Taoufik Abbad
Abdenbi El Ansary
Margit Molnar
Kyongjun Kwak
Paul Yu
OECD Economic Surveys: Morocco 2024
Economic Assessment
OECD Economic Surveys
Abstract
Morocco’s prudent monetary and fiscal policies have ensured macroeconomic stability and supported the economy during recent crises. A major reform is underway to replace subsidies with targeted social assistance and to expand health insurance. To finance structural reforms and broaden the tax base, additional revenues will need to be raised. Morocco has achieved rapid industrialisation, avoiding the “resource curse”, including through a relatively open economy and inward investment in key sectors, but more needs to be done to avoid the “middle-income trap” and accelerate convergence to the advanced economies. Productivity growth would be supported by implementing existing reforms and further measures to encourage private investment, boost competition, reduce corruption and tackle widespread informality. While Morocco has a young and growing workforce, a large share of women and young people remain outside the labour force. Many jobs remain informal and of low-quality, while unemployment levels for urban youth are elevated. Education quality and attainment have substantial room for improvement to deliver the necessary skills needed by employers. Morocco has made ambitious commitments to reduce greenhouse gas emissions by 2050 to net zero, but more progress is required to meet these objectives. In light of recent droughts and growing demand, additional efforts are needed to manage the scarcity of water.
Morocco is on its way to recovery from the multiple adverse shocks over the past few years including the COVID-19 pandemic and then surging food and energy prices, recurrent droughts and the 2023 Al Haouz earthquake. Past prudent fiscal policies allowed for timely interventions to shield households and businesses from the drop in income and then soaring prices, while monetary policy was tightened to manage the surge in inflation, but longer-term spending commitments have increased as certain subsidies are being replaced with an expansion of the social safety net.
Despite steady growth prior to the pandemic, Morocco’s per capita income remains well below that of OECD members and regional peers, implying ample room for catching up (Figure 1.1). Convergence to advanced economies continued until 2011, when it began to reverse, meaning that incomes in per capita terms have since been growing more slowly than in OECD countries on average. While Morocco’s position relative to average MENA country levels of per capita incomes increased sharply in 2015, when many experienced downturns, convergence has since stalled. GDP growth averaged around 3% in the five years prior to the pandemic, similar to some regional peers but well below the best-performing countries at a similar level of GDP per capita. Over a longer period, Morocco has seen sustained economic and social development with steadily rising GDP per capita over past decades, improvements in infrastructure, rising life expectancy and a growing population. Since the early 2000s, macroeconomic stability has been prioritised, the development of the private sector has been encouraged more strongly, and industry has grown, including through foreign investment, although services and agriculture retain a large role in the economy. There are significant differences between the main cities and rural areas, particularly those in remote and mountainous areas, and there are two official spoken languages, Arabic and Amazigh. The Kingdom of Morocco is a constitutional monarchy where the executive is headed by the Head of Government, chosen from the largest party in the directly-elected House of Representatives, while the King chairs the Conseil des Ministres that sets the strategic orientations of policy and other tasks defined by the constitution.
Note: 1. Current prices in purchasing power parity; international dollars per capita.
Source: IMF World Economic Outlook database.
Better growth performance has been hindered by weak productivity gains (Chapter 2) and growth has been too low to generate sufficient employment for new entrants and to address structural shifts in agricultural employment (Chapter 3). Widespread informality not only perpetuates low-quality jobs but holds back productivity gains and growth at the firm level and creates an uneven playing field, thereby hindering efficiency-enhancing competition. Furthermore, the small size of the manufacturing sector limits the scope for innovation to bring about productivity gains and perpetuates the low level of sophistication of products and low value added. While steady population growth and a young population are an asset, labour force participation is low, particularly for women and youth. Education outcomes are improving but remain relatively weak and a significant school reform is underway. Pervasive informality, with up to two-thirds of the employed in informal jobs, has perpetuated low quality jobs, low wages and insufficient social protection.
Morocco is undertaking significant reforms to address many of these issues, informed by a national dialogue around the New Development Model. The main effort to boost private sector investment is the new Charte de l'Investissement, which combines a new system of investment incentives with improvements in governance and efforts to improve business conditions. At the same time, the government is gradually phasing out long-standing butane gas subsidies for households and replacing them with a targeted social assistance programme, compulsory registration in a new social register and a large-scale expansion of health coverage. These reforms aim to achieve a significant strengthening of the social safety net, while bringing more people into the formal economy.
Against this background, the main messages of this first Economic Survey of Morocco are:
Economic growth continues to rebound, inflation has fallen, and public debt is around 70% of GDP. Plans to narrow the public deficit by 2026, while revamping both spending and taxation including reallocating some subsidies to the new social assistance programme, should be implemented. A debt target and expenditure rule would help to manage spending pressures. Measures to increase formalisation and tax and non-tax revenues in specific areas would help to finance structural reforms and broaden the tax base.
To achieve climate goals, a broad-based approach to carbon taxation should be considered together with supporting policies. Further efforts to tackle water shortages, including higher fees over time, are needed.
Productivity has improved, but further convergence would be boosted by upskilling the labour force, increasing the efficiency of public investment, building on existing initiatives to encourage private investment, ensuring competition and a level playing field, reducing corruption, and ensuring favourable conditions for digitalisation and innovation.
Morocco has a young and growing workforce, but high informality and low levels of labour-force participation for women and youth. Incentives to formalise should be improved, including in the design of labour regulations and social contributions, and enforcement strengthened. Active labour-market policies need to be streamlined. A range of measures to remove barriers to women playing a larger role in the labour force is needed, including improved access to childcare. The education system needs to be strengthened, including to provide more help for those falling behind.
The Moroccan economy is recovering steadily from the pandemic and the energy and food price shocks, despite the 2023 devastating earthquake and recent droughts, but GDP remains below the pre-pandemic trend. Over the past 20 years, annual GDP growth has averaged around 3.7% as the economy has benefitted from the improvement in productivity and the workforce with around 2.4% growth in per capita terms. Activity fell sharply during the pandemic, including tourism, but recovered strongly and growth since 2021 has averaged around 4.3%.
A 6.8 magnitude earthquake hit central Morocco on 8 September 2023, claiming around 3 000 lives and 6 000 injuries. The earthquake, with its epicentre around 80 km from Marrakech, the fourth-largest city, severely affected several provinces including Al-Haouz, Azilal, and Chichaoua. The Ministry of Interior reported extensive damages to 60 000 buildings, especially in rural and impoverished villages. Despite its high humanitarian toll, the earthquake had a limited impact on the economy. The State quickly responded by providing rescue and medical services, and relief supplies while mobilising resources from international, governmental, and civic agencies. Funds raised from domestic donors reached MAD 19.6 billion by the end of 2023. The total expense of the reconstruction programme is anticipated to reach MAD 120 billion (around 8% of GDP) by 2027.
Growth has been strong over recent quarters, supported by the recovery of agricultural production as the drought has eased (Figure 1.2). GDP grew by 3.4% in 2023. Foreign inbound tourism reached a new record of 14 million tourists in 2023, up from 11 million in 2022. Private and public consumption increased by 3.9% and 4.1%, contributing 2.4 and 0.8 points respectively to GDP growth. Investment grew by 1.5% and is expected to strengthen in 2024 as capacity utilisation rates have reached unprecedented levels.
Source: CEIC; High Commission for Planning; Bank Al-Maghrib; Foreign Exchange Office; and OECD calculations.
While Morocco has experienced low and stable inflation over past decades, inflation picked up to over 10% in early 2023 as a result of higher energy and food prices. The current account deficit widened sharply in 2022 due to higher energy and food imports while tourism income was still recovering but remittances were stronger. The exchange rate depreciated during this period but has returned towards the previous range as commodity prices have moderated. In September 2022, the Bank Al-Maghrib (BAM) raised its policy interest rate from 1.5% to 2%, followed by two additional consecutive hikes by 5 bp, reaching 3% in March 2023 (Figure 1.3, Panel B). In 2023, both headline and core inflation started to ease, thanks to falling energy prices, stabilising food prices, timely policy tightening, and budgetary support measures benefitting importers and transporters. The current account deficit shrank to 0.6% of GDP in 2023 on the back of soaring car exports, tourism receipts and remittances. Subsidies for gas and food products also helped reduce inflationary pressures but are set to be partially phased out. Inflation has fallen significantly in both headline and core terms and is expected to stabilise in 2024 at around 2%, although there remain uncertainties mainly due to external factors, such as international geopolitical tensions. Easing inflationary pressures allowed policy rates to be cut in June 2024 to 2.75%. Monetary policy should continue to be set using a data-dependent approach, easing policy as inflation durably subsides.
Source: CEIC; High Commission for Planning; Bank Al-Maghrib; OECD calculations.
The agricultural sector has been hit by drought
The agricultural sector, accounting for 11% of GDP, is a key part of the economy, particularly in terms of employment, incomes and activity in rural areas. Agricultural production is volatile, particularly for cereals, and vulnerable to external factors, such as climate change. Cereal production decreased notably in 2016 and 2022 due to drought (Figure 1.4., Panel A), although agricultural production increased by 6.2% in 2023, contributing 0.7 percentage points to GDP growth. Given the severe drought and international food price hikes, the government provided subsidies to licensed importers of soft wheat and raw sugar, as well as to road freight providers, from March 2022 to May 2024. Additionally, the Generation Green (Génération Green) 2020-2030 and the Green Morocco Plan (Plan Maroc Vert) 2008-2020 have encouraged non-cereal production, such as fruits and garden crops in areas with low cereal yields (Belahsen, Khellaf and Belahsen, 2016[1]). Thanks to these efforts, agricultural value added is now less vulnerable to climate change: while the drought in 1995 severely affected agricultural value added, the drought in 2022 had a milder impact (Figure 1.4., Panel B).
Note: Mt refers to million tonnes.
Source: OECD calculations based on Ministry of Agriculture, Fisheries, Rural Development, Water and Forests and High Commission for Planning;.
The labour market recovery has been weak
The labour market has underperformed during the recovery. The employment and labour participation rates have continued to follow a downward trend, aggravated by the most recent downturn. Labour participation of women remained exceptionally low at 19% in 2023, compared to 69% for men (Figure 1.5), despite a temporary pick-up during the pandemic.
The unemployment rate, which increased during the pandemic, reached 13% in 2023, the highest over the past two decades (Figure 1.5), with the unemployment rate for youth aged 15-24 reaching a historical record of 35.8%. Unemployment is primarily a phenomenon of young urban people. The labour market has not been able to generate a sufficient number of good-quality jobs to integrate young people and to offset structural changes in agricultural employment, while the skills of young people are not always well matched to employers’ needs and there are barriers to their participation in formal jobs (see Chapter 3). Efforts to integrate youth into the workforce are increasingly urgent given rising unemployment, as well as to support long-term growth.
In light of this, the government has undertaken several recent initiatives to boost employment, including the Awrach and Forsa programmes. The Awrach, launched in January 2022, aimed to create 250 000 direct jobs over two years, focussing on those affected by the pandemic, and has a budget of MAD 2.3 billion (USD 244 million). The Forsa programme focuses on fostering entrepreneurship, offering financial aid of MAD 100 000 to support young entrepreneurs’ projects. By 2023, the programme received over 30 000 project proposals and provided funding to 1 400 projects. The government aims to increase the share of female beneficiaries of the Forsa programme from 20% to 32%, highlighting efforts to address the significant gender disparities in labour market outcomes (see Chapter 3). These programmes will continue into 2024, but provisions should be improved and extended in some way with measures in place to monitor and evaluate their impact to meet on-going challenges with a strong focus on encouraging people to move into stable good-quality jobs.
