2009 BUDGET HIGHLIGHTS GOM'S CONTINUING ROOM TO

C O N F I D E N T I A L SECTION 01 OF 03 RABAT 000109

SENSITIVE
SIPDIS

E.O. 12958: DECL: 02/03/2019
TAGS: EFIN ECON MA
SUBJECT: 2009 BUDGET HIGHLIGHTS GOM'S CONTINUING ROOM TO
MANEUVER

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Classified By: Econ Counselor Stuart Smith, Reasons 1.4 b/d.


1. (SBU) Summary: Morocco's 2009 budget, the first prepared
by the government of Abbas El-Fassi, breaks little new ground
in comparison with its predecessors. The budget maintains a
strong focus on social issues, which account for 53 percent
of spending. Reduced subsidy spending has enabled the
government to increase the resources allocated to public
investment, with the goal of counterbalancing expected
downturns in foreign investment, remittences, and exports as
a result of the global financial crisis. Other measures to
support growth include reinforcement of spending on key
weaknesses in Morocco's business environment. These include
additional resources for the justice sector and support for
new anti-corruption and competition agencies. The budget,
with this increased spending and continuation of reduction in
income tax rates, shows that Morocco's strong fiscal
performance in recent years gives the government room to
maneuver, even in an economic downturn. The "Alliance of
Economists" of the Prime Minister's own Istiqlal party has
called for even more spending, however, arguing that the
government has focused too much on reducing Morocco's
indebtedness, which it argues is already manageable at 53.6
percent of GDP. Meanwhile, parliament's inability to affect
the budget underscores its lack of power. End Summary.


2. (U) Budget Outline: The global budget envisions an
increase in revenue of 24 percent to USD 35.2 billion and an
increase of expenditures of 23 percent to USD 36.7 billion
(when autonomous activities and special Treasury accounts are
included),leaving the country with a "revenue shortfall" of
approximately USD 1.5 billion (or
MAD 13 billion). (Note: The actual deficit is budgeted to be
larger, at USD 2.6 billion, or approximately 3 percent of
GDP, as budget revenues include some loans and expenditures
include paying off some of Morocco's existing debts. End
Note.) While predicted revenue increases appear large, they
are actually less ambitious than they first appear. Actual
tax revenue in 2008 exceeded budget projections by 20
percent, so that the actual increase over the revenues
realized in 2008 is only 3 percent.


3. (U) The budget is framed to address two primary goals:
maintaining an elevated level of growth in the face of the
global economic downturn, while also addressing Morocco's
lagging performance on a number of key social indicators.
Social sectors account for 53 percent of all spending, and
have increased by USD 1.4 billion over the 2008 budget.
Priority areas include particularly education (USD 5.5
billion or 16 percent of spending is devoted to education),
public health, housing, urban development, and youth and
sports.


4. (U) Though the majority of state resources in the budget
are devoted to social goals, the government's public focus
has centered more on its planned measures to support growth.
These include:

-- Increasing investment: direct state investment will rise
25 percent to USD 5.4 billion, while overall investment
(including that by public enterprises and the Hassan II Fund)
will be three times that at USD 16 billion. Principal
projects include accelerating investment for the full range
of transportation infrastructure, and developing new poles
for specific industries across Morocco. These include for
the chemical industry (near Jorf Lasfar),fishery canning
industry (Agadir),offshoring (Oujda, Fes, and Marrakech),
and agro-industry (Meknes, Berkane, and Beni-Mellal),as well
as extension of existing industrial zones near the Tanger Med
port.

-- Reinforcement of the purchasing power of Moroccan
citizens: extension of the "Moukawalati" ("My Enterprise")
program, which helps young entrepreneurs win micro-financing
for their business projects; an increase in public sector
salaries (a 9 percent increase in the government's salary
bill, though recruitment will be strictly limited to bring
the overall civil service salary/GDP ratio down to the
average rate for comparable countries); increase in family
allowances; reduction in top tax rates (now down to 40
percent from the previous top rate of 42 percent) and an
increase in the income floor for taxation from USD 2,857 to
USD 3,333.

-- Support for exports: Continued reduction in import duties
to reduce the cost of manufacturing inputs; encouragement of
the capitalization of small and medium-sized enterprises by
allowing them to reduce their profit tax by 10 percent;

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creation of a special USD 59.5 million fund to support
exports; and simplification of customs procedures.

-- Diversification of the sources of growth through
invigoration of sectoral strategies for agriculture (spending
will rise 58 percent to USD 800 million to implement the
"Plan Maroc Vert"),water, energy, and phosphates, and
support for other sectors.

-- Improvement of the business climate through acceleration
of reform of the justice sector (which will see a 22 percent
budget increase),support for the new Central Anti-Corruption
Agency and the Competition Council, and creation of both a
new Economic and Social Council and a single investment
promotion agency.


5. (SBU) A number of issues remain to be addressed. While
subsidy spending will fall to USD 3.4 billion from last
year's USD 5.2 billion, as a result of the recent fall in the
price of oil and other primary commodities, the promised
reform of the subsidy system to focus aid on needy
populations is tackled only incrementally. The government
will launch a limited USD 59.5 million program to channel
assistance directly to the poorest Moroccans. For now the
compensation system itself remains largely unchanged,
however, with the bulk of spending devoted to petroleum
products, whose benefit primarily reaches more favored
segments of the population.


