2007 MOROCCAN BUDGET

UNCLAS SECTION 01 OF 02 RABAT 000189 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EFIN ECON MA SUBJECT: 2007 MOROCCAN BUDGET This message is sensitive but unclassified. Please handle accordingly. ¶1. (SBU) Summary: Morocco's 2007 budget, adopted in the just concluded fall parliamentary session, highlights both the economic successes of the government of Prime Minister Jettou and the challenges that will remain for his successor. In its broad outline, the budget reinforces the overall macro-economic stability Morocco has achieved in recent years, maintaining the budget deficit at around 3.1 percent of GDP while also increasing public investment and beginning the difficult process of tax reform. More troublesome is the fact that despite recent compression of the civil service, the public sector wage bill is up 6.9 percent from 2006, while overall expenditures are up 14.8 percent. In addition, the budget does not touch the politically sensitive topic of the Caisse de Compensation, which subsidizes products ranging from petroleum to sugar. As a result of these trends, the long term sustainability of Moroccan budgetary policy is in question with debt service up nearly 33 percent, to the point where it represents over 30 percent of the total budget. End Summary. ¶2. (U) Budget Outline: Morocco's 26.6 billion USD budget for 2007 is up nearly 15 percent on the 22.98 billion USD that the Kingdom expended in 2006. Government revenue, however, is forecast to rise only 8.2 percent to 24.72 billion USD billion, leaving the country with a deficit of 1.78 billion USD, or approximately 3.1 percent of GDP. The budget forsees 3.4 percent growth, 2 percent inflation, and is based on an average oil price of 65 USD per barrel. Expenditures are divided among government functioning (12.74 billion USD), investment (3.02 billion USD),debt (6.86 billion USD) and other expenditures (3.85 billion USD). The budget includes 1.6 billion USD for the price supports on petroleum, sugar, and other products that the Moroccan state provides through the Caisse de Compensation. Roughly 1 billion USD of this total is for subsidies for this year, with the remainder going to pay off arrears from previous years. ¶3. (U) Tax reform: Government officials note that revenue growth in the 2007 budget lags behind expenditures in part as a result initial tentative steps to reform Morocco's income tax. With a top marginal rate of 44 percent and such swift escalation that even wage earners who earned 4,000 USD faced a 35 percent rate, Morocco's income tax, particularly when coupled with social security taxes of 35 percent, constituted what the World Bank termed a "severe constraint on the use of human capital." The 2007 budget begins gingerly to address the situation by reducing the top tax rate from 44 to 42 percent, raising the floor at which income tax is first imposed from 2325 USD to 2800 USD and also adjusting the internal salary bands, so that (for example) the 35 percent rate becomes effective at a salary of 5,230 USD. The changes will cost the government an estimated 290 million USD in revenue. ¶4. (U) Expenditures: Increases in everyday government expenditures include a 6.9 percent increase in spending for civil service salaries, despite the completion of the program of voluntary departures which the government has pursued in recent years. Given that the average increase in the wage bill over the last six years has been 7.5 percent, the voluntary departures succeeded in bringing that increase below that level by only 1 percent in 2007. The largest increase in the budget by far, however, is for debt service, which is up nearly 33 percent over 2006, representing over 30 percent of the total budget. External debt payments are relatively stable at 1.1 billion USD, but internal debt payments for interest and principal have swollen to 5.76 billion USD, a 41 percent increase. Prime Minister Jettou has sought to downplay the issue, in arguing that the internal debt increase is less dramatic when one discounts one-time charges for the voluntary departures (930 million USD) and the arrears of the retirement system (1.28 billion USD). ¶5. (U) Investment: On the positive side of the ledger, the budget significantly increases investment, though at least one observer has argued to us that the increase stems in part from clever accounting in shifting unrealized investments from 2006 to 2007 books. Nonetheless, the 17.8 percent increase in investment is noteworthy. When other investment spending is included, including that chanelled through the Hassan II Fund, public enterprises, and special Treasury accounts, total Moroccan investment spending totals nearly 10.46 billion USD. ¶6. (SBU) Caisse Reform: Left for a future government is the politically sensitive topic of reform of the Moroccan subsidy RABAT 00000189 002 OF 002 system, which the government left untouched in the 2007 budget. Recent declines in oil prices have eased the burden these subsidies impose on the overall budget (and the budget itself is based on a realistic average price of oil of 65 USD per barrel),but critics still indict the system for its failure to target the truly needy. Subsidies on "small" propane gas bottles, for instance, have led many enterprises to utilize large numbers of such small canisters, rather than buy such gas in larger quantity. Even Caisse officials estimate that well under fifty percent of their spending reaches the truly needy, as originally intended. ¶7. (SBU) Comment: With its investment and subsidy components and initial steps towards tax reform, the 2007 budget is clearly framed with the upcoming 2007 parliamentary elections in mind. Debates in the parliament largely consisted of political parties attempting to position themselves in a politically favorable light, and did not address the the budget's underlying balance or sustainability. Similarly, in his recent public presentations on the budget, Finance Minister Oualalou has preferred to discuss improvements in Morocco's social and economic situation, rather than enter into the weeds of budgetary policy. Future governments may not have that luxury, however, given pressures stemming from Morocco's mounting internal debt and the need for further reform of the country's social security system. Critics argue too that the government must do more both to rein in ordinary expenditures and to target critical areas such as agricultural reform and industrial development, and warn that the 3.4 percent growth on which the budget is based is not sufficient to either reduce poverty or absorbe new entrants into the labor force. End Comment. ****************************************** Visit Embassy Rabat's Classified Website; http://www.state.sgov.gov/p/nea/rabat ****************************************** Riley