Source: High Commission for Planning.
Morocco has an open economy with foreign investment, exports and remittances being important drivers of growth
Morocco benefits from its open economy, trade and FDI. Morocco is tightly integrated into global value chains, particularly with those of EU countries. The country is successfully transforming its economy from exporting mostly raw materials in the 1980s and 1990s to exporting higher-value-added products, including electronics, automobiles, aeronautics, and fertilisers. European car companies have established factories, while other manufacturers from Japan and China increased their investment in industries, such as automobile components manufacturing, creating strong industrial ecosystems. This has increased trade and jobs, although Morocco has often specialised in lower value activities in these supply-chains and the role of domestic firms is limited in many areas. Chemicals, including phosphates and derived fertilisers produced by OCP Group, accounted for 17% of exports in 2023, while machinery and transport equipment accounted for a combined share of 41% (Figure 1.6., Panel A). Imports of these items also accounted for a significant share of total imports, reflecting Morocco’s growing participation in global value chains. Additionally, as a net energy importer, fuels ranked as the third-largest item of imports, accounting for around 17% in 2023 (Figure 1.6., Panel B). Morocco’s trade is concentrated on the European Union. Spain and France were the two biggest export destinations, collectively accounting for almost 39% of total direct goods exports in 2022 (Figure 1.7., Panel A). China is growing in importance as a trade partner, becoming the second largest exporter to Morocco, and accounting for some 10% of total Moroccan imports in 2022 (Figure 1.7).
Source: Office des Changes.
Source: Office des Changes.
Amid these evolving trade dynamics, Morocco’s ability to attract foreign direct investment (FDI) remains crucial for productivity growth. In 2023, inward FDI stocks to Morocco reached MAD 685.5 billion, a 3.5% increase compared to 2022 (Figure 1.8., Panel A) and around 50% of GDP. France, consistently leading as the largest source of FDI, contributed to 30.8% of the total stock, followed by the United Arab Emirates (20.3%) and Spain (8%).
Given large-scale emigration and a large diaspora, remittances play a key role in Morocco’s economy, serving both as a significant source of income for its people and as a stabilising force for the country’s foreign official reserves. Remittances have been on the rise, with a historic record of MAD 115.3 billion in 2023 (Figure 1.8., Panel B). Around 31% of the remittances in 2023 originated from France, followed by Spain (13%) and Italy (9%). Morocco could further harness this potential, for example, by considering the introduction of diaspora bonds. The bonds could help facilitate investment in local enterprises and education, enhancing the impact of remittances beyond traditional financial support, mirroring the success witnessed in other countries such as Israel and India (Gelb et al., 2021[2]).
Source: OECD calculations based on Office des Changes data.
The recovery is projected to continue
Going forward, the Moroccan economy is projected to continue its steady recovery path. Real GDP is expected to grow by 3.5% in 2024 and 4.0% in 2025 (Table 1.1). The main drivers of growth will be the service sector and exports. Manufacturing industries, including automobiles and electronics, will continue to expand. The government’s post-earthquake reconstruction programme, planned until 2027, and incentives of the new Investment Charter will bolster public and private investment. Economic recovery with robust remittance inflows, the higher minimum wage and subdued inflation will improve consumers’ disposable income and boost consumption. The statutory minimum wage increased from a monthly MAD 2 970 (USD 299) to MAD 3 111 (USD 313) in September 2023 and further increases are planned. Exports of goods are expected to slightly moderate in 2024 with demand remaining weak in key export markets, although sales of the automotive sector and chemical products, including phosphates, are expected to rebound. Inflation is projected to gradually decline to 2.3% in 2024 and 2% in 2025, benefiting in particular from easing energy and food prices. However, economic risks are largely tilted to the downside due to continued high uncertainties including international geopolitical tensions, repeated droughts, and the continued weak global economic recovery, in particular of European countries (Table 1.2). Seismic activity poses a reoccurring risk . The IMF flexible credit line (FCL) of USD 5 billion approved in April 2023 until 2025 provides an external buffer against future shocks.
Despite the 2023 earthquake and the international geopolitical context, the tourism sector appears to have been resilient and to be growing strongly. According to the National Airports Office (ONDA), air traffic increased by 32% in 2023, reaching a record of 27.1 million passengers (departing and arriving, including domestic trips), thanks to the introduction of new international flights connecting Moroccan cities to more global destinations. The government’s approval of the operation license of an additional domestic airline, starting from mid-2024, will help enhance competition in the market. Morocco has important assets for tourism including its rich culture and history, together with improving tourism infrastructure. Morocco aims to reach 15 million and 17.5 million tourists in 2025 and 2026. The government has set an ambitious goal of 26 million visitors by 2030, expecting to benefit from co-hosting the 2030 soccer World Cup, which will help the country further develop its tourism infrastructure, including transportation and accommodation.
(1) Contributions to changes in real GDP, actual amount in the first column.
Source: Morocco National Accounts; Ministry of Economy and Finance; OECD Economic Outlook 115 database and updates
Morocco’s monetary framework and exchange rate regime have contributed to stable inflation over the past decades (Box 1.1). The fixed exchange rate regime adopted in 1973, coupled with capital controls, provided policy room for effective and autonomous monetary policy. This regime helped stabilise the fluctuation of the value of the dirham against major currencies, including the euro and US dollar, providing a nominal anchor to the economy and predictability for trade and foreign investment. Following the surge of inflation in 2022, the central bank raised the policy interest rate in late 2022 and the exchange rate modestly depreciated. Inflation has now returned to lower levels and this created room for lower policy interest rates from June 2024.
The design of the monetary regime needs to ensure a stable domestic economy and predictability for foreign trade, while – as a commodity importer and with a large share of food and energy in consumption – managing external shocks, avoiding financial instability, including from global developments, and managing terms of trade gains. Developing deeper domestic financial markets and accessing international capital markets would help to manage risks. Continued careful management of foreign reserves remains essential in supporting economic resilience and market confidence during the transition towards more flexible exchange rates and a more open capital account as envisaged.
The setting of exchange rate policy falls under the responsibility of the Ministry of Economy and Finance, as specified in the 1978 decree, while the implementation of this policy is ensured by the central bank (Article 11 of Bank Al-Maghrib’s statute), including holding and managing the country’s foreign exchange reserves (Article 12).
Rules relating to foreign exchange transactions are proposed by the Exchange Office (Office des Changes), which is a state agency subordinated to the Ministry of Economy and Finance, and are authorised by the Ministry. According to the latest set of instructions, the dirham is fully convertible on the current account, as well as for inward foreign direct investment transactions and corporate borrowing from abroad.
In 2018, Morocco pledged to take steps towards a flexible exchange rate regime and reduced controls on capital flows, in parallel with the adaptation of the monetary policy framework to inflation targeting. As a first step, the government initiated a voluntary and gradual transition by first allowing fluctuation of the exchange rate within a band of 2.5% (instead of the former 0.3%) from the reference exchange rate, based on a basket composed of 60% euro and 40% US dollar. In 2020, this fluctuation band was further widened to 5%. Since 1 January 2024, the central bank has been using a new methodology for determining foreign exchange reference rates for the revaluation of assets and liabilities denominated in foreign exchange based on interbank transactions carried out by market makers.
A roadmap was developed to manage the operational implementation of the transition and the central bank has implemented measures to improve the liquidity of the interbank foreign exchange market such as the use of foreign exchange auctions. The central bank has also initiated informational awareness campaigns to banks and major companies on the major economic implications of the reforms, particularly on the notion of exchange rate risk and the use of hedging instruments.
In January 2024, Morocco further relaxed regulations on international capital flows, for example allowing for Moroccan traders to pay in advance to foreign suppliers to facilitate international trade. Additionally, the tourism travel allowance was significantly raised from MAD 45 000 (USD 4 600) before 2022 to MAD 100 000 (USD 9 970) per year, improving global business engagement. In addition, tourists can add 30% of their personal income tax paid and business travellers up to 100% of their personal or corporate income tax paid up to a ceiling of MAD 500 000 or 1 000 000 respectively. These measures reflect Morocco’s strategic efforts to enhance its financial market’s openness and integration with the global economy.
During this transitionary period, Morocco’s currency has shown relative stability against major currencies, while the widening of the fluctuation band of the exchange rate started to play a role as a shock absorber (World Bank, 2023[3]). Nominal effective exchange rates remained largely stable during and after the pandemic and well anchored against other currencies, especially the euro. Foreign official reserves continued to remain adequate. At the end of 2023, official reserves stood at MAD 358 billion, which equates to around 5 months of imports. The reserves provide Morocco with a critical safety net against external shocks.
Source: Bank Al-Maghrib; Office des Changes.
Although the pandemic and the subsequent energy crisis slowed the pace of these reforms, Morocco should continue its gradual implementation of the transition to a more flexible exchange rate regime and a more open capital account by making progress in the preparatory works. This would be supported by an inflation targeting framework that can effectively reduce inflation and its volatility, and raise GDP (Fratzscher, Grosse-Steffen and Rieth, 2020[4]). The expected gain for Morocco from the stabilisation in output and inflation from this shift is anticipated to outweigh the costs of increased volatility in exchange rates and interest rates (IMF, 2023[5]). Past experiences from Poland and Chile suggest that Morocco could successfully lower the sensitivity of inflation to shocks after the introduction of inflation targeting with a flexible exchange rate (Ha, Kose and Ohnsorge, 2019[6]).
The reform of the monetary and external framework should go hand in hand with other policy efforts to attain the prerequisites, which include maintaining strong macroeconomic fundamentals, the central bank’s credibility and capacity, and enhanced public awareness. In 2024, the central bank continued its preparatory work, for example, adjusting the reference exchange rate to be more consistent with international practice. Enhancing transparency could further strengthen the central bank’s credibility. According to the IMF, the revision of Bank Al-Maghrib’s statute in 2019, following the previous statute in 2006, has created momentum for establishing a high level of transparency through a clearer mandate on price and financial stability (IMF, 2022[7]). Publishing detailed minutes of monetary policy board meetings, for example, could improve communication with the public and markets. Enhancing disclosures on the framework and operational modalities in the realms of financial stress testing and FX reserve management would help market participants to better understand and anticipate central bank actions. More could be done to bolster the independence of the central bank. Currently, six out of nine Monetary Board members are appointed by the Head of Government. A more open process for appointment to the Monetary Board and publishing additional information on the selection of Board members would help reinforce the perception of independence and transparency.
The Moroccan financial system has expanded rapidly with its assets reaching 220% of GDP in 2022, but banks appear well-capitalised. The financial system is concentrated (Bank Al-Maghrib, 2023[8]). It comprises of 53 credit institutions (19 conventional banks, 5 participatory banks and 29 finance companies), mostly engaged in traditional financial intermediation and representing nearly 60% of the financial system’s assets. Banks represent a significant part of the financial sector, with a notable concentration among large institutions (Figure 1.9). The three largest banks represent approximately 62% of the total assets, loans, and deposits of the banking sector (Figure 1.9., Panel B) (Bank Al-Maghrib, 2023[9]). The Systemic Risks Coordination and Monitoring Committee (CCSRS) conducts macroprudential supervision of the financial system. Developing participatory finance in Morocco is a priority for the authorities and it has grown rapidly in recent years.
