Economy

Alleviating Inflation's Strain: Wage Increases Offer Partial Respite

Friday 31 May 2024 - 10:30

As the Kingdom contends with inflation spurred by an energy crisis compounded by the Russia-Ukraine conflict, which has markedly affected raw material prices in Morocco, the steady uptick in prices has not been met with a corresponding uptrend in wages, leading to a decline in household purchasing power. Against this backdrop, the government has opted to raise public sector salaries by 1,000 dirhams beginning in 2025 to alleviate the inflationary pressures.

Inflation, characterized by escalating prices, directly impacts purchasing power. For example, if prices surge by 6% while wages only rise by 3%, purchasing power diminishes. This is the observed trend since the post-Covid recovery, exacerbated by the Ukraine-Russia conflict. Demand, fueled by recovery initiatives amidst supply disruptions in Asia due to lockdowns, has driven up prices for specific commodities. The Russia-Ukraine conflict, involving two significant wheat producers and, notably, Russia, a major oil and gas exporter, has triggered steep hikes in energy and raw material markets. The surge in fuel and consumer goods prices has significantly eroded the purchasing power of middle and lower-income groups, with inflation being perceived as a formidable challenge to address.

The incremental increase in the minimum wage (SMIG), slated in two phases commencing in 2025, alongside the 1,000-dirham raise for public sector employees, effective from July onwards, will only partially offset inflation. Moreover, the Moroccan Center for Economic Conditions (Centre Marocain de Conjoncture) asserts that these wage adjustments will struggle to keep pace with the projected price hikes for 2026, given the substantial escalations witnessed since the decade's onset.

The situation grows more intricate when contemplating the productivity enhancements achieved during the same period and their ramifications on income distribution. The disparity between price and wage dynamics assumes a more pronounced magnitude. While companies witness augmented profits due to enhanced productivity, workers fail to reap the full benefits of these advancements, further exacerbating the gap between price and wage evolution.

The Moroccan Center for Economic Conditions also highlights that between 2021 and 2024, the erosion of purchasing power owing to the escalating cost of living stood at 16.6%. Simultaneously, the adjustment of the SMIG over the same period did not surpass 10%, offering only partial redress for the purchasing power decline since 2021.

The cumulative impact of the two-year SMIG hike would amount to less than 1%. However, the decision to increment public sector salaries by 1,000 dirhams, phased over two years, will exert a more substantial influence on public expenditure. The surge in operational costs could tally up to 5 billion dirhams for the current year. In essence, public finances will need to absorb a considerable additional burden, thereby augmenting the deficit vis-à-vis the initial budget forecasts. This increment will inflate the budget deficit by nearly 4% compared to the early-year estimates.