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