High banking concentration implies low competitive pressure and greater profitability for banks (above 8% returns on average equity (ROAE) on average). Competition in the Moroccan banking sector has improved in recent years, due to continuous strengthening of the regulatory framework, liberalisation of banking activity with a significant presence of foreign capital (6 banks and 6 finance companies have majority foreign ownership), and efforts made by the central bank to promote financial inclusion. Morocco would benefit from continuing on-going efforts through a range of programmes to diversify and develop digital banking services and mobile payment solutions (M-banking), expand their access to the entire population (including to small and medium-sized businesses, women, rural areas) and promote financial education programmes.
Source: Bank Al Maghrib, Annual report on banking supervision, 2023.
Banks continued to post solid performance in 2022 and to expand their balance sheets, despite a deceleration of credit growth. Following the slowdown in activity, the energy price shock and higher interest rates, corporate non-performing loans (NPLs) have increased to 11% of all outstanding loans (Figure 1.10). Companies operating in the tourism and hospitality sector continue to have the highest NPL rates, followed by the fishing and construction sectors. Banks’ loan loss provision coverage at an average of 68% in 2022 appears adequate, including for the three systemically important banks. According to the macro-stress exercise carried out by Bank Al-Maghrib covering the years 2023 and 2024, solvency indicators would exceed the minimum regulatory requirements even in the event of significant tensions. Bank Al-Maghrib is in the process of implementing Basel III requirements and in some areas the minimum requirements are already met, including the average Tier 1 capital ratio, which was at 12.4% in 2022 (well above the Basel III minimum of 9%) and the average solvency ratio at 15.6% (well above the minimum of 12%). The short-term liquidity coverage ratio (LCR) was at 170% in 2022. In 2019, Morocco introduced the net stable funding ratio (NSFR) to ensure that banks maintain a minimum amount of stable financial resources to meet minimum funding needs over a one-year period. In addition to the solvency ratio, Bank Al-Maghrib applied the regulatory leverage ratio in 2021 at 3% on both a standalone and consolidated basis in line with international standards. The average leverage ratio of the banking sector was 7.4% at the end of 2022, reflecting a leverage of Moroccan banks.
There are potential vulnerabilities in the real estate and agricultural sectors, where land valuations have fallen and drought persists. The Moroccan banking sector remains exposed to significant risks from the commercial real estate market due to the volume of unsold inventory, stalled construction projects, and delays in the delivery of many projects in major cities. Another potential source of systemic risk is related to climatic factors and drought, with a third of bank loan portfolio exposed to climate risks. Economic damages from extreme drought and flood conditions could be as high as USD 17.5 billion (12% of GDP) (World Bank and Bank Al Maghrib, 2024[1]). The Financial Stability Board’s report (October 2022) uses stress tests to quantify the impact of climate risks on financial stability, by assessing the impact of severe water stress on economic activity and its implications for bank losses. Additionally, the central bank, with the support of the World Bank, recently performed its first systemic climate stress test of the Moroccan banking sector based on Network for the Greening of the Financial Sector (NGFS) reference scenarios.
Source: BAM, ACAPS.Bank AL Maghrib, 2022, Financial Stability Report. Bank AL Maghrib, 2023a, 9th annual report on banking supervision.
The public finances have helped stabilise the economy
The public finances helped to stabilise the economy, notably during the COVID-19 and the energy and food crisis, with the government deficit doubling from around 3½ percent of GDP on average over the period of 2016-19 to peak at over 7% of GDP in 2020. Beyond the play of automatic stabilisers and the existing food and energy subsidy system, discretionary measures helped to mitigate the adverse socio-economic impacts of these shocks. The budget deficit is expected to continue its downward trajectory towards 4% of GDP by end-2024 (Figure 1.11) as supports have been reduced and the economy recovers, despite remaining pressures from the drought and the earthquake. Both tax and non-tax revenues have grown strongly, while subsidies have reduced as global commodity prices have eased.
1. LF: Finance law
Source: National authorities.
The authorities launched a five-year MAD 120 billion (around 8% of GDP) reconstruction programme following the devastating earthquake in the Marrakech–Safi region in September 2023, focusing on rehousing people, rebuilding homes and infrastructure, and improving connectivity. Funding comes from reallocation of budgetary appropriations of already planned programmes, the solidarity fund dedicated for earthquake reconstruction and international cooperation. As of January 2024, 57 596 households had received MAD 2 500 monthly financial assistance and as of March 2024, more than 51 000 households an amount of MAD 20 000 for the first tranche of aid relating to the reconstruction of totally or partially collapsed housing.
Significant changes to spending and taxes are underway, but the deficit is set to narrow in the coming years
A significant reform to the system of social support is underway with the phasing out of energy subsidies and extending health and social security coverage. This reform will benefit many Moroccan families and improves the efficiency and targeting of spending (Table 1.3). In 2022, the government extended health insurance coverage to liberal professions, and the agriculture and craft sectors, in addition to the vulnerable (people previously covered by the Régime d’Assistance Médicale pour les Économiquement Démunis, RAMED). The 2024 budget initiates an additional social protection scheme: the Direct Social Aid Programme (Programme d’Aide Sociale Directe). This new income support includes targeted direct social assistance to vulnerable families with and without children, in addition to a birth allowance and an allowance for orphaned children. By the end of July 2024, 3.8 million families, or more than 12 million people, had benefited. This includes approximately 5.2 million children. In addition, a new housing aid was introduced in 2024, replacing tax incentives in favour of the real estate sector, targeting almost 110 000 housing units (Box 1.2). Taken together, the Direct Social Aid Programme and the medical coverage extension amount to a cost of around MAD 34.5 billion in 2024 (2.3% of GDP).
Note: * Including December 2022 ** For 2023, the figure given represents the actual cost of compensation, including accompanying measures in the transport sector. For 2024, this refers to the funds allocated by the 2024 Finance Act to support consumer prices, including accompanying measures such as the Urban and Interurban Road Transport Reform Support Fund (FART).
Source: “Programmation budgétaire triennale”, “Note de présentation de la loi de finances » and speeches by the Head of Government.
The Moroccan authorities launched a new Direct Housing Aid Programme in January 2024 for a five-year period (2024-2028) at an annual cost of MAD 9.5 billion to support the acquisition of newly built homes.
The programme aims to provide MAD 100 000 for the acquisition of a home with a sale price of less than or equal to MAD 300 000, and MAD 70 000 for the acquisition of a home priced between MAD 300 000 and MAD 700 000, all taxes included.
To qualify, candidates must be first-time home buyers who have not previously received government housing assistance or privileges and sign a final sales contract committing to making the property their primary residence for at least five years from the date of the contract.
To finance the social measures, the Moroccan authorities are phasing out fuel subsidies, alongside other measures. As in many other emerging economies, Morocco has a long history of subsidising energy and food with the aim of alleviating poverty and smoothing price fluctuations. While subsidies have contributed to reducing poverty and preserving household purchasing power, they are costly, distort incentives (including to reduce emissions) and are regressive. The wealthiest 20% of the population disproportionately benefit from subsidies, accounting for 27% of sugar and butane gas subsidies (Ministère de l'Economie et des Finances du Maroc & AFD, 2020[10]). Before 2015, other fuel products, namely diesel, gasoline, and industrial fuel were also subsidised but the government phased out subsidies on these products, coinciding with easing global energy price pressures. Under the old system, subsidy amounts were determined based on the pricing structure of subsidised products, intended for domestic consumption, which includes all associated costs, taxes and government-set profit margins added to the import price. The Compensation Fund covers the discrepancy between the cost of these products and the price established by authorities. The government is now gradually phasing out the main subsidies. In 2022, subsidies peaked at MAD 42.1 billion (3.2% of GDP), with subsidies for butane gas amounting to nearly MAD 22 billion, reflecting increased international prices. In 2022, to maintain price stability, safeguard household purchasing power and ensure a stable supply of essential goods, other temporary subsidies were also introduced, notably for the transport sector (MAD 4.4 billion), the anti-drought plan (MAD 10 billion), the suspension of import duties on wheat and the reactivation of the soft wheat restitution system (MAD 9.3 billion), as well as the transfer of MAD 5 billion to the electricity company ONEE to cope with rising production costs of electricity. The three-year budgetary programme to 2026 provides for a reduction in subsidies from MAD 29.7 billion (2% of GDP) in 2023 to MAD 7.8 billion (0.5% of GDP) in 2026.
At the same time, the government is raising additional revenues. The 2024 Finance Law streamlined VAT rates from four different rates to two (10% and 20%) by 2026. Some rates are being increased, such as for electricity, while others are being lowered, such as renewable energy and a range of basic necessities including water and medicines that are now zero-rated to meet the objective of maintaining the purchasing power of households. The reform aims to make the VAT system less distortionary between different goods and services. The 2024 Finance Law also introduced a VAT withholding system to combat potentially fraudulent invoicing. Taken together, these measures are expected to raise revenues very modestly (Ministère de l'Economie et des Finances, Maroc, 2023[11]).
The government is developing and making use of off-balance sheet financing mechanisms (such as leaseback operations) and public-private partnerships (PPPs), together with continued efforts to rationalise public portfolio management, including through the progressive implementation of provisions of the law on the reform of state-owned enterprises (see Chapter 2). This reform primarily targets enhancing the financial interaction between the budget and SOEs by streamlining transfers to these entities and enhancing their performance, thereby augmenting dividends to the budget’s advantage.
Taken together, the medium-term fiscal framework 2024-2026 projections with currently legislated and planned measures will narrow the budget deficit, decreasing gradually from 4.3% of GDP in 2023 to 3% in 2026. As well as the large increase in social spending and the significant saving from subsidy reform (reaching around 1½ - of GDP on average per year), the public finances will be boosted by the gradual return of investment to pre-pandemic levels (-0.9 percentage points of GDP), as well as the tax reform (‑0.3 percentage point of GDP) (Figure 1.12). These plans should be implemented to lower the deficit to ensure favourable debt dynamics and to avoid undue stimulus to the economy. Any further increases in spending or tax cuts should be met within the overall framework of this narrowing of the deficit.
Improvement in the central budget balance, percentage of GDP
Note: The graph shows the cumulative evolution of different components of revenues and expenditures on the budget balance as a percentage of GDP. For investment and subsidies, the comparison is made with the 2023 level.
Source: OECD calculations based on Document de programmation budgétaire Triennale globale pour la période 2024-2026, Ministère de l’Économie et des Finances.
Debt appears sustainable but there are longer-term pressures
Owing to prudent fiscal policy choices, Morocco’s debt-to-GDP ratio was broadly stable in the years prior to the pandemic and is set to be on a downward path in a range of scenarios looking ahead (Box 1.3). The central government’s debt-to-GDP ratio, which significantly increased during the COVID-19 crisis, has decreased from a peak of 72.2% in 2020 to 69.5% in 2023. However, given favourable growth dynamics with interest rates below nominal growth, the return to a deficit of around 3% should be enough to maintain the government-debt to ratio broadly flat as it was in the pre-pandemic years. In 2023, the central government debt ratio is broadly in line with economies in the region and many similar economies. Interest on government debt is mostly at fixed rates with the external debt share around 24% of the total and average debt maturity close to seven years. An analysis of the future debt path suggests that under current policies, the debt ratio will remain modestly below current levels (Box 1.3), although Morocco could eventually face demographic headwinds if any extension of the pension system is not adequately funded.
