VZCZCXRO6107
RR RUEHLMC
DE RUEHRB #0189/01 0330957
ZNR UUUUU ZZH
R 020957Z FEB 07
FM AMEMBASSY RABAT
TO RUEHC/SECSTATE WASHDC 5745
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC

UNCLAS SECTION 01 OF 02 RABAT 000189 
 
SIPDIS 
 
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E.O. 12958: N/A 
TAGS: EFIN ECON MA
SUBJECT: 2007 MOROCCAN BUDGET 
 
 
This message is sensitive but unclassified.  Please handle 
accordingly. 
 
¶1.  (SBU) Summary: Morocco's 2007 budget, adopted in the just 
concluded fall parliamentary session, highlights both the 
economic successes of the government of Prime Minister Jettou 
and the challenges that will remain for his successor.   In 
its broad outline, the budget reinforces the overall 
macro-economic stability Morocco has achieved in recent 
years, maintaining the budget deficit at around 3.1 percent 
of GDP while also increasing public investment and beginning 
the difficult process of tax reform.  More troublesome is the 
fact that despite recent compression of the civil service, 
the public sector wage bill is up 6.9 percent from 2006, 
while overall expenditures are up 14.8 percent.  In addition, 
the budget does not touch the politically sensitive topic of 
the Caisse de Compensation, which subsidizes products ranging 
from petroleum to sugar.  As a result of these trends, the 
long term sustainability of Moroccan budgetary policy is in 
question with debt service up nearly 33 percent, to the point 
where it represents over 30 percent of the total budget.  End 
Summary. 
 
¶2. (U) Budget Outline: Morocco's 26.6 billion USD budget for 
2007 is up nearly 15 percent on the 22.98 billion USD that 
the Kingdom expended in 2006.  Government revenue, however, 
is forecast to rise only 8.2 percent to 24.72 billion USD 
billion, leaving the country with a deficit of 1.78 billion 
USD, or approximately 3.1 percent of GDP.  The budget forsees 
3.4 percent growth, 2 percent inflation, and is based on an 
average oil price of 65 USD per barrel.  Expenditures are 
divided among government functioning (12.74 billion USD), 
investment (3.02 billion USD), debt (6.86 billion USD) and 
other expenditures (3.85 billion USD).  The budget includes 
1.6 billion USD for the price supports on petroleum, sugar, 
and other products that the Moroccan state provides through 
the Caisse de Compensation.  Roughly 1 billion USD of this 
total is for subsidies for this year, with the remainder 
going to pay off arrears from previous years. 
 
¶3. (U) Tax reform: Government officials note that revenue 
growth in the 2007 budget lags behind expenditures in part as 
a result initial tentative steps to reform Morocco's income 
tax.  With a top marginal rate of 44 percent and such swift 
escalation that even wage earners who earned 4,000 USD faced 
a 35 percent rate, Morocco's income tax, particularly when 
coupled with social security taxes of 35 percent, constituted 
what the World Bank termed a "severe constraint on the use of 
human capital."  The 2007 budget begins gingerly to address 
the situation by reducing the top tax rate from 44 to 42 
percent, raising the floor at which income tax is first 
imposed from 2325 USD to 2800 USD and also adjusting the 
internal salary bands, so that (for example) the 35 percent 
rate becomes effective at a salary of 5,230 USD.  The changes 
will cost the government an estimated 290 million USD in 
revenue. 
 
¶4. (U) Expenditures: Increases in everyday government 
expenditures include a 6.9 percent increase in spending for 
civil service salaries, despite the completion of the program 
of voluntary departures which the government has pursued in 
recent years.  Given that the average increase in the wage 
bill over the last six years has been 7.5 percent, the 
voluntary departures succeeded in bringing that increase 
below that level by only 1 percent in 2007.  The largest 
increase in the budget by far, however, is for debt service, 
which is up nearly 33 percent over 2006, representing over 30 
percent of the total budget.  External debt payments are 
relatively stable at 1.1 billion USD, but internal debt 
payments for interest and principal have swollen to 5.76 
billion USD, a 41 percent increase.  Prime Minister Jettou 
has sought to downplay the issue, in arguing that the 
internal debt increase is less dramatic when one discounts 
one-time charges for the voluntary departures (930 million 
USD) and the arrears of the retirement system (1.28 billion 
USD). 
 
¶5. (U) Investment: On the positive side of the ledger, the 
budget significantly increases investment, though at least 
one observer has argued to us that the increase stems in part 
from clever accounting in shifting unrealized investments 
from 2006 to 2007 books.  Nonetheless, the 17.8 percent 
increase in investment is noteworthy.  When other investment 
spending is included, including that chanelled through the 
Hassan II Fund, public enterprises, and special Treasury 
accounts, total Moroccan investment spending totals nearly 
10.46 billion USD. 
 
¶6. (SBU) Caisse Reform: Left for a future government is the 
politically sensitive topic of reform of the Moroccan subsidy 
 
RABAT 00000189  002 OF 002 
 
 
system, which the government left untouched in the 2007 
budget.  Recent declines in oil prices have eased the burden 
these subsidies impose on the overall budget (and the budget 
itself is based on a realistic average price of oil of 65 USD 
per barrel), but critics still indict the system for its 
failure to target the truly needy.  Subsidies on "small" 
propane gas bottles, for instance, have led many enterprises 
to utilize large numbers of such small canisters, rather than 
buy such gas in larger quantity.  Even Caisse officials 
estimate that well under fifty percent of their spending 
reaches the truly needy, as originally intended. 
 
¶7. (SBU) Comment: With its investment and subsidy components 
and initial steps towards tax reform, the 2007 budget is 
clearly framed with the upcoming 2007 parliamentary elections 
in mind.  Debates in the parliament largely consisted of 
political parties attempting to position themselves in a 
politically favorable light, and did not address the the 
budget's underlying balance or sustainability.  Similarly, in 
his recent public presentations on the budget, Finance 
Minister Oualalou has preferred to discuss improvements in 
Morocco's social and economic situation, rather than enter 
into the weeds of budgetary policy.  Future governments may 
not have that luxury, however, given pressures stemming from 
Morocco's mounting internal debt and the need for further 
reform of the country's social security system.  Critics 
argue too that the government must do more both to rein in 
ordinary expenditures and to target critical areas such as 
agricultural reform and industrial development, and warn that 
the 3.4 percent growth on which the budget is based is not 
sufficient to either reduce poverty or absorbe new entrants 
into the labor force.  End Comment. 
****************************************** 
Visit Embassy Rabat's Classified Website; 
http://www.state.sgov.gov/p/nea/rabat 
****************************************** 
 
Riley