Morocco's Fiscal Outlook: Fitch Ratings Predicts Deficit Reduction by 2026

Projected Spending Cuts and Fiscal Strategies Signal Optimism Amid Challenges

Morocco is on a path to reduce its fiscal deficit over the next few years, according to a new report from Fitch Ratings. The credit rating agency forecasts that the North African nation’s fiscal deficit will decrease to 3.4% of its GDP by 2026, down from 4.3% in 2023. This anticipated improvement stems from a combination of strategic spending cuts and fiscal reforms.

A fiscal deficit arises when a government's expenditures exceed its revenues, excluding borrowings, within a specific fiscal year. It reflects a situation where the government spends more than it earns from taxes and other revenue sources.

Strategic Spending Reductions

One of the primary drivers behind the projected fiscal deficit reduction is a planned decrease in government spending. Total expenditure is expected to average 25.7% of GDP from 2024 to 2026, down from 26.4% in 2023. This reduction will be partially due to lower capital expenditures as Morocco recovers from the immediate reconstruction costs following the 2023 earthquake.

Subsidy spending is also forecasted to drop by about 1.2 percentage points of GDP as the country scales back on subsidizing gas canisters. In May 2024, the Moroccan government raised prices for subsidized butane gas cylinders by 25%, marking a significant step in its broader strategy to reduce subsidies on gas, sugar, and wheat.

However, Fitch Ratings cautions that the success of this plan hinges on avoiding further external shocks that could pressure the government to maintain or increase subsidies, potentially derailing fiscal consolidation efforts.

While subsidy expenditure is set to fall, spending on social benefits is projected to rise by approximately 1.4 percentage points of GDP on average over the next three years. This increase reflects the government’s initiatives to expand social safety nets, including unemployment benefits for self-employed and non-salaried workers. Additionally, a new family allowance scheme was introduced in late 2023, and the compulsory basic health insurance system was broadened in 2022.

Revenue Projections and Tax Reforms

Fitch expects Morocco’s total revenue to average 21.9% of GDP between 2024 and 2026, slightly down from 22.2% in 2023. Tax revenue, in particular, is anticipated to fall by around 0.5 percentage points of GDP from 2023 levels. Planned reforms to streamline corporate income tax and value-added tax rates are not expected to significantly boost revenue in the short term, as higher rates in some areas will be counterbalanced by lower rates in others.

To mitigate revenue shortfalls, Morocco plans to increase its reliance on innovative financing mechanisms, which include the sale and lease-back of state assets. These methods are projected to contribute around 2.1% of GDP to government revenues from 2024 to 2026, up from an average of 1.0% between 2019 and 2023. However, Fitch warns that these mechanisms are generally one-off in nature and may not provide a sustainable long-term solution.

### **Debt and Rating Implications**

Fitch Ratings suggests that a significant and sustained reduction in Morocco’s general government debt-to-GDP ratio could lead to positive rating actions. The agency’s current baseline scenario sees this ratio falling marginally to 69.7% by 2026, from 70.2% in 2024. This remains higher than the median of 55% for countries in the ‘BB’ rating category.

The Moroccan government has set more ambitious targets than Fitch’s projections, aiming to reduce the fiscal deficit to 3% of GDP by 2026. Achieving this goal could accelerate positive outcomes if social spending is lower than expected, tax reforms enhance revenue, or economic growth surpasses the projected average of 3.3% for 2024-2026.

Morocco faces a challenging road ahead in its efforts to narrow the fiscal deficit. While planned spending cuts and innovative financing strategies offer a pathway to achieving this, the success of these measures will depend on the country's ability to avoid external shocks and enhance revenue mobilization. As the government works towards its fiscal goals, close monitoring and adaptive strategies will be crucial to ensuring long-term economic stability and growth.