Morocco's economy to shrink up to 7% in 2020 on pandemic and drought threats, IMF says

North African nation's economic output to rebound 4.5% as crises effects wane but risks remain

A farmer walks among orange trees dried out by drought on Morocco's southern plains of Agadir in the country's agricultural heartland. Moroccan authorities have diverted water from the dams that irrigShow more

Morocco's economy is projected to contract 6 to 7 per cent this year as the dual impact of the Covid-19 pandemic and an ongoing drought hit the farming-reliant nation, leading to a deep recession, the International Monetary Fund (IMF) said.

The North African country's gross domestic product is expected to rebound by 4.5 per cent next year as the effects of the two crises wane, though "considerable" downside risks remain, the Washington-based lender said on Monday following a staff mission to the country. The expansion estimate for 2021 is less than the 4.9 per cent expansion forecast that the fund had projected last month in its latest World Economic Outlook.

The extent of this year's economic contraction will depend "on the evolution of the health crisis, as well as a spike in unemployment rate", Roberto Cardarelli, the IMF official who led the staff mission, said. "The fiscal and external deficits are expected to widen, on the back of lower tax revenues and tourism receipts, respectively."

The Covid-19 pandemic has taken a severe toll on the global economy that has entered into the worse recession since the 1930s Great Depression. The health crisis has hampered international trade, paralysed air travel and disrupted global supply chains. A second wave of infections is forcing governments around the world to re-impose lockdowns and other measures to curb the spread of the virus.

Moroccan authorities have responded with measures that helped contain the economic and social impact of the health crisis, taking decisive measures to expand social assistance this year.

"The fiscal policy stance has been eased appropriately in 2020," Mr Cardarelli said. "Tax revenues have fallen sharply and spending measures have been put in place to minimise the economic and social impact of the crisis."

Wage subsidies, cash transfers to households in the informal sector, and the extension of credit to firms, have sustained domestic demand, protected the most vulnerable, and supported the productive system, the IMF said.

A rebound is expected next year given the resilience of remittances and lower imports that have limited Morocco's external financing needs, while international reserves are "comfortably" above 2019 levels due to the IMF precautionary liquidity line in April, Mr Cardarelli said.

The IMF expects an economic rebound next year as the 2021 budget backs recovery over the next few years, mainly through investment and reforms to the social protection system announced by the authorities.

The IMF staff agree with authorities that the process of fiscal consolidation should be gradual and begin only once the economic recovery becomes well anchored.

The fund recommends lowering public debt as a percentage of economic output from 2022. However, a slower-than-expected economic recovery would call for a delayed fiscal adjustment.

Measures to extend the tax base, pursue further public administration reforms to rationalise spending, and the authorities’ privatisation programme would help rebuild the fiscal buffers while financing the extension of social protection programmes, the IMF said.

The central bank's accommodative monetary stance should be maintained until there are signs that inflation has begun to increase, the fund said.

"Advancing on the structural reform agenda is essential to solidify the recovery from the pandemic and achieve stronger, resilient, and more inclusive growth, one that improves the standard of living for all Moroccans," Mr Cardarelli said.

Comprehensive reform of the social protection system, the extension of health care insurance to all Moroccans, the reform of state-owned enterprises, preparing the legal framework for the digitalisation of the public administration and reforming education are among the key measures recommended by the IMF.