Even though the public finances are on a solid footing and Morocco has a young population with a strong growth potential, prudent management of the public finances is needed to ensure macroeconomic stability. While the current debt burden is manageable and returning to the pattern of past deficits would be enough to maintain its stability, there is a case to use favourable periods of revenue to reduce the debt ratio to preserve fiscal space to manage future downturns. In addition, there is a strong social pressure to improve outcomes and areas, including higher education, where additional investment is needed, and to finance necessary structural reforms.
This Box sets out paths for the debt-to-GDP ratio under current policies. Due to a lack of consolidated general government debt for Morocco, only the central debt is considered. Local government debt and social security are not included, although the latter recorded surpluses in recent years.
In the baseline scenario based on currently legislated policies with the assumption of growth at its potential from 2026 until 2050 (4.1% on average over that period), a GDP deflator of its historical average (2%), interest rates at 3.2% and the primary budget deficit shrinking gradually to its medium-term objective of -0.5% by 2026, the debt-to-GDP ratio would decrease steadily to 45.1% by 2050 due to favourable debt dynamics as the economy expands (Figure 1.13).
In a scenario where the impact of growth-enhancing structural reforms quantified in this Survey is taken into account, the high potential for structural reforms to raise growth would put the debt ratio on a stronger downward growth.
Note: The baseline scenario assumes that GDP growth returns to its potential by 2050 (4.1% on average between 2026 and 2050), GDP deflator is 2%, interest rates (apparent interest rate) on debt stabilise at 3.2% and the primary deficit shrinking gradually to its medium-term objective (-0.5% of GDP by 2026).
Source: OECD calculations based on Ministry of Economy and Finance data.
While Morocco currently has a young population, experience from OECD countries shows that great care will be needed in the design of the pension system to ensure that it is adequately funded over the long term, as well as ensuring pension adequacy, fairness and appropriate risk sharing. The government is planning major reforms to the pension system through the process of social dialogue to improve the sustainability of existing commitments and strengthen the public and private pension systems, based on guiding principles established by the Commission on Pension Reform. This includes raising the coverage of the pension system, which currently only covers around half of all workers and where the majority of older people currently have no retirement coverage. The reserves of the existing pension funds are expected to be exhausted in the coming years. Work to implement a new approach to pensions should continue; it is essential that this is well-designed to be on sustainable and sound financial footing. Building up sufficient reserves and planning on a long-term basis as in Canada (including building up large reserves) would help avoid the challenges many OECD countries are facing as their populations age.
Further strengthening the fiscal framework would help manage spending pressures
Good fiscal outcomes prior to the pandemic were supported by a strict “golden rule” introduced by the 2015 Organic Finance Law (Box 1.4), which strengthened the medium-term budget framework, contributing to keeping the budget deficit on-track and ensuring a medium-term focus to fiscal management. Combined with effective debt management, this has helped to ensure fiscal credibility and to keep borrowing costs at reasonable levels. However, the current fiscal framework does not have an adjustment mechanism that would ensure the return of the debt ratio to previous levels following shocks. In addition, the economy and commodity prices were relatively stable between 2015 and 2019 and so the ability of the golden rule to contribute to cyclical management was not rigorously tested. However, this may change in the years ahead and so a more flexible approach to cyclical management could be warranted, while keeping the fiscal discipline imposed by the existing system.
In Morocco, debt issuance is governed by the 2011 Constitution and the 2015 Organic Finance Law. The Constitution empowers Parliament and the Government (Article 77) to ensure macroeconomic balance, while the Organic Finance Law introduces a binding “golden rule” limiting public borrowing to investment financing and debt rollover. While the government fully adhered to the golden rule before the pandemic, this rule was suspended during the pandemic.
A three-year budgetary framework anchoring fiscal policy with spending and revenue forecasts three years ahead based on macroeconomic projections and future tax/spending measures accompanies the annual Finance Law, aimed at enhancing the credibility and transparency of fiscal policy and providing a medium-term vision.
The fiscal framework should be further strengthened, while providing flexibility in a well-defined way. A medium-term debt target with an expenditure rule and a safeguard mechanism would work in that direction. First, a new medium-term debt ratio target would help to ensure that the debt ratio does not trend upwards and would set a high-level anchor for the Organic Finance Law. Second, a multi-year limit on primary spending growth, alongside periodic spending reviews, would help to manage the risk of spending overruns or pressures to raise spending relative to the current medium-term plan, including by revising it to a higher level, and strengthen the provisions that exist in the Organic Finance Law. This could initially be based on the existing medium-term plans to ensure they are implemented and to allow for the planned increase in social spending, but after 2026 could be more closely aligned to the growth of trend GDP. This rule would strengthen the existing political commitment to implement the medium-term budget plan, as well as eventually setting its level as a function of economic circumstances. Third, a safeguard mechanism could allow for the suspension of the expenditure rule in exceptional circumstances subject to the approval of Parliament.
The creation of an independent fiscal council, whose design could be inspired by the OECD principles for IFIs (OECD, 2014[12]), could contribute to the assessment of ex ante and ex post compliance with the fiscal rules and the use of the exceptional circumstances clause. Such a body could also give an expert opinion on the macroeconomic and budgetary assumptions which underlie the Finance Law before its presentation to Parliament. Taken together, this would increase transparency to the public and markets and help to ensure the fiscal rules are effective. The OECD previously found that certain budgetary risks, such as those associated with public debt, are monitored by the Ministry of Economy and Finance, but in an ad hoc manner and recommended that Morocco should put in place the first milestones of a budgetary risk management framework (OECD, 2023[13]). The 2024-2026 budgetary programming has outlined key medium-term budgetary risks and contingent mitigation measures. Continuing to enrich the scope of the risk analysis exercise including providing a quantification of the main identified risks, paired with a coordinated approach to risk monitoring, would help to ensure the resiliency of public finances.
Spending pressures need to be managed and efficiency increased
With pressures for higher spending in some areas and to finance growth-enhancing measures, it is important that spending is well-managed. Government spending is about 33% of GDP (as reported by the IMF, consolidating the general budget of the central government, the Autonomous State-Managed Services and Special Treasury accounts with statistical adjustment), well below most OECD countries, but in line with neighbours or some OECD members like Türkiye (Figure 1.14). However, this figure is limited to the central government budget. With the inclusion of sub-central governments, social security funds and quasi fiscal funds (Box 1.5), Morocco’s government is closer in size to those of OECD countries at above 40% of GDP in 2021, the latest year for which all the required data are available (this is an upper limit as not all transfers across accounts are accounted for and hence there may be double counting).
Note: For Morocco, revenues and expenditures are for the central government.
Source: IMF World Economic Outlook database.
Morocco does not compile data comparable to general government accounts in OECD countries. The major difference between the international definition and the Moroccan is the exclusion of the social security accounts, the SOEs producing public services, and the sub-national government levels. As there are transfers across accounts, these cannot simply be aggregated with other parts of the government’s balance sheet.
The Moroccan State budget is basically the central government budget. This central government budget comprises:
The General Budget (Budget général). This is the cornerstone of the central budget (75.7% of central expenditures based on the 2024 finance law). On the expenditure side, it includes operating expenses, investment outlays, and debt service costs. On the revenue side, it covers taxes, proceeds from fines, remuneration for services rendered and user charges, donations, rental income from state property and sales, proceeds from the transfer of movable and immovable property, royalties and profit shares as well as resources and financial contributions from SOEs.
Autonomous State-Managed Services (SEGMA : Services de l’État gérés de manière autonome). SEGMA (0.4% of central expenditures based on the 2024 finance law) are service providers that lack legal person status and rely on their own resources to cover expenditures not charged to the general budget. The primary goal of SEGMAs, which consist largely of provincial hospitals and training centres, is to provide public services for remuneration to users at the sub-central level. SEGMA have budgetary autonomy and must generate at least 30% of their resources from their own revenues. Those failing to meet this requirement are abolished. A shortfall in operating revenue can be compensated by a balancing subsidy transfer from the general budget.
Special Treasury Accounts (CST : Comptes spéciaux du Trésor). These accounts track revenues earmarked for specific expenditures such as for specialised or multi-year operations, regardless of fiscal year boundaries, that cannot conveniently be included in the general budget framework. These accounting operations are tied to the application of legislation, regulation, or contractual obligations predating the creation of the account. On the basis of the 2024 finance law, these accounts represent 24% of central expenditures.
At a sub-central level, local elected authorities and their associations (the so-called groupements) manage budgets with two main parts: the operating budget and the investment budget, which may also include annexes and special accounts. Local authorities include regions, prefectures or provinces, urban and rural municipalities, while their associations encompass inter-regional cooperation committees and groups of local authorities.
Resources for local authorities come from taxes, royalties and service fees, tax sharing with the central government (30% of VAT, 5% of personal and corporate income tax receipts and 20% of insurance contract taxes), state or other public legal entity subsidies, authorised borrowing proceeds, property and equity income, proceeds from joint funds, and donations. Similarly, group resources include contributions from member authorities, state subsidies, transferred service revenues, asset income, borrowing proceeds, and donations.
Expenditures cover operational costs like personnel, maintenance, debt servicing, subsidies, and contributions, as well as capital expenditures such as new construction, buildings, roads, local interest equipment, loan repayments, and contributions to projects relevant to local authorities. Group expenditures reflect the operational and capital needs of their collective operations.
The planned revenues and expenditures in 2024 for local authorities’ budgets amount to MAD 49.5 billion and MAD 39.8 billion, respectively, compared to MAD 350.5 billion and MAD 435.4 billion for the state budget (Trésorerie Générale du Royaume, 2023[14]).
Concerning the social security sector, total contributions and benefits amounted to MAD 67.4 billion and MAD 59.8 billion, respectively, for pension funds (pension fund expenditures do not include military pension schemes) and MAD 14.8 billion and MAD 12.5 billion for health insurance funds in 2021 (Source: Autorité de Contrôle des Assurances et de la Prévoyance Sociale).
In addition to the central and regional budgets and social security funds, there are also sizeable public funds handled by public organisations that deliver public goods and services (OECD, 2019[15]) (Ministère de l'Économie et des Finances, 2023[16]). These bodies do not only deliver the services purchased by the government, as would be common in other countries, but they may also collect specific taxes (taxes parafiscales) that contribute to the funding of their spending. The largest of such taxes (60% of the total) is the professional training tax collected by CNSS (Caisse Nationale de Sécurité Sociale) on behalf of the training agency OFPPT (Office de la Formation Professionnelle et de la Promotion du Travail), but there are also such taxes on imports and on television sets among others. Such taxes amounted to 0.4% of GDP in 2022.
Note: Pension fund expenditure does not include military pension schemes.
Source : Trésorerie Générale du Royaume; Direction des Entreprises Publiques et de la Privatisation; Autorité de Contrôle des Assurances et de la Prévoyance Sociale.
Adding up spending by the various entities in Table 1.4, while accounting for transfers between accounts (in particular between the general budget and the special treasury accounts and the sub-central budget accounts, respectively) would result in government spending of 40.6% in 2021. Revenues would also be 36.2% of GDP, comparable to the levels of many OECD countries.
