unemployment benefits.12 95 92 Post-Covid growth outlook 2018 2019 2020 2021 2022 Outlook Source: World Bank staff estimates. We project a 6.3 percent contraction in 2020 due primarily to the COVID-19 pandemic, but also to as reduced household incomes and savings due poor rain conditions impacting the agriculture to the global recession, potential quarantines for sector. Compared to our pre- COVID-19 forecast, international arrivals, etc. may limit global tourism Morocco’s real GDP growth has been revised demand. Growth is projected to average 3.9 percent downwards by 9.9 percentage points. This overall over 2022–2024. This projection implies a cumulative projection for 2020 is consistent with a continuation output loss of 31 percent of 2019 GDP between 2020 of the economic decline through the second half of and 2022 (Figure 20). the year, albeit with a lesser intensity than in Q2, which We expect the pandemic to widen the fiscal is expected to be the peak of the recession. Resulting deficit and drive up public debt in both 2020 and from the disruption of global value chairs and the 2021. On the revenue side, tax revenues will be lower effects of the lockdown on production, industrial than previously expected in 2020 and 2021. On the value added is projected to contract by 7.4 percent. expenditures side, significant increases are projected In turn, we expect the services sector to face a 5.8 in 2020, driven by additional spending on health and percent contraction in 2020 due to social distancing social protection. As a result of this combination of measures and travel restrictions, which are impacting automatic stabilizers and mitigation-related spending most acutely transport and tourism. Inflation is to protect households, the overall fiscal deficit projected to reach 0.7 percent in 2020 as a result of (excluding privatization proceeds) is projected to the pandemic-induced demand shock dominating the widen to 7.8 percent of GDP in 2020 (compared to supply shocks stemming from the virus and drought a projected deficit of 3.7 percent pre- COVID-19 impact on agricultural production. pandemic). Consequently, public debt is projected Over the medium term, growth is expected to rise to 77.4 percent of GDP in 2020 (compared to pick up gradually, but the pace and length of to 65 percent in 2019). Over the medium term, the that recovery are subject to high uncertainty. fiscal deficit will be gradually declining to average The post-pandemic economic recovery is projected 5.5 percent of GDP over 2021–2024 compared to to be protracted, with real GDP only returning to the 3.3 percent in the pre- COVID-19 pandemic forecast. pre-pandemic trend, at the earliest, by 2022. In 2021, Central government debt is also expected to return to the economy is projected to expand by 4 percent as a downward path in the medium-term. agricultural output recovers to its historical growth rate while non-agricultural output slowly picks up as economic activity gradually restarts. Tourism is 12 In addition, the reform plans that have been unveiled projected to recover at a slower rate as concerns envisage the reinforcement of existing social protection about subsequent waves of COVID-19, as well programs, for which a social registry will be implemented. 14 MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY Due to the COVID-19 shock, the current this year, and an 11 percent of GDP recovery plan is account deficit is expected to widen in 2020, being put forward by the authorities. In addition, the before narrowing in the medium term. The current expansion of state-sponsored credit guarantees to account deficit is expected to widen from 4.1 percent prevent corporate bankruptcies implies that the public of GDP in 2019 to 6 percent in 2020. The external sector is accumulating contingent liabilities on a shock has led to sharp declines in export and tourism substantial scale, part of which could materialize in the revenues, and capital inflows. The current account medium-term, which could further limit fiscal space. The deficit is projected to shrink starting in 2021 to 5.5 monetary response has also been extraordinary with percent of GDP and would continue to gradually narrow the BAM’s policy interest rate at its historical minimum over the remainder of the forecast period as exports, for close to four months. While this has certainly tourism receipts, FDI, and remittances recover and as limited the impact of the crisis on the real economy, manufacturing export sectors (especially automobiles, going forward, the authorities will have less room for electronics, and chemicals) expand. Foreign direct maneuver should the pandemic aggravate its course, investment is expected to decrease to 1.6 percent or the global economic environment deteriorate further. of GDP in 2020, again on account of the COVID-19 The Moroccan government could begin to shock, before recovering to around 3.2 percent of GDP face a more challenging financing environment. over the medium term. We expect gross international The gross financing needs of the public sector are reserves to remain at a comfortable level of 6.9 months expected to surpass 15 percent of GDP both in 2020 of imports in 2020 thanks to foreign financing. and 2021. While the government has so far maintained good access to international financial markets (the last €1 billion sovereign issuance that took place Challenges in September 2020 was largely oversubscribed), Fitch’s recent decision to downgrade Morocco to The second wave of the pandemic could affect sub-investment grade could have an impact on future the pace of the recovery. Given the scale of the issuances.13 In this context, external financing might disruptions caused by the lockdown and the sense become more constrained, and Morocco’s exposure that there is a general pandemic fatigue among the to the risk of a disruption in global financial markets population, the government seems more reluctant has increased.14 However, for the time being, the now to impose stringent measures to control the reaction of international financial markets has been virus than it was in March. However, the number of muted with yields on Morocco’s benchmark 2031 confirmed contagions remains high. As is already retracing their reaction to the downgrade. happening in many European countries, the ongoing The COVID-19 pandemic is deteriorating health crisis may eventually force the Moroccan banks’ credit portfolio. The ratio of non-performing authorities to adopt new restrictions, which would loans (NPLs) has increased from 7.6 percent in slow the economic recovery. Furthermore, even if the December 2019 to 8.4 percent in September 2020. In government manages to avoid measures that could its most recent bank stress tests, BAM estimates that further disrupt activity, the measures that have been taken to contain the second wave elsewhere will have an impact on exports, tourism receipts, workers’ 13 The only major agency that has reaffirmed Morocco’s remittances and FDI flows, given that Morocco’s rating is Standard and Poor’s, although it has recently main trading partners have already been forced to re- changed its outlook from stable to negative. Fitch’s impose partial lockdowns. recent downgrade is relevant because Morocco was just The policy space to mitigate the effects one notch above investment grade. 