6. (SBU) Perhaps because of the ongoing public focus on the
international economic conjuncture and its implications for
Morocco, only muted comment has surrounded the budget. At
the time of its debate in Parliament, opposition MPs
particularly targeted the government's decision to raise
consumption taxes on basic consumer staples, rather than to
increase taxes on alcohol. They also pressed for the income
floor for taxation to be raised further. As usual, however,
the government ruled most of these proposals out of order, on
the basis of constitutional provisions that preclude deputies
from proposing amendments that either reduce government
revenues or result in an additional burden on the public. It
did, however, agree to raise the floor for imposition of
income tax from USD 3,200 to USD 3,300.


7. (C) Aside from standard opposition denunciation of this
parliamentary tactic, the most significant critique has come
from the "Alliance of Economists" associated with the Prime
Minister's own Istiqlal party. That group, headed by former
Tourism Minister Adil Douiri, termed the budget "prudent and
comfortable" but suggested that the government had room to be
significantly more aggressive in seeking to attain its goal
of keeping Morocco's growth rate up in the current
international climate. In a recent meeting with us, Douiri
suggested that the continuing focus on reducing Morocco's
overall indebtedness is misplaced. Government debt is down
to 53.6 percent of GDP, he noted, and the government has been
at or near a balanced budget in each of the last two years.
Such a budget policy is not appropriate for a developing
country like Morocco, he argued. Instead, the government
should ramp up spending on key sectors like housing and
manufacturing and be willing to tolerate a deficit of 3-4
percent of GDP. The key change in Morocco's economic
performance in recent years, Douiri pointed out, is that
average annual non-agricultural growth has been raised from 3
to 5 percent. With exports likely to take a hit this year,
he suggested that this improved performance will be difficult
to maintain, and that the government could do even more to
pick up the slack. In the Alliance's view, middle and
low-income housing are the sectors where additional
government spending would have the largest impact.
Similarly, while expressing skepticism that government
spending can reverse a business cycle, he argued that
spending to support Morocco's manufacturing base through the
downturn would leave it ready to resume exporting when
conditions improve.


8. (C) Comment: Given that in addition to Douiri, a former
Minister, the Alliance is composed primarily of young
Istiqlal Ministers (including Economic and General Affairs'
Nizar Baraka, Housing's Ahmed Hejira, and Transport's Karim
Ghellab) its critique is more than a little ironic. Douiri
stressed that while he closely coordinates his messaging with
the party, the Alliance's role is to be out in front of the
government and "to sow the seeds" for future policy
decisions. This allows the party, which is just one part of
the governing coalition, to keep its distance from Alliance
recommendations, if it wishes. In this case, government
movement in the Alliance's direction is likely if revenue

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performance remains strong and if continued low oil prices
also free up additional resources. Whether this will occur
will only become evident over the course of the year. New
figures released in late January, however, show that Morocco
enters 2009 in a strong fiscal position: after a year (2007)
in which an expected deficit turned into a balanced budget,
analysts now anticipate that the 2008 budget will return a
deficit far below its budgeted level of 3 percent of GDP, and
may in fact yield a surplus, thanks to strong revenue
performance. Baraka, in his presentation last week at Davos,
highlighted this achievement of a deficit "below 1 percent of
GDP," in the face of subsidy spending that reached 5 percent
of GDP, as an indication of the "Moroccan exception."
Overall, the 2009 Moroccan budget appears to be framed to
leave the government room on the upside if revenues exceed
forecasts, something that would not hurt the governing
coalition electorally as local elections approach later this
year. End Comment.

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9. (U) Principal Budget Figures
--------------
(Note: Budget figures are given in Billion MAD; USD 1= MAD
8.4, approximately. End Note.)

EXPENDITURES 2009 Increase
percentage
Government operations 17.96 21
Personnel/salaries 9.00 13
Material 3.01 25

Common Charges
Compensation 4.04
(includes 5 billion in arrears from 2008)
Unforeseen Expenses 0.36
Pension Contributions 1.29

Investment 5.38 25

Debt Service 6.88 21
Domestic Debt 6.04 40
capital 4.20 76
interest 1.84 -5
External Debt 0.84 -39
capital 0.52 -51
interest 0.32 -2

TOTAL General State Budget 30.21 22

State Services Managed Autonomously 0.25 27

Special Treasury Accounts 6.26 11

TOTAL Overall GOM Budget 36.72 23

REVENUES

Direct Taxes 8.63 25
Company tax (IS) 5.08 45
Income tax (IR) 3.45 5

Customs Revenue 1.65 8

Indirect taxes 7.46 20
Registration/Stamp taxes 1.52 26
Revenue from State Enterprises 1.19 45
Loans, grants 7.50 27
Privatization Revenue 0.36

TOTAL GENERAL REVENUE 28.64 22

Revenues from Autonomous Activities 0.25 27

Revenue from Special Treasury Accounts 6.28 11

TOTAL BUDGET REVENUE 35.18 24

DEFICIT 1.55


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