Morocco’s Inflation Slowdown: Economic Relief, Household Pressures

With the start of a new cycle of slowing inflation, real interest rates are turning positive again. Large savers, banks, consumer credit institutions, investment management companies, among others, and to a lesser extent, fixed-income holders, including employees and retirees, should benefit from this easing of consumer prices. But for many households in Morocco, the cost of living continues to soar despite controlled inflation.

Except for the 2022 alert (+6.6%), “the highest inflation level since 1992,” according to Bank Al-Maghrib, inflation has remained stable in Morocco to the point that this moderation is taken for granted by households and businesses. But not for the Central Bank, whose inflation control remains the compass of policy.

The second half of the 1990s marked the beginning of this disinflation, with an average consumer price index (CPI) of 1.6% over the period 1996-2005. The rise observed between 2006 and 2008, due to the surge in commodity prices, was only temporary before a return to a “normal” average rate of 1.1% from 2009. According to Bank Al-Maghrib forecasts, inflation would reach 2.4% this year before falling back to 1.8% in 2026, which makes Morocco one of the best performers in this area.

The CPI in Morocco doesn’t tell the whole story

The accelerated decline in Morocco’s inflation is the result of a faster-than-expected easing in the price of volatile food products. It is also the result of falling fuel and lubricant prices, benefiting from a cheap barrel of oil, according to monetary authorities. Compared to its main trading partners, Morocco’s favorable inflation differential should push the dirham upward. Be careful, the consumer price index (CPI) is not a cost-of-living index, caution HCP economists.

Low inflation does not necessarily mean that households in Morocco have become richer, as the two barometers do not provide the same information. The consumer price index measures the effects of changes in the purchase price of products consumed by households, while the cost-of-living index measures changes in purchasing costs to maintain household living standards at a specified level.

On paper, the slowdown in inflation should translate into a small gain in household purchasing power, even if the perception depends on the structure of expenditures in the budget. A household that spends 40% of its income on food, for example, will not have the same perception of inflation as one that spends less than 10%. Inflation as measured by the High Commission for Planning (HCP) aggregates very different situations.

What matters for the average household in Morocco is less the statistical indicator than the erosion of its purchasing power observed on a daily basis, because despite disinflation, the pressure of compulsory expenditures (fixed charges) remains high. These expenses include, among other things, housing, water and electricity, telephone, internet connection, family assistance, loan repayments, and for a portion of the middle classes, children’s school fees.

38.2% of household spending on food

According to the latest survey by the High Commission for Planning (HCP), households spend an average of 38.2% of their budget on food, 1.2 points more than in 2014. A figure that contrasts with the downward trend observed for decades, analysts at the HCP are surprised, noting nonetheless that the weight of food expenditure remains below the peak of 40.6% almost 20 years ago (2007). Unsurprisingly, the poorest are also those who allocate the largest share of their income to food.

Thus, 10% of the population among the least well-off allocate half of their budget to food; compared to 30% for the 10% most well-off, reveals the HCP survey. Among the “winners” of disinflation are those on fixed incomes: employees, retirees, recipients of various benefits, and large savers. Even after adjusting for inflation, the real rate of return on investments (life insurance, mutual funds) will remain in positive territory.

Moreover, bank executives and asset management company managers in Morocco are rubbing their hands in a period of slowing inflation, because real interest rates remain at a level that does not cause them to lose money. With Bank Al-Maghrib’s key rate having returned to a low level of 2.25%, the remuneration of deposits and savings products is automatically falling in real terms. Moreover, the yield on Treasury bonds also remains at low levels.

This situation could result in a certain reluctance among investors to bet on long-term government debt at current interest rates. For the latter, the context is indeed favorable to generate strong demand from investors and savers. In doing so, the financial market would have acquired a new instrument contributing more to the development of its efficiency and depth. States – this is not the case in Morocco – opt for inflation-indexed debt as much for reasons of market efficiency as for considerations related to active debt management.

Because, issuing inflation-linked bonds can reduce the cost of debt in Morocco if the market’s inflation expectations are exaggerated. This option is not part of the “lexicon” of the Treasury and External Finance Directorate, which favors active debt management by reducing the maturity of outstanding amounts during periods of easing rates.

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(Featured image by Rana Kaname via Unsplash)

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First published in LES ECO.ma. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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