14 According to Hanusch et al. (2016), based on a of the COVID-19 is more limited now than it was cross country study of 20 developed and developing at the onset of the crisis. On the fiscal side, the economies covering the period between 1998 and 2005, government’s response to the pandemic contributes losing investment grade results in a 138 b.p. increase in to explain a 10 points-plus increase in the debt-to-GDP financing costs. Outlook and challenges 15 the NPL ratio could reach 9.9 percent by the end of prompting the government to create a high-level com- this year, and 10.8 percent in 2021. Moroccan banks mission to submit proposals for a new development remain well capitalized, but this deterioration in the model. In the post-pandemic world, reigniting growth quality of their assets could eventually pose a threat will be even more important to create jobs and revert to financial stability. the deterioration in social indicators that is expected in Increasing Morocco’s growth potential be- the short-term, and to help bring the debt-to-GDP ratio comes even more important in the post-pandemic to a downward path. To unchain the growth potential of world. The Moroccan economy was already show- the Moroccan economy, moving forward on structural ing signs of stagnation prior to the current crisis, reform is key, as detailed in the next section. 16 MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY SPECIAL FOCUS: COVID-19 AND THE MOROCCAN FORMAL PRIVATE SECTOR T he crisis is taking a heavy toll on Moroccan and 13 percent of SMEs are in financial distress as enterprises, many of which have been a result of the pandemic in a sample of 21 mostly forced out of the market, while others are advanced economies. As a result, up to 40 percent still experiencing sharp drops in sales. On a more of jobs could be at risk in sectors such as food and positive note, the crisis is also accelerating the accommodation, and arts and entertainment. These digital transformation of the economy, including the figures could be even larger in the developing world, corporate sector, which could pave the way for a more where a greater portion of the labor force is self- solid recovery. Going forward, the corporate sector employed or employed in the informal sector, with still requires immediate liquidity support to prevent more limited access to finance and to the State’s widespread bankruptcies, while a more structural support. approach is needed to remove the constraints that Morocco is among the lower middle-income in the past have limited the development of a more economies that have put forward an ambitious dynamic private sector. recovery plan. The global policy response to mitigate The corporate sector shake-up that the the impact of the pandemic has been unprecedented, COVID-19 crisis has unleashed globally is and the overall amount of the resources associated affecting SMEs disproportionately and could be with the measures that have been announced for more difficult to address in the developing world. that purpose is estimated at close to 12 percent of Based on survey data from 51 countries, the World the world’s GDP (IMF, Fiscal Monitor, 2020). However, Bank has recently produced new evidence about the developing countries have had a much more limited large and persistent effects of the COVID pandemic policy space to confront the crisis, primarily because on enterprises, showing an 43 percent average drop their central banks cannot provide monetary stimulus in sales even 12 weeks after the peak of the shock and an adjustment in employment levels on the part of 57percent of firms (Apedo-Amah et al., 2020).15 The 15 https://openknowledge.worldbank.org/handle/ IMF estimates (WEO, October 2020) that between 9 10986/34626. 17 or engage in assets’ purchases on a comparable FIGURE 21 • Percent of Firms Confirmed scale. As already emphasized, Morocco intends to Permanently Closed since COVID-19 (percent) mobilize close to 11 percent of GDP to support the private sector, one of the larger recovery plans that developing economies have put forward so far. Morocco Going forward, the crisis will also bring op- portunities to better exploit Morocco’s compara- Low Income Countries tive advantages. The effects of the pandemic on the Lower Middle Income corporate sector are profound and could drag on for Countries (inc. Morocco) a long time. However, the crisis will also bring oppor- Upper Middle Income Countries tunities, and in the case of Morocco it is helping to crystallize an ambitious agenda of structural reforms, High Income Countries the successful implementation of which could re- 0 1 2 3 4 5 6 7 solve long-lasting bottlenecks and increase potential growth. In addition, the country is well placed to take Source: WBG, COVID-19 Follow-up survey 2020. Note: Low Income Countries include Chad, Guinea, Niger, and Togo; Lower Middle advantage of the restructuring of Global Value Chains Income Countries include Morocco, Honduras, Mongolia, Moldova, El Salvador, Nicaragua and Zimbabwe; Upper Middle Income Countries include Jordan, Georgia, (GVCs) that the COVID-19 crisis has accelerated. Albania, Russian Federation, Guatemala; High income countries include Poland, Italy, Cyprus, Greece and Slovenia. How have Morocco’s Firms Coped FIGURE 22 • Breakdown of Closed Firms (%) with the COVID-19 Crisis? Morocco: 6.12 This section evaluates the impact of the pandemic Small (5–20) 6.90 on the Moroccan corporate sector using primary Medium (20–99) 5.64 Large (100+) 1.25 data collected by the COVID-19 Enterprise Follow- Manufacturing 2.60 up Survey. Just prior to the COVID-19 outbreak Services 6.90 (December 2019), a representative sample of 1,096 Béni Mellal-Khénifra and Drâa-Tafilalet 4.99 firms were surveyed in order to obtain information Casablanca-Settat 4.50 Fès-Meknès 22.82 about the Moroccan business environment. In July Marrakech-Safi. 3.04 and August 2020, these firms were re-contacted to Oriental 1.17 generate additional information about the impact of Rabat-Salé-Kénitra 3.30 COVID-19. The results obtained in this follow-up survey Souss-Massa 2.18 Tanger-Tétouan-Al Hoceima 10.33 confirm that the consequences of the crisis are severe Food 0.98 and persistent, but also that Moroccan corporations Garments 3.34 are taking action to adapt to the new reality. Other Manufacturing 3.00 Other Services 7.96 Between December 2019 and July/August Retail 0.89 2020, 6.1 percent of Moroccan firms have ceased Exporter 6.47 operations. This is the highest