Broken Economic `Hardware’ Thwarts Shift to Rate Cuts in Morocco

RABAT (Capital Markets in Africa) – The central bank hasn’t budged since 2016 despite taking an increasingly dim view of the country’s economy after a poor harvest and still-weak demand from its key markets in Europe. Meanwhile, consumer prices have recovered from a bout of deflation to exceed projections for the year.

Policymakers are likely to keep their benchmark interest rate at a record-low 2.25% again at a quarterly meeting on Tuesday. The pause will probably last through the second half of the year, according to Bloomberg Economics.

“The economy’s problems are about the hardware, not the software,” said Abdelouahed El-Jai, a former central bank director and now an economist at Rabat-based think tank Cerab. “The central bank should lower the rates to boost growth and reduce the cost of financing. The downside, however, outweighs the benefits, especially for savings.”

As political stability frays across the Middle East, Morocco has largely managed to sidestep regional unrest since 2011. But it’s increasingly under threat from protests over jobs, poverty and human rights.

Governor Abdellatif Jouahri waded into the debate this summer, warning that Morocco is struggling to cope with rising social demands and outlined the efforts the central bank had made in trying to boost economic growth and curb unemployment.

The International Monetary Fund has revised down its forecast for Moroccan economic growth to 3% in 2019, unchanged from 2018, and cut its inflation estimate to 0.6% from 1.4%.

Price growth swung from a five-year high in 2018 to below zero in the first quarter. It’s since picked up to reach an annual 0.8% in August, above the central bank’s 0.6% projection for 2019.

What Our Economists Say…
We expect the Moroccan central bank to keep its policy rate at a record-low 2.25% in the second half of 2019 as rising food prices push up inflation after a brief period of deflation.” –Mark Bohlund, Africa economist

Signaling a loss of patience with a divided government coalition, King Mohammed has asked his prime minister to propose a cabinet reshuffle in the fall and announced that he would appoint a committee to boost growth in order to better address social challenges, especially youth unemployment.

To tackle renewed grievances by businesses, Finance Minister Mohamed Benchaaboun said in September that the government doubled the pace of this year’s value-added tax reimbursements and cut by over half payment delays for state contracts. It will also inject liquidity in public firms to help them reduce payment delays within the next six months.

“Unfortunately the engine of Moroccan entrepreneurship is broken down,” Salaheddine Mezouar, who heads leading business group CGEM, said at a Sept. 13 conference in Casablanca. “Only a quarter of investment done in the country is by private businesses.”

Source: Bloomberg Business News