Comparison with other countries on what public funds are spent on is not easy as only the central government funds are reported. Moreover, the data are by government department, without classifying how much is spent by functional or economic category. Otherwise, the budget data, at least at the central level, are published on a regular basis and in a comprehensive manner, with a separate lengthy report on each published account. Moreover, few countries publish their budget to the extent of granularity Morocco does with budget tables spreading over hundreds of pages. Classifying them by economic and functional category (in addition to reporting social security fund and regional data) would allow government officials and researchers alike to make a better use of this wealth of information.
Source : OECD calculations based on data provided by the Ministère de l’Économie et des Finances (Trésorerie Générale du Royaume).
Raising the effectiveness and efficiency of public spending
Public spending on health and pensions has been lower than in OECD countries, reflecting low coverage rates and high out-of-pocket spending, although this will change in the light of recent efforts to raise public health insurance coverage. Public investment is higher than in most OECD countries as a share of GDP given high investment needs. The efficiency of public spending needs to be improved to ease pressures on the public finances and to improve outcomes (see Chapter 2) and warrants systematic evaluation, for example through spending reviews. Morocco spends a higher share of GDP on education than most OECD countries (Figure 1.15). Given the relatively poor outcomes on various education performance indicators (see Chapter 3), it would be desirable to conduct a systemic evaluation of education spending to identify potential sources of improvements and efficiency gains alongside existing reform efforts. Morocco has a large school-age population, but that alone cannot explain the high level of spending. Research links education spending inefficiency to institutional factors, such as absenteeism by both teachers and students (Fayad, Auclari, G. and Dua, A., 2023[17]). Health spending at 6% of the GDP is in line with lower OECD spenders, though given the high share of out-of-pocket spending (Special Commission on the Development Model, 2021[18]) and the relatively low coverage in 2021, there is room to increase efficiency in this area as insurance coverage is expanded.
Note: For OECD members, all data are on National Account basis. As for Morocco, public investment spending is based on National Accounts standards, while the other items approximate such a spending definition.
Source: OECD Public Finance database and Moroccan authorities.
Public procurement is a powerful tool to spur competition in public markets and increase the efficiency of spending. In Morocco, the size of the public procurement market is 15-17% of GDP, reflecting the important role of the government in the economy. The laws governing public procurement have undergone profound changes in recent years with decree No. 2-22-431 of 8 March 2023 being the most recent. The earlier limit of MAD 200 000 set for acquisitions by purchase order from public institutions increased to MAD 500 000 from 1 September 2023. The reforms brought about a number of positive developments, such as the inclusion of sustainable development elements and innovation, ensuring direct payment of contractors and harmonising the framework for all stakeholders, making Morocco’s public procurement system the most advanced in the MENA region. A simplified process for SMEs has also been adopted. While ministries and public enterprises allot public contracts with a quota for SMEs, a proven approach to enhance competition is to require the division of large public contracts into smaller lots without affecting the feasibility and efficiency of the work to be delivered, especially in countries with many very small firms. Monitoring and implementation of sustainability and innovation in public procurement need to be ensured to have the desired impact. It would be useful to assess the impact in applying the national preference principle. The introduction of the reference price can serve as a benchmark but could potentially lead to collusion and higher prices and needs to be carefully evaluated. The public procurement process can be lengthy and is hampered by unsuccessful tenders, in part, due to a lack of capacity in some areas. In Morocco, there is no dedicated profession of public procurement specialist with the work carried out by general civil servants using procurement manuals detailing purchasing and logistics functions and the role may not be a popular assignment due to potential suspicion of corruption. Ideally, the job should be done by highly skilled and specialised professionals, but at a minimum a competency framework should be established to ensure high standards. A study has been carried out on how to professionalise the public purchaser function with suggested measures to adopt.
There is room to raise revenues
To finance reforms and to broaden the tax base to allow lower rates, there is a need to find additional sources of revenue. Morocco’s official public revenues at about a quarter of GDP are comparable to those in neighbouring countries and emerging economies, though lower than in most OECD members. By the broad definition, however, as in Box 1.5, the size of revenues at 36% of GDP would be in line with those of many OECD countries. While in the past decades revenues were sufficient to finance most spending without having to resort to borrowing too much, ambitious welfare programmes and investment needs increase pressure on spending and structural reforms may require spending, while long-term pensions commitment will build as the population eventually ages. Morocco should strengthen the design of each type of tax, while maintaining efficiency and fairness (OECD, 2019[15]).
Currently, most revenues (nearly 40%) come from indirect taxes, in particular the VAT, as in many countries at similar income levels (Figure 1.16). The recent streamlining of the VAT will likely strengthen this revenue source. Taxes on income, profits and capital gains represent a quarter of total revenues (8% of GDP) and are a much less important source of revenue than in OECD countries, partly related to the very high level of informality and compliance issues. Less than 4 million private sector employees declare with the tax authorities, even though more than ten million are working. Moreover, the income tax system is highly progressive with the top rate at 38% and less than 5% of private sector taxpayers contributing more than three quarters of personal income taxes paid by private sector employees (Figure 1.16). At the other extreme, 80% of private sector taxpayers contribute only 1.6% of those taxes. This is due to a tax-free allowance of MAD 30 000 per year. All this, however, is just a quarter of taxes on income, profits and capital gains: personal income taxes collected from civil servants play an important role given that they tend to be better paid, it is easier to collect revenue from them and the civil service in Morocco is relatively large. Overall, there is room to improve the collection of personal income taxes from the private sector by reducing informality, as well as more stringent compliance measures. As discussed in Chapter 2, this should combine more effective enforcement of tax obligations and measures to encourage voluntary compliance, alongside a range of other measures to encourage formalisation.
Note: Panel B: The tax-free allowance is MAD 30 000. Private sector only.
Source: OECD Public Finance database; OECD Details of Public Revenue for Egypt, Morocco, South Africa, Thailand and Tunisia database; Ministry of Economy and Finance of Morocco.
Morocco has a progressive corporate income tax system. In 2022, 77 firms, which constitute a mere 0.1% of declaring firms, contributed half of corporate income taxes and 3.1% of declarants contributed 90%. By sector, the largest contributors were banks and insurance companies with a 22.5% share, followed by firms in the commercial sector at 20% and in manufacturing at 16%. The corporate income tax system, with the lowest rate at 20%, poses a significant challenge for smaller firms and hinders entrepreneurship and formalisation. The 2023 Finance law reduced the number of rates to just three: 20% for most companies with profits below MAD 100 million, 35% for those with profits above MAD 100 million (except service firms in Casablanca Finance City and firms in industrial acceleration zones, as well as those investing at least MAD 1.5 billion over five years) and 40% for financial sector firms, including the central bank and a couple of dozens of other companies. These target tax rates will be achieved by 2026: for firms with profits below MAD 300 000, it will be gradually raised to 20%, while for industrial firms with profits between MAD 1 million and MAD 100 million, it is being reduced to 20%. While this new schedule is less distorting and rates for some firms are lower, the MAD 100 million threshold may still restrict growth of firms in some industries. Moreover, the lifting of the corporate income tax rate for the smallest category from 10% to 20% by 2026 will likely hurt small businesses and business creation. Given that 90% of declaring firms belong to that category, these changes imply a significant loss of competitiveness as 20% is a high starting rate for corporate income tax rate in international comparison. The impact of these changes, including on SMEs and the formalisation of businesses, should be carefully evaluated. Most small firms do not currently pay corporate income taxes, only a minimum contribution of 0.25% is levied on their sales (reduced from 0.5%) if they are making a loss. However, more stringent reporting and disclosure requirements, as recommended in Chapter 2, and a more effective formalisation of informal activities would tend to result in a greater share of profit-making firms, but a high starting rate could disincentivise setting up a firm and formalising.
Tax expenditures are spread across 292 measures and at 2.5% of GDP in 2023 are still sizeable, despite the elimination of 178 measures over 2006-23. They are mostly related to exemption from VAT (over half) and corporate income taxes (a sixth). Tax expenditures fell from 2.9% of GDP in 2022, a fall mostly attributed to the corporate income tax reforms. As part of the reforms, 14 tax expenditures have been abolished. There is, however, ample room for further rationalisation. Tax incentives should be motivated based on their socio-economic impact in accordance with Law 69-19 and only applied where justified. Conducting a systemic cost-benefit evaluation of all existing incentives, with a view to streamlining and abolishing ineffective tax expenditure measures, could further bring about increases in government revenues.
Morocco’s share of non-tax revenues at 2-2.5% of GDP is relatively low, especially given available mineral resources (Figure 1.17) (Conseil Économique, Social et Environnemental, 2023[4]). Other countries with mineral deposits manage to raise more revenues from royalties, which are part of non-tax revenues. Morocco’s non-tax revenues mainly come from sales of goods and services and are related to property owned by the state. Royalties are in the miscellaneous category, making up a mere 0.8% of GDP. Given its rich deposits not only in phosphates, but also a wide range of other potentially lucrative minerals including cobalt, copper, and manganese which have potential to be developed, royalties should be used to bring more revenue to the budget. While transparency has increased, more information on the terms of existing long-term mining concessions would help the public and independent fiscal authorities to exercise oversight of revenue streams from natural resources. An additional reason for low recorded central non-tax revenues is so-called parafiscal revenues, which are taxes or sur-taxes collected by state agencies, but that are not recorded as part of the central government budget.
Source: OECD Tax Statistics, Revenue Statistics in Africa; OECD National accounts – Government.
State owned enterprises contributed around 1% of GDP to government revenues in the form of dividends and contributions, primarily from the OCP (the administrative monopoly for phosphate mining and processing) and the land registry agency (Agence National de la Conservation Foncière du Cadastre et de la Cartographie, ANCFCC). However, the SOE sector receives significant government subsidies, although it tends to be a net contributor to the government budget, mostly through dividends (Figure 1.18).
Note: Data refer to commercial public enterprises. 2024 is projection.
Source: Ministry of Economy and Finance.
As commercial SOEs are supposed to be profit oriented, they should make appropriate net contributions to the budget. Given the large size of the SOE sector, they could be more important contributors to sustainable revenues in the long run. To deliver the greatest profits for the benefit of all, following good governance principles as defined by the OECD and continuing to implement existing reforms would help (discussed in Chapter 2). Furthermore, their dividend submissions to the budget should not be driven by ad hoc cash needs, as it could disrupt their cash flows and make their financial management and long-term investment planning difficult. Pre-defined shares of profits should be regularly transferred to the budget at an appropriate level.
There is ample room to step up revenues that help green the economy and contribute to a more efficient use of resources. As discussed in the green transition section of this chapter, raising taxes on diesel, enacting a carbon tax, raising water prices and a full enforcement of water withdrawal fees could raise revenues worth 1.4-1.5% of GDP (Box 1.6 and Table 1.5). Furthermore, with Morocco’s convergence to more advanced countries, it receives less development assistance, in 2021 reaching 0.8% of GNI and representing of over 3% of its financing needs (Box 1.7).
This box summarises the fiscal impact of selected reform measures in this Economic Survey. These estimates are undertaken where feasible given available data and evidence and come with significant uncertainty. In other key areas, the sign of changes is included for major reforms that would have a significant economic or social gain, but for which there is insufficient information to quantify the impact.