percentage observed Non-exporter 4.88 in the countries in which a follow-up survey has been Average of other 24 countries 1.58 conducted (Figure 21). However, it worth noting that Source: WBG, COVID-19 Follow-up survey 2020. only 0.2 percent of firms had filed for insolvency at the time of the survey. By size, the most impacted firms are small businesses (5–19 employees), with as only 1.3 percent of businesses with more than 6.9 percent of firms reporting to have closed, followed 100 employees have reported to have permanently by medium-sized firms (20–99 employees), with 5.6 closed. Firms in the service sector are more affected percent (Figure 22). Larger firms, instead, seem to than firms in the manufacturing sector firms (6.9 vs. have been better equipped to confront the crisis, 2.6 percent of closures). Geographically, firms in 18 MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY FIGURE 23 • Manufacturing Capacity Utilization a 32 percent decline in the capacity utilization of Loss Due to COVID19 manufacturing firms during the months that followed 100 the outbreak of the pandemic (Figure 23). Again, small 78 –32% 80 –41% –22% 76 77 –30% enterprises were the most affected, with a drop in Utilization rate (%) 53 59 54 utilization rates of 41 percent, followed by large firms 48 50 (30 percent decline). The strongest impact is observed in firms located in the Northern region, where capacity utilization fell by as much as 66 percent. 0 All Small Medium (+100 employees) The demand shock was compounded by a (5–19 (19–99 disruption in the supply of inputs. 82.5 percent of employees) employees) Moroccan firms report to have experienced a decrease Before Covid–19 After Covid–19 in the demand for their products and services, while Sources: WBG, Enterprise surveys 2019; COVID19 Follow-up survey 2019 (1st wave); only 3.1 percent report the opposite. In addition, own calculations. 82.6 percent of firms suffered from a decrease in the supply of inputs, while 2.6 percent report the opposite trend. Exporting and food industry firms and business Fès-Meknès and Tanger-Tétouan-Al Hoceima regions located in Fès-Meknès appear to have been somewhat suffered significantly more than firms located in other less affected by these negative trends. regions. Firms’ sales have been heavily impacted by The manufacturing firms that survived the pandemic. The negative effect of COVID-19 was the crisis were forced to reduce their capacity larger in Morocco than in the average of the other 24 utilization. Indeed, the follow up survey reports surveyed countries (Figure 24). Indeed, 86.9 percent Impact of the Pandemic on Firms’ Sales FIGURE 24 •  Percent of firms experiencing Average change in decreased monthly sales compared monthly sales compared to one year ago (%) to one year ago (%) Morocco: 86.9 Morocco: –46.83 Small (5–20) 87.98 –50.45 Medium (20–99) 84.72 –38.86 Large (100+) 85.49 –42.52 Manufacturing 82.93 –41.71 Services 87.86 –48.02 Béni Mellal-Khénifra and Drâa-Tafilalet 97.59 –62.47 Casablanca-Settat 83.02 –39.55 Fès-Meknès 82.58 –37.73 Marrakech-Safi. 80.03 –55.31 Oriental 95.22 –60.06 Rabat-Salé-Kénitra 97.89 –47.83 Souss-Massa 86.40 –62.77 Tanger-Tétouan-Al Hoceima 86.27 –44.59 Food 74.72 –39.58 Garments 85.02 –42.24 Other Manufacturing 85.68 –42.43 Other Services 86.63 –47.27 Retail 95.21 –52.5 Exporter 82.79 –39.1 Non-exporter 87.67 –47.35 Average of other 24 countries 82.19 –43.45 ! $ " # ! $ " " " $ ! % ! $ & ! $ + Source: WBG, COVID19 Follow-up survey 2020 (1st wave). Special Focus: COVID-19 and the Moroccan Formal Private Sector 19 of Moroccan firms experienced a decrease in monthly FIGURE 25 • Percent of Firms That Received/ sales of, on average, 50.4 percent (82.2 percent Expect to Receive National or Local Government Assistance – Breakdown and 43.4 percent respectively in the comparison countries). Once again, smaller firms were more Morocco: 28.35 affected, with a substantially larger decline in sales Small (5–20) 25.77 (50.4 percent vs. 38.9 percent in medium-sized firms Medium (20–99) 36.83 and 42.5 percent in large companies). The survey Large (100+) 22.46 Manufacturing 21.50 reveals wide regional differences, with a larger drop in 29.95 Services sales for firms located in Rabat-Salé-Kénitra, Oriental, Béni Mellal-Khénifra and Drâa-Tafilalet 22.18 Béni Mellal-Khénifra and Drâa-Tafilalet. Non-exporting Casablanca-Settat 26.33 Fès-Meknès 28.31 firms and companies in the retail sector also tended Marrakech-Safi. 38.03 to undergo a more severe fall in sales. Oriental 35.55 Moroccan firms expect a slow return to Rabat-Salé-Kénitra 13.36 normalcy, although they are more optimistic Souss-Massa 44.59 Tanger-Tétouan-Al Hoceima 35.87 than those of comparator countries. The surveyed Food 35.58 companies that report to have suffered a drop in Garments 30.41 demand expect to return to their normal levels of Other Manufacturing 13.74 sales within 5.2 months.16 It is worth noting, however, Other Services 31.46 Retail 21.09 that Moroccan firms seem to be more optimistic than Exporter 29.35 those in the other countries where a follow-up survey Non-exporter 24.94 was conducted, which on average expect longer Average of other 24 countries 29.27 recovery periods. Medium-sized firms and companies Source: WBG, COVID19 Follow-up survey 2020 (1st wave). based in Fès-Meknès, Casablanca-Settat and Tanger- Tétouan-Al Hoceima tend to be more optimistic about the return to normalcy than small and large firms. Wage subsidies have been the most Instead, the outlook seems grimmer for companies common form of government assistance in located in the Oriental, Souss-Massa and Marrakesh- Morocco. The follow-up surveys have distinguished Safi regions, which expected recovery periods of 7.7 between 5 types of support: cash transfers, deferral of months, 7.0 months and 6.8 months, respectively. The payments, access to new credit, fiscal relief and wage sectors that expect a faster recovery are non-food, subsidies. In terms of public aid intensity, the subset non-garment manufacturing (3.2 months). of Moroccan firms that reported to have received Close to one out of three formal firms public assistance benefited, on average, from 2.57 reported to have received the government’s measures (Figure 26). Most of them (86.6 percent) assistance at the time of the survey. More specifically, 28.4 percent of Moroccan firms reported to have either received or expected to receive some form of government assistance as of the first wave of 16 This result is similar to that obtained by HCO, which found that 57 percent of firms that have not yet returned the pandemic, a result that does not differ substantially to normal activity levels expect to do so in 6 months at the from the average observed in the other 24 countries in most, while 44% think that it will take at least a year. Two which a follow-up survey was conducted (Figure 25). thirds of manufacturing firms expect to find