In Morocco, the economic and social assessment of the Covid-19 pandemic reveals a deep recession that has negatively affected businesses and households. It is a shock that has hit both demand and production through the disruption of supply chains, which has caused a sharp slowdown in the pace of economic growth.

It is a unique crisis in terms of its severity and the scale of its spread. The Moroccan economy, in the pre-crisis period, was characterised by several structural vulnerabilities – such as a deceleration of the growth rate, a high rate of unemployment and fragility of both the public finances and the current account of the balance of payments. The pandemic has aggravated this situation by generating a decline in GDP recorded at 7.2% in 2020.

The state has taken measures to bolster the preservation of jobs, the maintenance of business activity and the establishment of conditions for economic recovery. These include the creation of a strategic investment fund, public administration spending, cash transfers to households and lower interest rates. Estimating the economic effects of these measures is of critical importance to the government, as they indicate the level of support needed in a shrinking fiscal space.

My work assesses the effects of the actions taken by the government during Covid-19 on economic variables and raises many questions about the design of monetary and fiscal policies in the future, and their interaction in an environment of high public debt.

The first measure was to increase public investment by creating a new strategic investment fund of 45 billion dirhams – equal to 4.5% of Moroccan GDP. In the short run, this decision had an instantaneous impact on activity. The value of the output multiplier is around 80% of the shock volume in the first year, before falling to 70% in the second year.

According to my empirical analysis, the creation of this investment fund has a double impact. The first result consists of the crowding-out effect on private investment, which can be explained by the fact that, to mobilise this amount, the Moroccan state borrowed money from the financial market by issuing treasury bills.

The second result lies in the response of the economy to the increase in demand for public investment. Firms increased the demand for labour and sustained the same level of capital before it was lowered. This was due to the mode of financing of this fund, which increased the rate of return on capital and wages.

In the long term, the creation of this fund will continue to weigh heavily on private investment and consumption. This result contradicts the knock-on effect of public investment, which contributes to the stimulation of private consumption and, consequently, to the creation of jobs in the private sector. The results of this measure are modest.

The second measure that I evaluate consists of quantifying the response of the Moroccan economy following the granting of 25 billion dirhams, equal to 2.5% of GDP. This came in the form of cash transfers to five million households among the vulnerable population. This initiative aimed to stimulate purchasing power and boost Moroccan economic activity (since households operating in the informal sector had lost their income due to the compulsory confinement linked to the health crisis).

Following this decision, the variables’ dynamics showed a weak but positive response regarding the total production and consumption rate, which recorded a value of 5%. But this value had registered a decline by the end of the year.

To cope with the negative effects of the pandemic, especially the expenses related to the health sector, Morocco increased public consumption to 5.7%, equal to 1.3% of GDP during the year 2021. These measures would have involved exceptional spending to support the health sector and households’ purchasing power.

The dynamics of the variables after the increase in public spending are consistent with economic theory, and indicate the presence of a crowding-out effect in private consumption, which fell by 30% of the shock volume in the first year, before continuing to deteriorate for the rest of the period. The shock also led to an increase in public debt, which was double the amount of the shock in the first year.

A further measure taken by the Moroccan authorities was monetary. To counteract the negative effects of the pandemic, the central bank lowered the interest rate by 0.5% in March and by 0.25% in June. My simulation results for this decision show an increase in output by 1%, highlighting the importance of this shock compared with other shocks.

This increase in output was a direct response to the increased injection of liquidity by the central bank into the financial system. This led to an increase in investment and consumption, which recorded values of 4% and 1% respectively. This increase supposes the increase in labour demand and salary, which registered values of 1% and 0,5% respectively.

Another issue of key importance is the effectiveness of these decisions in restoring the equilibrium state of the public debt as a result of fiscal and monetary measures. A shock to public transfers leads to a persistent deviation of the debt from its equilibrium level, followed by a shock to public consumption.

Nevertheless, public investment is the fiscal instrument that allows for a more or less small increase in public debt, compared with other fiscal measures. Regarding the decision taken at the monetary level, the reduction of the interest rate by 0.75% allows the reduction of the public debt as a result of the enrichment of the economy, investment and consumption.

This column draws on ‘Economic Resilience in Morocco During Covid-19’ by Redouan Abdenour, ERF Policy Brief No. 76.