Note: +/- indicate a positive/negative impact on the budget balance and ++/-- a large positive/negative impact.
Source: OECD calculations.
Foreign development assistance plays an important role in Morocco’s on-going economic and social development but is reducing as the country progresses. It has brought financing and expertise to support Morocco. Over the past few decades, the country has transitioned from being primarily an aid recipient to a more diverse relationship with its development partners. Indeed, the 21st century has seen a more diversified approach to official development assistance (ODA), with an emphasis on promoting economic growth, enhancing governance, and addressing climate change issues. Morocco also receives extensive financial support from foreign governments and multilateral development institutions.
On a net basis, ODA reached MAD 965 million or 0.8% of GNI in 2021, falling from MAD 1.8 billion (1.7% of GNI) in 2020. The main donors to Morocco were the institutions of the European Union with 30.1% of the total gross ODA granted, followed by France (24.1%), Germany (22.0%), Japan (6.0%), the United States (5.5%), and the Arab Fund (3.6%), totalling 91.3% of the total ODA provided in 2020-2021 (Figure 1.19., Panel A). On average, 36% of bilateral ODA was allocated to economic infrastructure and services in 2020-2021, 14% to education, and 11% to other social infrastructure and services (Figure 1.19., Panel B).
Source: OECD ODA Statistics database.
While the Moroccan economy has grown, strong convergence to more advanced countries could be achieved, as well as making growth more inclusive and environmentally sustainable. Major reforms are underway to support investment and social protection, among others, but additional actions would support this process.
Morocco’s New Development Model (NDM), prepared by an independent commission, encapsulates major ambitions for the country by 2035, before the demographic dividend fades out (Special Commission on the Development Model, 2021[18]). It aims at addressing four shortcomings: lack of a vision for the country’s long-term development, inadequate regulation, limited public sector capacity and lack of trust in government (Box 1.8). The NDM recognises the need for action to make the best out of the country’s endowments and demographic and geopolitical setting. Even though the NDM was designed by independent experts, it is a guidebook for government agencies to implement. In parallel with this overarching document, there is a plethora of sectoral plans, mostly spanning over the medium term. The inclusion of quantifiable targets and deadlines enhances the credibility of national and sectoral plans. Those targets, however, could be better communicated to the public and only indicators that are readily/publicly available chosen. This would help policymakers and the public to gauge progress. Regular stocktaking would help in getting all stakeholders onboard. These ingredients are crucial also to hold policymakers accountable.
The New Development Model is a comprehensive strategy with quantified targets Morocco aspires to achieve in the coming decade. It was prepared by a group of experts invited by the Special Commission for the Development Model and released in April 2021. The multiple indicator targets (Table 1.6) reflect the overarching nature of the strategy spanning over the economy, the society, the government and its relationship with citizens, the environment and external relations.
Source: Special Commission on the New Development model (2021), The New Development Model – Releasing energies and regaining trust to accelerate the march of progress and prosperity for all.
The New Development Model identifies four priority areas for transformation: (i) creating a productive economy with higher value added and more jobs, (ii) strengthening human capital for future skills, (iii) enhancing inclusiveness of growth and (iv) empowering regions.
Source: Special Commission on the New Development model (2021), The New Development Model – Releasing energies and regaining trust to accelerate the march of progress and prosperity for all.
Beyond economic performance targets and measurability, data provision, conformity and availability constitute barriers to designing and implementing the right policies (Box 1.9). More resources, including upgrading investment and technical expertise, need to be invested into data production, compilation and validation. Furthermore, key structural surveys should continue to be published covering the various socio-economic and sectoral aspects, as has been done in the past. The conclusions of these surveys should be accessible to policymakers, researchers and the general public on a timely basis. Data collection should be centralised to ensure quality, conformity with international standards and comparability across datasets and with aggregate data. The Haut Commissariat au Plan could play this role. The OECD Recommendation on Good Statistical Practices (originally of 2015, amended in 2019) states that statistical systems should ensure that statistics are presented in a clear and understandable form, released in a suitable and convenient manner, including in a machine-readable form, ‘open data’ should be found easily, and available and accessible on an impartial basis with supporting metadata and guidance. Furthermore, responsibilities for co-ordination of statistical activities should be established, including the co-ordination of statistical output among producers through standard classifications and avoiding the duplication of effort, with co-ordination functions clearly laid out and anchored in statistical legislation.
The lack of comprehensive, timely and highly-quality statistics and data is a major impediment to effective policy making in Morocco. Core national accounts indicators and a wide range of statistics are published. However, there are many gaps in the coverage and timeliness of statistical information as a whole in Morocco. Methodological information is often lacking. Statistical information is published across a range of agencies and a single online platform for data dissemination is missing.
Certain types of data that could be useful for analysis of the domestic economy and international comparison are not available, such as government accounts based on the National Accounts methodology, aggregate investment data comparable to budgetary data on investment, a split between real estate and infrastructure investment, to mention a few at the national level.
Other categories of data, essential to the analysis of certain major economic issues, should be produced with an annual or bi-annual frequency, in order to better capture the dynamics of productivity and well-being and to avoid the delays that can occur during exceptional events. This applies in particular to the structural surveys carried out to update the base years of the National Accounts, which were delayed by the Covid-19 crisis. Moreover, the results of many of those surveys were made available 4-5 years after they were conducted, reducing their relevance and overall value.
Access to firm- and household micro-level data is problematic. In recent years, a large number of so-called “observatories” have been established adjacent to government agencies or the central bank to collect specialised data sets at the micro level.
Source: OECD compilation based on Moroccan government websites.
This Economic Survey puts forward recommendations that boost economic growth and accelerate Morocco’s convergence with the more advance countries primarily through boosting labour utilisation and productivity. The package of some of these reforms is quantified in Box 1.10, subject to the limitations of the data. Overall, improving education, raising labour market participation and efforts to reduce corruption would have a very substantial impact on Morocco’s GDP per capita in the long run (Table 1.7).
The table below (Table 1.7) quantifies selected structural reforms proposed in the Survey. Most of the estimates are based on empirical modelling of the relationship between the reform measure and total factor productivity and the employment rate. The sample of countries includes both OECD and major non-OECD countries (Égert, 2017[19]). Where possible, the table uses the time or “within” estimate to assess the impact of the change over time. The estimates may not fully capture the specificities of any given country and many reforms cannot be quantified and therefore these estimates are of an indicative nature.
Effects on the level of per capita GDP (%)
Source: OECD calculations based on (Égert, 2017[19]) and (Égert, de la Maisonneuve and Turner, 2022[20]).
Morocco needs to raise productivity and labour utilisation
Morocco’s GDP per capita gap relative to the United States is greater than not only in OECD members, including emerging economies, but also other countries in the region such as Egypt, Jordan or Tunisia (Figure 1.20). The large income gap in Morocco is not due to short working hours as in fact Moroccans work longer hours than people in OECD countries. Morocco is a country with great unexploited potential given its young population. The productivity gap appears to be greater than in regional peers or OECD members. The labour resource utilisation gap, which indicates what share of the labour force is employed, is smaller than in most other regional peers, though much larger than in OECD members or other emerging economies (Figure 1.20). Moreover, the gap increased significantly over the past decade, indicating that job creation has not caught up with the number of young people entering the labour market.
Note: Gap relative to the United States. Panel A: Labour productivity is measured as GDP per person employed (constant 2017 PPP $). Panel B: Percentage gap in employment to population ratio, 15+, total (%) (modelled ILO estimate). Panel C: Percentage point differences. Data for 2022 except for Jordan (2021), Egypt (2021), Tunisia (2019) and Algeria (2017).
Source: OECD calculations based on the World Bank World Development Indicators and ILO Wages and Working Time Statistics (COND) Database.
The regional productivity gap – here defined as the gap relative to the benchmark Tanger-Tétouan-Al Hoceima region–- varies greatly across the country (Figure 1.21). Relative to this northern region, which performs well on labour utilisation, all other regions, including Casablanca-Settat, exhibit a labour utilisation gap. In some rural areas the gap is large. As for labour productivity, the financial as well as the administrative centre of the country perform better than the benchmark region, but most of the others lag behind. In particular, Marrakesh-Safi and Fés-Meknés show the largest productivity gaps. Both are major tourism destinations with little manufacturing activities, mostly relying on services, which are known to be less productive than manufacturing industries.
Addressing low productivity growth and weak participation would create a virtuous cycle. Low rates of job creation are partly related to the modest rates of economic growth in recent years (Figure 1.21). Morocco managed to attract labour-intensive manufacturing and establish an industrial base beyond extractive industries as early as the 2000s. For instance, the automobile sector, which dates back only a couple of decades, boasts a workforce of 230 000 including its supply chains. However, to absorb the new cohorts looking to join the labour market each year (400 000-450 000 in the coming couple of years), higher growth and more production facilities are needed, including more of labour-intensive activities.
Percentage gap with respect to the Tanger–- Tétouan–- Al Hoceima region, 2020
Note: Larger regions only.
Source: OECD calculations based on data from the Haut Commissariat du Plan.
Growth in Morocco has mainly been driven by factor inputs, in particular of capital, while the contribution of labour has been modest (Figure 1.22). High investment rates with international standards should manifest in higher growth, but low investment efficiencies inhibit a higher contribution (see Chapter 2). The contribution of total factor productivity, which shows the efficiency of combining labour and capital, has been very modest over the past decades, often even negative.
Contributions by factors of production
Source: Conference Board Total Economy Database.
The productivity potential needs to be unleashed and labour better utilised and upskilled
Morocco has a relatively large services and a somewhat small agricultural and manufacturing sectors in value-added terms relative to lower-middle income group peers. Small manufacturing implies smaller scope for innovation to become an engine for productivity growth. Given Morocco’s population size, it should be able to produce, export and become competitive in a wider range of products than it is now (discussed in Chapter 2). Focussing too much on existing industries could forego the chances of developing new ones. Given relatively high labour costs, it is rather medium-skill-intensive industries where Moroccan firms could potentially compete in the global arena. Informality creates an uneven playing field and reduces productivity gains. According to some estimates, it reaches as high as 30% of GDP (Lahlou, Doghmi and Schneider, 2020[21]). Urbanisation could be a potential source of productivity growth by exploiting agglomeration economies. This could include the formation of a greater number of large cities, creation of intermediary cities and emerging regional centres for the provision of medical and financial services.
Morocco should make use of its people, including by tackling informality, high unemployment and very low participation for women and young people (see Chapter 3). Roughly three quarters of all workers have been trapped in informal arrangements (defined as having a job but not having any social insurance scheme) according to household surveys (Observatoire National du Développement Humain, 2019, 2017, 2015, 2013[22]), lacking decent jobs. The current introduction of social security insurance for all who register is a significant achievement for an emerging market economy at Morocco’s income level and will lower this measure of informality. At the same time, the system could be more work-focussed with stronger activation requirements for the unemployed. This process could be automated by linking the social security and social assistance registries with the unemployment agency, which would boost participation and improve matching. A major obstacle to greater labour market participation and formal employment is the very low level of education attainment of the working-age population, especially for women. Going forward, priority should be given to adults without education to acquire basic skills, on which they could base more technical skills. At the same time, people with basic skills need to be guided to training in vocational skills.