their normal This proportion is larger for medium-sized firms (36.8 activity levels in no more than 6 months. This proportion percent) than for small and large companies (25.8 drops to 55 percent among firms in the service sector. and 22.5 percent respectively). In addition, exporting HCP: «Reprise d’activité des entreprises suite à la levée du confinement: 2ème enquête sur l’impact de firms and companies in the services sector, as well as la COVID-19 sur l’activité des entreprises», July 2020. enterprises located in the Souss-Massa, Marrakech- https://www.hcp.ma/region-drda/Reprise-d-activite- Safi and the Oriental regions, were more likely to have des-entreprises-suite-a-la-levee-du-confinement-2eme- benefited from some form of public support. enquete-sur-l-impact-de-la- COVID-19-sur-l_a319.html. 20 MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY FIGURE 26 • Coverage Rate of Government FIGURE 27 • Sources of Financing for Cash Flow Assistance (% out of the total of Shortages firms that received government assistance) Morocco 11 2 63 8 16 Jordan 21 3 75 87 Zambia 7 2 16 75 56 53 39 38 42 Italy 26 1 10 12 51 35 28 28 20 0% 20% 40% 60% 80% 100% % of financing Wage Fiscal relief Deferral of Cash Access to subsidies payments transfers facilitated Loans from banks Loans from non-bank FIs new credit Equity finance Government grants Morocco Average-Other countries Other Source: WBG, COVID19 Follow-up survey 2020 (1st wave). Source: WBG, COVID19 Follow-up survey 2020 (1st wave). received wage subsidies, a much larger proportion to 3 percent in Jordan, 16 percent in Zambia or 10 than in the other surveyed countries (39 percent). The percent in Italy (Figure 27). second most common form of support were fiscal Dwindling liquidity is aggravating the exemptions or reductions (55.8 percent), followed late payment problem. 62.1 percent of surveyed by deferrals of payments (52.8 percent) and cash firms reported to be behind in their payments to transfers for businesses (42.2 percent). In turn, only suppliers, landlords and tax authorities. By size, small 20.1 percent of firms reported to have benefited from enterprises were the most likely to fall behind on their access to facilitated credit, although that proportion is payments (67.5 percent, compared to 51 percent for likely to have increased substantially in the aftermath both medium and large enterprises). This problem of the survey, given the various guarantee programs is particularly acute in in Béni Mellal-Khénifra and that have been launched. It is worth noting that nearly Drâa-Tafilalet (86.3 percent), followed by the Oriental, all small firms that have received the government’s Souss-Massa, and Rabat-Salé-Kénitra regions assistance have benefited from some form of wage with 72.3 percent, 70.1 percent and 66.7 percent, subsidies, while 70.3 percent of supported large respectively. In addition, 21.4 percent of firms were firms were granted a deferral of payments (i.e., credit overdue on their obligations to financial institutions. payments, rent or mortgage, suspension of interest Large and small firms reported the highest incidence payments, or rollover of debt). Larger firms were also of overdue obligations, with 28.8 percent and 23.6 more likely to received fiscal relief than middle-sized percent, respectively, compared to 14 percent among or small firms. medium-sized firms. Another worrisome indicator is Moroccan firms are covering their cash that 40.8 percent of Moroccan firms anticipate falling flow shortages primarily with internal funds. 72 in arrears on outstanding liabilities. percent of Moroccan firms experienced decreased Although the number of hours worked liquidity or cash flow availability. Smaller and larger has decreased substantially, a relatively low firms were more likely to suffer from liquidity shortages proportion of Moroccan formal sector firms (75 percent for both categories) than middle sized report to have permanently laid off their enterprises (67 percent). Liquidity shortages appear to employees. Indeed, 50.1 percent of firms have have been more acute in Marrakesh-Safi, Fès-Meknès reduced the total hours worked per week, but only and Rabat-Salé-Kénitra than in the rest of the country. 14.4 percent have decreased the total number of Equity finance accounted for 63 percent of cash flow permanent employees (Figure 28). As a result, the shortages’ financing during the pandemic, compared average change in permanent full-time workers since Special Focus: COVID-19 and the Moroccan Formal Private Sector 21 Impact of the Pandemic on Employment FIGURE 28 •  Percent of firms that Percentage change of decreased total hours permanent full-time workers worked per week (%) since December 2019 (%) Morocco: 50.09 Morocco: –4.89 Small (5–20) 56.13 –5.67 Medium (20–99) 36.39 –1.38 Large (100+) 44.48 –10.30 Manufacturing 48.51 –1.90 Services 50.45 –5.58 Béni Mellal-Khénifra and Drâa-Tafilalet 26.59 –10.49 Casablanca-Settat 57.29 –1.97 Fès-Meknès 38.18 –7.61 Marrakech-Safi. 58.78 –1.43 Oriental 83.20 –19.23 Rabat-Salé-Kénitra 39.87 –9.44 Souss-Massa 56.78 –4.65 Tanger-Tétouan-Al Hoceima 26.95 –0.82 Food 53.25 –0.32 Garments 25.82 –8.03 Other Manufacturing 52.15 –1.04 Other Services 50.37 –5.27 Retail 50.91 –7.74 Exporter 42.95 –5.29 Non-exporter 52.85 –5.51 Average of other 24 countries 64.68 –17.59 Source: WBG, COVID19 Follow-up survey 2020 (1st wave). December 2019 is minus 4.9 percent. These numbers Moroccan firms are adapting to the new compare favorably with other countries in which a economic reality, and the crisis is accelerating follow-up survey has been conducted, suggesting the digital transformation of the corporate sec- that the Moroccan government’s mitigation labor tor. As much as 42.3 percent of surveyed compa- market measures have been effective. Large firms nies report to have adopted measures to adapt to reported to have let go a higher proportion of their the pandemic context. Firms in the garments indus- workforce (10.3 percent) than medium-sized firms (1.4 try (56.7 percent) were more likely to convert their percent) and small firms (5.7 percent). Companies in production lines to address changing market needs. the Oriental region recorded the largest workforce Regionally, firms in Fès-Meknès and Tanger-Tétouan- reduction, with 19.2 percent, followed by Béni Mellal- Al Hoceima showed more flexibility than their coun- Khénifra and Drâa-Tafilalet and Rabat-Salé-Kénitra terparts in the rest of Morocco. Particularly notewor- (10.5 percent and 9.4 percent, respectively). Instead, thy is the fact that 29.8 percent of the surveyed firms employment seems to have been less affected in the report to have started or increased their online busi- Northern region, where 27 percent of firms reported ness activity in response to COVID-19 pandemic, a to have decreased working hours worked, with a 0.8 proportion that was larger among middle-size firms percent drop in permanent full-time employees. Firms increased and in the Casablanca-Settat and Souss- in the food and other manufacturing sectors were the Massa regions. Similarly, 22.6 percent of firms in least affected, with a slight reduction of 0.3 percent Morocco started or increased delivery of goods, ser- in working hours and of 1 percent in the number of vices or carryout, and 23.4 percent of firms offered permanent employees. On the other extreme, firms in flexible remote work arrangements for their workers, the garments sector reported an 8 percent reduction bringing the share of the workforce working remote- of permanent full-time workers since December 2019. ly to 7.1 percent. 22 MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY Maintaining the Reform Momentum Morocco’s participation in more sophis- ticated GVCs can continue to be encouraged. The private sector still requires extensive Many of the domestic policies recommended by the emergency support to minimize the long-term 2020 World Development Report (Box 3) to enhance impact of the crisis. Although the economy is already participation in GVCs have been under implementa- exhibiting some post-lockdown green shoots, the tion in Morocco for quite some time, explaining the situation of large sections of the corporate sector is still emergence of various success stories in the automo- severely compromised. In this context, the government tive or aeronautics sector. However, there is room to prioritizes using its remaining policy space to inject intensify that effort in order to capitalize on Morocco’s equity and liquidity into the system through innovative policy track record and geographical location as driv- schemes, such as the Mohammed VI Fund, and ers for a greater participation GVCs. An area of re- through existing credit guarantee programs and the form that could be explored further is labor policy, BAM’s refinancing windows. Indeed, the alternative which according to the 2019 Enterprise Survey is could result in a wave of corporate insolvencies a major concern for 23 percent of Moroccan firms, from which the Moroccan economy would take against an average of 12 percent in the world and 9 a long time to recover. The data from the follow-up percent in the MENA region. Deepening the associa- Enterprise Survey presented in the previous section tion agreement with the EU could also be useful and suggests there is scope to broaden access to existing making additional progress with the de-carbonization lines of support. For that purpose, the requirements of the Moroccan economy could become increasing- associated with the various guarantees will have to be ly important to secure access to European markets.17 constantly monitored (on a risk-adjusted basis) and, Progress could also be sought with other integration if necessary, amended, as has been recently done to processes (most notably, the African Continental broaden the universe of firms potentially eligible for Free Trade Area), which would help develop regional these programs. value chains and position Morocco as an ideal hub In the meanwhile, the government is to reach new markets. In this process, the short-term right to build momentum on structural reform adjustment costs of a greater international integra- with a view to exploit Morocco’s comparative tion should be taken into considerations and miti- advantages in a post- COVID world. The pandemic gated to reduce adverse local impacts on workers and its devastating economic consequences are and firms. Finally, trade policy inconsistencies, such helping to crystallize an ambitious policy agenda that as those that may result from the adoption of pro- could address long-standing social inequities while tectionist measures that increase the price of inputs unleashing the potential of Morocco’s private sector. for the firms that participate in GVCs, could become This unique juncture provides an opportunity to build counterproductive. upon the structural reforms already implemented A proactive approach is needed to engage during the past decades, and in so doing accelerate anchor firms with local suppliers. To realize their full the transition towards a development model that is potential as a source of jobs and of knowledge and more reliant on productivity and private investment as technology spillovers, the participation of local SMEs sources of growth. The reform agenda could also be into GVCs needs to be encouraged. For that purpose, shaped by a strategic appraisal of the opportunities local SMEs may benefit from additional support and that could emerge in the post-pandemic world. coordination, and the public sector could play a more In particular, the current crisis is accelerating the transformation of international trade, and Morocco 17 Indeed, the EU’s post- COVID recovery strategy is is well placed to take advantage of European emphasizing the transition to a greener economy, which multinational firms’ drive to shorten supply chains, as may encourage European multinational firms to look the authorities have rightly pointed out in their new for more sustainable supply options along the GVCs in industrial strategy for 2021–23. which they participate. Special Focus: COVID-19 and the Moroccan Formal Private Sector 23 BOX 3. NATIONAL POLICIES TO TRANSITION TO A MORE SOPHISTICATED PARTICIPATION IN GVCS As opposed to many other countries in the MENA region, FIGURE 29 • Merchandise Trade (% of GDP) over the past decades Morocco has managed to substantially 120 expand the economic significance of merchandise trade, which increased from 41.6 percent of GDP in 1999 to 63.9 100 percent of GDP in 2019. Among other things, this trend 80 reflects the authorities’ activism in the negotiation of bilateral and preferential trade agreements, which has significantly 60 increased Morocco’s integration into the global economy. 40 However, despite well-known success stories in the automotive, 20 electronics and aeronautics sector, Morocco’s participation in GVCs exhibits some signs of stagnation. Indeed, measured as 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 a share of gross exports, forward and backward linkages to GVCs have barely changed during the past decade. To some extent, this may reflect the disruptions to global trade that have Tunisia Jordan Morocco Djibouti Egypt Paksistan tended to characterize the aftermath of the global financial crisis. However, it may also suggest that Morocco is not doing Source: IMF, UNCTAD Eora Global Supply Chain Database. enough to capitalize on some of the comparative advantages that could turn it into a more relevant player in GVCs, including its geographical proximity to the European markets, a dense network of FTAs and still competitive labor costs. FIGURE 30 • Morocco’s Participation in GVCs The 2020 World Development Report focuses on GVC and their (% of gross exports) potential contribution to development and shared