On-going reforms should increase well-being and reduce inequalities
Inequalities measured by the Gini index have slightly fallen over the past decades from 0,40 to 0,39 in 2020. With the new direct social assistance introduced in 2023, inequalities will likely fall. Individual opportunity is largely determined early in life: being born in rural or urban areas leaves a mark on one’s career and life. People living in rural areas, who make up over a third of the population, have relatively limited access to high-quality public services. There are also fewer work opportunities in rural areas beyond agriculture and three-quarters of the poor live there (Table 1.8). The much greater weight of within-region inequalities relative to those between regions to some extent captures the urban-rural divide (Table 1.9). The between-region component remained at a very low level. Furthermore, inequalities are the largest in the richest regions such as Rabat or Casablanca. Being born in a relatively poor family (below 60% of the median income) increases the chances of being illiterate by 13 percentage points (based on ONDH Household Surveys).
Percentages
Note: Poverty is a relative concept and is defined as below 60% of median national income.
Source: OECD calculations conducted jointly with the Observatoire National du Développement Humain (ONDH) based on its household surveys (Enquête panel de ménages).
Theil indices of inequality decomposed into within and between components
Source: OECD calculations conducted jointly with the Observatoire National du Développement Humain (ONDH) based on its household surveys (Enquête panel de ménages).
Public governance needs to improve
Corruption is harmful to growth as it leads to high transaction costs and can distort economic choices, as well as undermine social objectives, and government policies. Morocco’s anti-corruption efforts have been stepped up over the past decade with the creation of a new legal framework and institutions. Despite this progress, corruption is perceived to be relatively high in Morocco compared to OECD norms and some other countries in the region (Figure 1.23.) according to the Transparency International’s indicator. Morocco was ranked 97th among countries on this indicator in 2023. Morocco’s average score on the Varieties of Democracy Project’s Control of Corruption indicator is also weak by OECD norms. There is high perception of bribery, as measured also by this index with 83% of the respondents reporting that bribery is widespread in Morocco and 61% saying it is extremely widespread. Legislative corruption is perceived as high as measured by a subcomponent of this indicator.
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based components of the “Control of Corruption” Indicators by the Varieties of Democracy Project.
Source: Panel A: Transparency International; Panels B & C: World Bank, World Governance Indicators; Panel D: Varieties of Democracy Project, V-Dem Dataset v12.
The National Authority for Probity, Prevention and Fight against Corruption (Instance Nationale de la Probité, de la Prévention et de la Lutte contre le Corruption) carries out surveys among citizens to assess corruption in society. According to the latest survey in 2023, 67% of Moroccan-domiciled respondents think that corruption is widespread or very widespread (Instance Nationale de la Probité, de la Prévention et de la Lutte contre le Corruption, 2024[24]). Information on corruption-related legal cases is hard to come by, which underlines the need for more transparency.
Corruption spans over the entire business landscape. Petty corruption, captured by the question whether gifts are expected to “get things done”, is preponderant with 35% of firms in a representative survey of companies answering “yes” (Figure 1.24.). While MENA countries have relatively high levels of corruption in general, surveys report that Morocco has a high prevalence of bribes in many aspects of doing business covered by the survey. Getting an operating or an import license or a construction permit are reported often to involve gifts. Some firms prepare gifts for meeting with tax officials. Overall, nearly 13% of government transactions with firms were reported to involve bribes.
Percentage of firms expected to give a bribe in their different types of encounters with public officials, 2023
Source: World Bank Enterprise Surveys.
Public procurement is a domain prone to corruption in many countries. In Morocco, more than half (58%) of firms surveyed in the same exercise report that they are expected to prepare gifts to secure government contracts, a much higher ratio than in OECD countries, although not all firms would have direct experience of public procurement. Since August 2023, a reform has required the public procurement process to be managed online. Digitalisation of the tendering process and greater transparency will help reduce corruption. To strengthen this process, further measures could be taken to limit the room left for “tailoring” tenders to favoured applicants. Procurement documents should ensure fair competition by ensuring technology neutrality and avoiding unnecessary specifications. This could be ensured by having the process reviewed by competition experts in addition to the current possibility of filing a complaint at any stage of the process, including prior to the submission of offer.
Although nearly half (47%) of the respondents are satisfied with the government’s efforts to fight corruption, fighting against corruption comes only fourth in their priority list for action, after healthcare, jobs for the young and education. It is the top priority for only 10% of the respondents and second for 12%. In contrast, corruption is the second biggest obstacle to firm development according to the most recent vintage of the World Bank Enterprise Survey and has consistently been prioritised among other obstacles to development, even though the percentage of firms ranking it first has declined over time from nearly 21% in 2013 to 15.7% in 2023.
Morocco has strengthened its anti-corruption institutions in recent years: starting in 2016, a National Anti-Corruption Strategy (SNLCC) has been put in place, followed by the creation of the National Authority for Probity, Prevention and the Fight against Corruption (INPPLC) in 2018 as a central institution to set the direction of anti-corruption activities, although the authority only became fully operational in 2022 following the appointment of its Secretary General and 12 permanent members. The National Anti-Corruption Commission (CNAC) was established in 2017, led by the Head of Government, and in charge of implementing and overseeing the country’s anti-corruption strategy. Legal and constitutional provisions to manage conflict of economic interests of civil servants, including the monitoring of assets of public officials, a whistleblower protection system and an internal audit function, as well as external oversight by the Court of Audit, have been put in place (OECD, 2023[3]). Furthermore, digitisation of administrative procedures and a good governance framework for public institutions have been implemented to combat corruption. In addition, in February 2023, Morocco was taken off the FATF grey list following a series of reforms in 2022 strengthening its anti-money laundering and anti-terrorist financing legislation, regulations, and criminal penalties.
Despite progress, there remain imbalances and shortcomings in the anti-corruption framework and efforts should be pursued to fill these gaps and strengthen existing measures. For example, regular reporting and information on progress in the implementation of the SNLCC is lacking and the adoption of a Code of Conduct for civil servants, under development since 2018, is still pending. To date, Morocco does not yet have an efficient system for the detection and management of conflicts-of-interest for civil servants. The conflict-of-interest provisions are fragmented across various statutes and are limited to economic gains and illicit enrichment, leaving out other potential conflict of interest situations linked to personal ties or relationship, or other personal interests and commitments. Draft laws and proposals were announced in 2020 on the updating of the norms relating to conflicts of interest and their alignment with international standards, but no concrete implementation has taken place to date (OECD, 2023[2]). The Court of Audit’s, in this field, focusses on a high-level verification of the filing of asset declarations by civil servants. Full digitalisation of this work, as well as allocation of more human resources, would allow an effective control of the content of declarations, as prescribed by the law. Morocco is not yet a signatory to the OECD Anti-Bribery Convention.
There is no legislation regulating lobbying activities (OECD, 2023[2]), which would help to strengthen the transparency of public decision-making processes and avoid specific interest groups having undue influence, and no standards to manage risks related to the revolving door between the public and private sectors. In addition, the burden of proof of good faith on a whistleblower may be excessive as the person may incur criminal penalties if their case is not successful. To fulfil its commitment as a signatory to the United Nations Convention against Corruption to enact relevant domestic laws, Morocco introduced a draft law on whistle-blower protection in February 2019. This is a step forward relative to The Code of Criminal Procedure, which already provides protective mechanisms for citizens. The new law recognises the importance of civil servants in uncovering cases, containing a provision that specifically applies to them.
Digitalisation, in general, is a powerful tool to reduce corruption in all spheres of life by recording all transactions and leaving less room for face-to-face interactions. Complementary measures should be adopted where needed to prevent any favouring by officials, by, for instance, reducing the degree of discretion they can have over administrative decisions. Decisions of whether granting a license should be based on meeting certain objective criteria without leaving room for arbitrariness.
Morocco faces increasing climate challenges, including water scarcity
Morocco is relatively vulnerable to the threat of climate change: average temperatures have risen faster than the global average and precipitation levels have followed a downward trajectory over the past 60 years. These trends are set to exacerbate the frequency and intensity of droughts and floods in the coming decades. An early leader in climate action, Morocco has made environmental sustainability and mitigation efforts a key feature in recent national and sectoral plans.
Morocco’s Nationally Determined Contribution (NDC), submitted in 2021, puts forward an emission reduction target of 45.5% by 2030, relative to trend emissions since 2010, and the country now aims to be a net-zero carbon economy by 2050 (Figure 1.25). A 2050 timeline to net zero is among the most ambitious among middle-income countries and in the region. It launched a roadmap for the transition during COP 28 in the National Low Carbon Strategy. Achieving these targets will be challenging in the context of rising emissions in a business-as-usual scenario due to a growing economy and it will be important to ensure the transition is equitable. Morocco should move ahead with implementing the emission reduction measures specified in the national strategy.
Source: National authorities - National Low Carbon Strategy – SNBC Morocco 2050 (December 2023).
Morocco has set out strategic priorities to reduce emissions to 2050, including the development of renewable energy and green hydrogen, efforts to increase electrification and energy efficiency, and targets and actions to reduce emissions in 7 key sectors as specified by the energy minister during the launch of the National Low Carbon Strategy (SNBC). The government should publish the SNBC in full. As more than 85% of the financing to support the roadmap is envisioned to originate from the private sector, the government should identify financing gaps and support the continued mobilisation of private capital in a timely and ongoing manner. Morocco’s first Biennial Transparency Report (BTR) to track progress towards NDC goals is due by the end of 2024.
Electricity production is the largest source of emissions in Morocco, accounting for over 40% of emissions (Figure 1.26., Panel A), and demand for electricity is set to grow rapidly as the economy expands and through the electrification of more activities. Currently, two-thirds of electricity is produced through coal-fired power stations (Figure 1.26., Panel B). However, Morocco committed in 2023 to phase out coal as part of the Powering Past Coal Alliance (PPCA) with an indicative phase-out date by 2040. Endowed with significant renewable energy potential with one of the highest rates of insolation worldwide and high average wind speeds, Morocco has set an ambitious target to raise the share of renewables in installed electricity capacity from 39% in 2023 to 52% by 2030. The Noor Power Plant in Ouarzazate is the largest concentrated solar power plant in the world with MW 510 of capacity. As well as avoiding emissions, increasing the share of renewables will increase energy security and improve Morocco’s external account by reducing dependence on imports of energy. While the 52% target for renewable’s capacity is welcome and could be achieved ahead of time, more than 16 percentage points of the current capacity reside in Morocco’s hydroelectric assets. These currently only contribute 3% of electricity generation (Figure 1.26., Panel B), a result of droughts and lower water levels, leading to a large gap between renewable capacity and actual generation (Figure 1.27., Panel A). The deployment of renewables electricity generation will need to accelerate significantly.
Source: IEA
The growth of the economy, increasing reliance on electricity and planned large-scale deployment of renewables, will require major investments in the grid and measures to manage energy intermittency and grid stability. Investments to upgrade the grid are on-going. While the state-owned electricity company (ONEE) currently allows low-voltage electricity users to move towards a dual-pricing scheme, a broader application of time-of-use (TOU) pricing could contribute to grid stability by smoothing out electricity demand over time. Morocco experiences excess electricity loss of up to 6% during transmission compared 2.5% in peer countries (Conseil de la concurrence du Maroc, 2024[25]). A more comprehensive use of TOU pricing, investments in the grid and storage and improving interconnections to other countries would promote energy efficiency in terms of transmission and distribution of electricity.