prosperity. It 70 warns about the risk of traditional industrial policies relying on 60 tax incentives, subsidies and local content requirement, given the distortions they can generate in today’s GVCs. Indeed, 50 with few exceptions in Asia, most of the countries that have 40 relied on those instruments to promote integration into GVCs 30 have had limited success. Instead, the report encourages the 20 adoption of domestic policies aimed at correcting the market 10 failures which prevent participation in GVC. These actions can be grouped in the following four categories: 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Endowments. Eliminate barriers to investment, adopt supportive FDI policies (including well-designed investment promotion Backward participation Forward participation strategies to attract multinational GVC lead firms) and improve the business climate. Foster access to banking credit and Source: IMF, UNCTAD Eora Global Supply Chain Database. equity finance. Reform services policies (telecommunications, finance, transports and other business services). Avoid rigid labor regulations and exchange rate misalignments. Improve technical and managerial skills. Invest in human capital, educate for innovation and open-up to foreign talent. Market size. Reduce tariffs and non-tariff measures to improve access to inputs. Pursue and deepen trade agreements to include services and investment. Harmonize and mutually accept standards, especially with the countries that participate in the targeted GVCs. Geography. Improve trade infrastructure, by reforming customs and border procedures, liberalizing transport and logistics services and investing in ports and roads. Provide advanced logistics services by investing in multimodal transport infrastructure. Liberalize ICT services, invest in ICT infrastructure and expand high speed broadband. Institutions. Improve policy predictability, also through the negotiation of deep trade agreements. Strengthening certification and testing capacity to ensure compliance with international standards. Enhance contract enforcement and protect intellectual property rights. Source: World Bank, 2020 World Development Report. 24 MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY effective intermediating role between them and lead global efforts to mitigate the impact of the crisis. A first GVC multinational firms, for instance by providing challenge has been to reach informal sector firms, for information about local supply options. In addition, which direct cash transfers and the deferral of certain the government could invest in sector specific skills, payments have been common policy responses providing training and managerial skills to the local globally. Going forward, it is important to acknowledge SMEs that have the potential to connect with the that the informal sector is highly heterogeneous, and larger firms that are integrated into GVCs. Technical that there are no silver bullets to promote formality. For assistance can also be an effective tool to help local a vast majority of workers and businesses, informality firms reach the quality levels that are required to work is not a choice, but the consequence of a lack of with anchor firms. Finally, the authorities may explore opportunities, inadequate skills and low productivity. the possibility of adding measures to facilitate access This segment, therefore, requires public policies that to finance for local firms that have the potential to contribute to create opportunities through financial supply lead GVC multinational firms. and digital inclusion, broader access to social Morocco needs to stimulate competition insurance systems or human capital development. and level the playing field for new entrants in goods Instead, for the segment of the informal economy that and services markets. As already emphasized, over has reached a level of productivity that enables it to the past two decades, the country has implemented compete with the formal sector, the focus could be several structural reforms that have substantially on providing the right incentives to progress toward improved the business climate. This progress, however, formality. Having altered these actors’ perceptions has been uneven, which has limited the overall about the costs and benefits of falling under the radar effectiveness of the reform process in delivering a of the public sector, the current crisis may provide more dynamic corporate sector. The main bottlenecks new opportunities to advance in that direction. For lie in the lack of contestability in many markets, which instance, the direct subsidies and guarantees that is associated with certain sector-specific regulations, are being put in place to support the recovery could with the unequal treatment of incumbents and new be designed in such a way as to reward the informal entrants, and with the ineffective implementation of self-employed workers or microenterprises that opt to competition policy. Solving these problems may take register.18 some time, which could be perceived to be in short Additional approaches could be explored supply given the urgency to support the post- COVID to combine skill upgrading with income support. recovery. However, there are effective measures that Although the transfers put in place during the could be implemented relatively quickly, including lockdown (and thereafter for specific sectors) were the strengthening of the Competition Council (which crucial to support household’s income, they did little became operative less than two years ago) and the to improve formal or informal workers’ employability. extension of public procurement rules to all levels The authorities could explore options to combine of governments and to SOEs. Additionally, the SOE active labor market policies with income support, reform in which the government is embarking could complementing the social protection reforms which prioritize competitive neutrality, thus ensuring that the have been announced by his Majesty the King. commercial participation of the State in the economy Indonesia, for example, has used such a cash does not prevent new firms from entering new markets for training programs which provides subsidized and thriving and in the process drive improve quality/ lower prices of goods and services to consumers. The COVID-19 pandemic may offer a 18 This might be especially relevant for the tourism industry, window of opportunity to develop innovative which is characterized by its high informality rates, and approaches to tackle informality. The high rates for which most of the emergency measures adopted by of labor and business informality that characterize the government during confinement have been extended many developing countries have stood in the way of due to the severity of the crisis. Special Focus: COVID-19 and the Moroccan Formal Private Sector 25 vouchers for skilling and re-skilling targeted at To foster SMEs’ access to finance, the unemployed workers. In the current context, such government could complement its guarantee programs could emphasize the skills that are more programs with a regulatory reform of the likely to gain relevance in the post-pandemic world, microfinance sector and with additional support such as those related with the digital economy and to the supply of equity for early-stage companies. e-commerce. With a longer-term perspective, the Although the stock of credit to the private sector is announced reinforcement of the unemployment relatively high in Morocco (above 70 percent of benefit scheme could provide an interesting platform GDP) and the guarantee schemes put forward by to integrate the provision of adequate income support the authorities have supported credit for established with more effective active labor market policies. formal firms, Moroccan entrepreneurs and smaller The government could reinforce its companies continue to suffer from a lack of access institutional framework in order to maximize to finance. One way to address these segments’ the crowing in effect of its renewed investment needs would be to strengthen the regulatory effort and could initially prioritize maintenance framework for microfinance institutions, which are still works and green projects. There is solid empirical severely constrained by their current legal status as evidence suggesting that the fiscal multiplier of public associations, and in terms of the services they can investment is higher during uncertain times such as provide.19 A new microfinance law (already in process) the current pandemic (IMF, Fiscal Monitor, 2020), could pave the way for increasing these institutions’ which justifies the government’s decision to prioritize financial intermediation role for low income segments capital accumulation in its recovery plan. Indeed, the of the population, by allowing them to offer savings endorsement of new projects by the State could be accounts and to venture into new products, such as a particularly effective tool to anchor expectations micro-leasing or insurance. In addition, the newly and boost the confidence of private entrepreneurs created Mohamed VI Fund could play a decisive role precisely when economic agents are more likely to to mobilize institutional investors in the provision of defer their hiring and investment decisions. However, private equity and venture capital available for start- scaling up public investment can also result in the ups and new SMEs. selection of projects with sub-optimal social and There is a dire need for additional measures economic returns and in cost overruns. Therefore, for to tackle late payments. Such delays were already the investment pillar of Morocco’s recovery strategy a pervasive problem before the crisis, which the to be effective, strong institutional safeguards need pandemic seems to be aggravating: according to to be in place throughout the project life cycle, but the data collection firm Inforisk, the COVID crisis has especially at the selection/ex ante evaluation and lengthened payment delays by 28 percent in the case at the procurement phases. The reforms that are of microenterprises, 57 percent for middle-size firms required to reinforce public investment governance and by 63 percent for the largest firms. However, as a could also take some time to be implemented. Given result of their lower bargaining power, late payments the current sense of urgency around the need to continues to be a more pressing problem for smaller support the recovery through public investment, the firms (on average, 272 days for microenterprises, authorities could initially prioritize maintenance, while against 178 days for middle-size firms and 143 days appropriate methodologies are put in place to evaluate for large companies). This lengthening of payment and select new projects. Such investments have the terms could push hundreds of otherwise solvent advantage of adding value to existing infrastructure, firms into bankruptcy, which calls for a bolder and of being labor intensive and relatively easy to government response (beyond the requirement to implement. Complementarily, the government could use part of the credit mobilized by guarantees to prioritize climate-smart investments with potentially large long-term returns, aimed at de-carbonizing the 19 A positive development in this area was the increase of Moroccan economy and at increasing the resilience of the microfinance loans size cap from 50,000 MAD to agricultural systems. 150,000 MAD decreed in 2019. 26 MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY cancel financial obligations with other firms).20 Among resulted in a credit rating downgrade, which could the measures that could be contemplated are the adversely affect not only the sovereign’s but also following: (1) reducing payment delays on the part private firms’ access to finance. To minimize the risk of the public sector, in particular with regards to VAT of further downgrades and an excessive increase refunds; (2) enforcing the financial penalties already in financing costs, the government could begin contemplated by law, or introducing an automatic to articulate a medium-term fiscal consolidation entitlement to interest charges for suppliers that plan and communicate it effectively. A key pillar are paid with excessive delays; (3) the progressive of that plan could be to reinvigorate the tax reform non-deductibility of VAT for invoices that are paid process. Indeed, converging towards Morocco’s with a certain delay; and (4) greater transparency potential tax base through a series of well targeted about payment practices, for instance, through the measures could mobilize enough revenues to put imposition of additional reporting requirement on this the debt ratio on a downward path without unduly topic for larger firms, or through the compilation of a hurting the economy’s long-term growth prospects. database on late payers. In addition, the government In addition, enhancing transparency would help could further increase the supply of official credit for economic agents cope with the current uncertainty. firms experiencing cash flow difficulties as a result This could be done by disclosing the contingent of late payments or provide insurance products to liabilities associated with the government’s recovery facilitate their access to private credit. strategy and by providing more clarity on the fiscal Laying the foundations of a credible implications of the reforms that have been announced medium-term consolidation plan is desirable in recent months (such as the expansion of the social in these times of uncertainty and rapidly protection network). Finally, the large unanticipated deteriorating fiscal space. Over the last decade, increase in indebtedness caused by the pandemic is Morocco has earned a solid reputation for the raising awareness across the globe about the need robustness of its macroeconomic framework. But, for a solid fiscal risk management framework in these as discussed in sections 1 and 2, the COVID-19 uncertain times. shock will substantially expand Morocco’s twin fiscal and current account deficits. Given the severity of the current recession, the authorities are wisely using available fiscal space to support the recovery. 