Note: Panel B: Indicator scale range from 0 to 100 with higher values reflecting a more supportive regulatory environment for renewable energy. MENA 14 includes Algeria, Bahrain, Egypt, Iran, Israel, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, and the United Arab Emirates. The indicators reflect regulation and policy measures as of 2021 and thus does not reflect reforms to renewable energy regulation enacted by law No. 40.19 in 2023.
Source: OECD Green Growth database; Regulatory indicators for sustainable energy, IRENA.
There are regulatory obstacles to a faster rollout of renewables and the regulatory framework is less favourable than on average in the OECD and compared to best-performing countries in the region (Figure 1.27 Panel B). Early regulations governing renewable energy deliberately had a narrow scope and did not fix a clear framework on the relationship between renewable project developers and ONEE (Usman and Amegroud, 2019[26]). However, updates to renewable energy regulation in 2023 have improved the regulatory landscape. Major changes include: the introduction of a scheme to communicate periods of grid stress; the rollout of pricing measures for transparent grid access; and a new legal framework for industrial renewable energy self-producers. Further work in guaranteeing the sale of excess energy of self-producers to the electricity grid operator, as well as measures to support the direct sale of renewable energy to end-users, would further support renewable energy deployment.
In the long term, comprehensive changes in the electricity market would support further renewable energy deployment and boost competition. While Morocco has gradually liberalised the energy market by allowing private participation in renewable energy production and distribution activities, ONEE, the state-owned vertically integrated utility, remains a key player in generating electricity, in addition to having a monopoly on transmission (World Bank, 2022[27]). While recent reforms have transferred ONEE’s role in distribution to new regional multiservice companies (SRMs), ONEE’s continued role in transmission leads to a potential conflict of interest, making it difficult for private operators to compete and contributing to the lack of investment in renewable energy (IMF, 2023[28]; IMF, 2024[29]). ONEE has begun the preparations for the unbundling of its financial accounts between ONEE’s transmission operations and its generation and distribution businesses. Further steps towards the full unbundling of ONEE into legally separate entities and the establishment of an independent transmission system operator (TSO) to manage network access fairly between private and public actors would boost competition in the market and investment in renewable energy. (Conseil de la concurrence du Maroc, 2024[25]). An independent TSO, through which producers and distributors can trade electricity freely, would allow for effective pricing and competition in the electricity market. The transition to a low-carbon economy will need to be accompanied with a broader energy mix and natural gas may have a role as a bridge fuel during the transition, both as a less carbon-intensive alternative to coal and oil and as a source of flexibility for the power system (World Bank, 2022[27]). Currently, natural gas contributes around 8% of the country’s total electricity (Figure 1.26., Panel B), with plans for a further expansion of natural gas capacity.
The government plans to significantly ramp up the production of green hydrogen as a key part of its long-term decarbonisation plans. Green hydrogen, produced with renewable energy, has a variety of applications as a conduit for energy conversion and storage. It can be blended into the gas network, substituting natural gas in power generation. Additionally, the flexible storage requirements of hydrogen allow it to supplement the power system to alleviate instances of grid stress and intermittency concerns. However, the sector is still in its infancy worldwide and its commercial viability is conditional on technological developments. Circular 03/2024 sets out the governance and support schemes to attract private investment in the sector in Morocco.
Carbon pricing and efficient taxation can support the climate transition by providing incentives and sending signals to consumers and producers to curb emissions. Environmental taxes in Morocco are currently low at half a percent of GDP, down from nearly 2% of GDP in 2000 (Figure 1.28., Panel A). This is a smaller share than many of its peer economies. The main environmental taxes are transport fuel excise duties. While the government has traditionally provided subsidies for fossil fuels (including during the energy crisis), this is now being phased out. Savings from the withdrawal of butane gas subsidies are being redirected towards funding an expansion of cash transfers to vulnerable households under the new targeted social assistance programme. Additionally, tax incentives have been introduced to help households replace butane gas use with solar or electric water heaters. A monitoring of behavioural changes during the initial phases of the transition may be warranted to ensure rural households do not revert to more dangerous and environmentally harmful substitutes such as wood or charcoal burning. The VAT rate on energy generated from fossil fuels is set to gradually increase from 14% to 20% in 2026, while the rate generated from renewable sources will see a corresponding decline from 14% to 10%.
Note: Panel A: 2020 except for Morocco, Egypt, Tunisia, South Africa and Costa Rica (2019); Israel (2018); and Canada and Korea (2014).
Source: (OECD, 2023[30]), Green Growth Indicators; (OECD, 2024[31]), Exposure to air pollution.
Morocco relies primarily on excise taxes to price carbon with no explicit carbon taxes or an emissions trading system in place (Figure 1.29., Panel A). As a result, less than 30% of greenhouse gas emissions are subject to a positive price in Morocco, compared to nearly 70% in OECD economies (Figure 1.29., Panel B). To adequately impose a price on emissions, Morocco should introduce over time a consistent approach to taxing and pricing greenhouse gas emissions, together with supporting policies. The Government is currently studying the implementation of a carbon tax and aims to release a roadmap for its adoption in 2025. This should include comprehensive taxation and pricing of emissions. Given that 15% of Morocco’s exports to the EU are in sectors that will be covered by the EU Carbon Border Adjustment Mechanism (CBAM), it would be sensible to align the approach with the EU, particularly for the iron and steel sectors that are most exposed (World Bank, 2023[32]). Under a broad-based approach, a starting tax of USD 10 per ton of emissions to be gradually increased over time, mirroring South Africa’s current rate and system (the only carbon price regime in force in the region), could be a good approach. A tax at this rate could have a positive fiscal impact of up to around 0.8% of GDP (Box 1.6).
Note: Excluding CO2 emissions from the combustion of biofuels.
Source: (OECD, 2022[33]), Pricing Greenhouse Gas Emissions: Turning Climate Targets into Climate Action, OECD Series on Carbon Pricing and Energy Taxation, OECD Publishing, Paris.
Transport currently accounts for 28% of emissions but could be a major source of emissions growth as travel demand picks up in conjunction with rising incomes and growing urbanisation. Motor fuels are subject to duties of MAD 2.42-3.76 per litre and a VAT rate of 10%. This is broadly in line with similar countries, but well below OECD norms (Figure 1.29., Panel A). The unit excise tax for diesel is currently more than 35% lower than the rate for premium gasoline, despite contributing disproportionally to excess air pollution and exacerbating Morocco’s high particulate matter exposure (Figure 1.28., Panel B). Deaths attributable to ambient air pollution per hundred thousand people were more than three times higher than the OECD average in 2019 (WHO, 2019[34]). The adoption of Euro 6 fuel standards in 2023, which tightened emission standards for new vehicles, is a welcome step towards reducing air pollution. Further measures to regularly evaluate and tighten emissions standards of existing vehicles and to gradually modernise Morocco’s aging vehicle fleet would help to improve air quality. Raising the excise rate of transport diesel fuel over time towards the current rate for premium gasoline of MAD 3.76 per litre would contribute both to cleaner air and lower carbon emissions, as well as raising additional revenue but needs to be carefully managed alongside other policies taking into account social circumstances (Box 1.6). Continuing to develop good multi-modal transport networks in major and emerging urban centres, consistent with Regional Development Plans, and a further expansion of urban public transport systems would help to limit future sources of emissions as Morocco continues to grow and urbanise.
Morocco is currently at a moment of extreme water stress and has experienced a series of recent droughts, exacerbated by changes in the climate. Between 1960 and 2020, the per capita availability of renewable freshwater resources declined by nearly 70% (Figure 1.30., Panel A), approaching a situation of absolute water scarcity. Meanwhile, average precipitation levels have dropped significantly in recent years (Figure 1.30., Panel B). Given heightened vulnerabilities to climate change, effective adaptation measures, particularly relating to tackling water supply challenges, need to be in place to ensure the resiliency of Morocco’s economy in addition to mitigation measures. Morocco’s national adaptation strategy, the National Strategic Adaptation Plan (NSAP) with a roadmap to 2030, emphasises water and agriculture as the two main vulnerabilities.
Source: World Bank WDI; ONU Environment
To tackle long-term water supply challenges, the government has outlined an ambitious water plan: the National Drinking Water Supply and Irrigation Program (PNAEPI) 2020-2027. The PNAEPI aims to mobilise up to MAD 115.4 billion — funded by the state budget (60%) and other public and private agencies including through the use of Public-Private Partnerships (40%) — and utilises engineering-focused solutions to reduce demand and enhance water mobilisation, including the construction of major projects to store and transport water. Diversifying sources of water supply, ensuring water security and combatting water challenges in the context of climate change are key goals of the programme. The programme will focus on improving water supply through dam construction, water demand management for the agricultural sector, and strengthening efforts to mobilise potable water in rural areas. However, infrastructure and engineering solutions alone may not be sufficient to adequately address Morocco’s water challenges as technological improvements in water supply can lead to Jevons paradox, leading to even higher water demand if the underlying market dynamics remain unchanged.
The low price of water contributes to Morocco’s water shortage situation as it leads to inefficient and excessive use. This phenomenon is particularly acute in the agricultural sector, which is by far the largest sectoral user of water in Morocco, consuming nearly 90% of the country’s water resources. The 2024 budget has outlined steps to increase water prices, including by raising the VAT rate of water for non-domestic use to 10% from 7%.
Revisions to agricultural water tariff rates to encourage a more effective use of the resource can go a long way in alleviating Morocco’s water supply challenges going forward. The agricultural water pricing structure of Morocco consists of a water use fee (known as Domaine Public Hydraulique (DPH) fees) and an irrigation service fee. Paid to the water basin agencies Agence de Bassin Hydraulique (ABH), the DPH fee represents the price of water extraction and contributes towards the operating costs of water resources and infrastructure, but it does not reflect the value of the water or cover the costs of the infrastructure itself. It is currently set at a low rate of MAD 0.02 per cubic metre for all agricultural users. The fee is not being collected for private and small-scale water users, that represent over 60% of irrigated areas, and an estimated MAD 240-254 million of revenue is foregone each year (World Bank, 2022[27]). Enhancing the powers of ABHs to enforce the collection of these fees more effectively from all users would equip ABHs with additional resources to better manage local water assets. Morocco should raise the DPH fee of water meant for agricultural use to a level that adequately reflect its full supply costs in line with the OECD Recommendation on Water (OECD, 2021[35]). A further step would be to regularly update the fee to progressively finance portions of the capital cost of new water infrastructure envisioned in the coming decades. Increases in agricultural water tariffs should be paired with ongoing programs to encourage farmers to transition away from water intensive crops for example from cereal to fruit trees.
Morocco faces significant climate change adaptation challenges from heat, lower rainfall, rising sea levels and more extreme weather events. These will require significant planning, investment and on-going spending, as well as coordination between levels of government and with the private sector. As noted, water management will need to be strengthened, the financial system faces some risks and agriculture will need to evolve. Many OECD countries have developed national adaption strategies to support this process. Further utilising and scaling the suite of disaster risk financing and insurance tools, including through sovereign and market-based risk transfer solutions through global reinsurers and CAT bonds can help to decouple Morocco’s growth prospects from increasing weather variability (World Bank, 2024[36]). Providing reliable and timely information on localised climate trends, leveraging the capacity of local governments, can help households, firms and small-scale agricultural producers better anticipate and accommodate extreme weather events.
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