20 According to IFC (2019), close to 40% of insolvencies are However, the trajectory of public debt has already due to late payments or to payment defaults in Morocco. Special Focus: COVID-19 and the Moroccan Formal Private Sector 27 DATA APPENDIX 29 TABLE 1 • Morocco: Selected Economic Indicators, 2016–2023 Est. Proj. Proj. Proj. Proj. 2016 2017 2018 2019 2020 2021 2022 2023 Real Economy (annual percent change, unless otherwise indicated) Real GDP 1.1 4.2 3.0 2.5 –6.3 4.0 3.7 3.8 Agricultural GDP –13.7 15.2 3.7 –5.8 –5.7 11.0 4.0 4.4 Non-Agricultural GDP 3.0 2.9 3.1 3.5 –6.3 3.1 3.7 3.8 Industry 0.6 3.6 3.0 3.5 –7.4 2.6 3.4 3.5 Services 2.9 2.7 2.7 3.8 –5.8 3.0 3.7 3.8 Private Consumption 3.7 3.8 3.4 1.8 –5.1 3.5 3.8 4.1 Government Consumption 1.5 2.1 2.7 4.7 8.9 3.8 3.5 3.1 Gross Fixed Capital Investment 8.8 –0.2 1.2 1.0 –8.7 4.7 4.9 3.9 Exports, Goods and Services 3.5 11.1 6.0 5.5 –10.7 6.5 6.8 6.9 Imports, Goods and Services 14.5 7.9 7.4 3.3 –6.3 4.3 4.5 4.6 Unemployment rate (ILO definition, in percent) 9.9 10.2 9.5 9.2 — — — — Inflation (average CPI, in percent) 1.6 0.7 1.9 0.2 0.7 1.3 1.7 2.0 Fiscal accounts (in percent of GDP) Expenditures 28.5 28.0 27.5 27.8 30.4 29.9 29.4 28.8 Revenues, including all grants 24.2 24.5 23.8 24.2 22.6 23.3 23.7 23.9 Budget Balance (excl. privatization) –4.4 –3.5 –3.7 –4.1 –7.8 –7.0 –5.9 –5.0 Central Government Debt 64.9 65.1 65.2 65.0 77.4 80.1 81.7 81.9   (annual percent change, unless otherwise indicated) Selected Monetary accounts                 Broad Money 4.7 5.5 4.1 3.8 — — — — Credit to non-government 4.4 2.8 — — — — — — Interest (key policy interest rate) 2.25 2.25 2.25 2.25 — — — — Balance of payments (in percent of GDP, unless otherwise indicated) Current Account balance –4.1 –3.4 –5.5 –4.1 –6.0 –5.5 –4.8 –4.1 Imports, Goods and Services –43.7 –45.0 –46.9 –45.8 –38.6 –44.1 –47.1 –47.1 Exports, Goods and Services 33.3 35.3 36.5 36.8 27.6 33.7 37.2 37.5 Net Direct Investment 1.5 1.5 2.4 0.5 0.6 1.5 1.7 1.8 Gross official reserves (bln US$, eop) 25.9 25.2 24.9 26.3 30.6 29.5 30.5 31.9 In months of imports 6.4 5.6 5.3 6.3 6.9 6.6 6.8 7.1 Exchange rate (average) 9.8 9.7 9.4 9.6 — — — — Memo items                 Nominal GDP (in billion dirhams) 1013 1063 1108 1151 1087 1144 1207 1278 GDP per capita (in current US$) 2998 3144 3348 3370 3135 3287 3439 3630 Source: World Bank staff estimates. Note: CPI = Consumer Price Index; ILO = International Labor Organization. 30 MOROCCO ECONOMIC MONITOR – FROM RELIEF TO RECOVERY TABLE 2 • Morocco: Key Fiscal Indicators 2015–2022 (in percent of GDP) Est. Proj. Proj. Proj. Proj. 2016 2017 2018 2019 2020 2021 2022 2023 Total revenues 24.2 24.5 23.8 24.2 22.6 23.3 23.7 23.9 Tax Revenues 20.9 21.2 21.2 20.7 19.0 19.1 19.5 19.7 Social Contributions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Grants (GCC) 0.7 0.9 0.3 0.1 0.2 0.1 0.0 0.0 Other revenues (including Privatization Proceeds) 2.6 2.4 2.3 3.4 3.5 4.1 4.2 4.2 Total expenditures 28.5 28.0 27.5 27.8 30.4 29.9 29.4 28.8 Compensation of employees 10.3 9.9 9.6 9.7 12.5 12.2 12.0 11.4 Use of goods and services and grants 7.9 7.8 8.0 8.3 7.6 8.0 7.9 8.0 Subsidies 1.4 1.4 1.6 1.4 1.1 1.2 1.1 0.9 Interest payments 2.7 2.5 2.5 2.3 2.6 2.5 2.4 2.4 Other expenses (incl. capital expenditures) 6.3 6.3 5.9 6.1 6.6 6.0 6.1 6.2 Overall balance (excl. privatization) –4.4 –3.5 –3.7 –4.1 –7.8 –7.0 –5.9 –5.0 Primary balance (excl. privatization) –1.6 –0.9 –1.3 –1.8 –5.2 –4.5 –3.4 –2.6 Overall balance (incl. privatization) –4.3 –3.5 –3.7 –3.6 –7.8 –6.6 –5.8 –4.9 Arrears 0.5 –0.1 0.3 –0.4 … …     Government financing 3.8 3.6 3.4 4.0 7.8 6.6 5.8 4.9 External (net) 0.3 0.3 –0.2 1.5 3.0 2.8 1.5 2.1 Domestic (net) 3.5 3.2 3.6 2.5 4.8 3.9 4.3 2.8 Central Government debt stock 64.9 65.1 65.2 65.0 77.4 80.1 81.7 81.9 External (net) 14.1 14.5 13.5 14.2 18.2 20.0 20.3 21.2 Domestic (net) 50.8 50.6 51.7 50.8 59.2 60.1 61.1 60.2 Memorandum items:                 SOE’s & Public Establishments’ Debt Stock 24.8 25.0 25.2 25.4         of which: external debt 16.6 16.8 16.1 15.5         Note: External and domestic debt is defined on a currency-based classification; government financing includes privatization. DATA APPENDIX 31 SELECTED RECENT WORLD BANK PUBLICATIONS ON MOROCCO (For an exhaustive list, please go to: https://www.worldbank.org/en/country/morocco) Once NEET, Always NEET ? A Synthetic Panel Approach to Analyze the Moroccan Labor Market May 2020 Policy Research Working Paper Morocco Economic Update – Spring 2020 April 2020 Brief Water Scarcity in Morocco : Analysis of Key Water Challenges Jan. 2020 Report Morocco - Supporting the Design of Performance-Based Contracts to Improve Results in Education Dec. 2019 Brief Polarization and Its Discontents: Morocco before and after the Arab Spring Oct. 2019 Policy Research Working Paper Doing Business 2020: Comparing Business Regulation in 190 Economies - Economy Profile of Morocco Oct. 2019 Doing Business Morocco Economic Update – Fall 2019 Oct. 2019 Brief The Moroccan New Keynesian Phillips Curve: A Structural Econometric Analysis Sept. 2019 Policy Research Working Paper Lessons from Power Sector Reforms: The Case of Morocco August 2019 Policy Research Working Paper Leveraging Urbanization to Promote a New Growth Model While Reducing Territorial Disparities in June 2019 Publication Morocco: Urban and Regional Development Policy Note Morocco: Systematic Country Diagnostic (‫ةيبرعلا‬, English, French) June 2019 SCD Creating Markets in Morocco a Second Generation of Reforms: Boosting Private Sector Growth, Job June 2019 CPSD Creation and Skills Upgrading Morocco’s Growth and Employment Prospects: Public Policies to Avoid the Middle-Income Trap March 2019 Policy Research Working Paper Gender Gaps in the Labor Market and Economic Growth Dec. 2018 Policy Research Working Paper Doing Business 2019: Training for Reform - Morocco Oct. 2018 Doing Business Climate Variability, Drought, and Drought Management in Morocco’s Agricultural Sector Oct. 2018 Working Paper The optimal mix of pricing and infrastructure expansions to alleviate traffic congestion and in-bus June 2018 Policy Research Working Paper crowding in grand Casablanca Maroc – Pour une Nouvelle Stratégie de Mise en Œuvre et de Gouvernance de l’Urbanisme et de May 2018 Working Paper l’Aménagement Urbain : Défis, Contraintes et Leviers d’Action (French) Morocco 2040 – Emerging by Investing in Intangible Capital, Country Economic Memorandum Oct. 2017 CEM (‫ةيبرعلا‬, English; French) 33 1818 H Street, NW Washington, DC 20433