From the Editor

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26 March 2020: By Arezki Daoud: North Africa is bracing for an unprecedented economic contraction, even if the coronavirus crisis were to be contained soon.  The fundamentals of economic growth are such, that the region is expected to witness an erosion of revenues driven by both internal and external factors, with direct hit on their own economic development and social safety nets. In this podcast, I will comment on the three North African of the Maghreb region, namely Morocco, Tunisia and Algeria. More on Egypt will come in a separate podcast.

The economic growth outlook for Morocco was already compromised before the appearance of COVID-19. The country is experiencing the second year of a severe drought, which has already halved the production of wheat in 2019 to about 5.7 million tons, down 50% from 2018, and this trend is expected to continue this season. The 2019 wheat harvest was very low considering that it was 34% below the average output achieved between 2008 and 2017. Agriculture officials see a repeat this year of the same problem, affecting one of Morocco’s biggest productive sectors and hence, impacting the entire economy.

Then came the coronavirus, which will likely have more adverse effects on the broad economy, even if the country’s energy bill will naturally be reduced due to the drop in oil prices. Morocco’s High Commission for Planning (HCP), which is one of the main sources of official data, has already warned that its forecast, scheduled to be updated in April, will be revised downward. Still, HCP officials will not likely go as far as showing an economic contraction. No need to scare people. But they will likely shave their January growth forecast of 3.5% to something like 2%. Now even assuming that this rate is too optimistic, a 2% GDP growth will mean the worst economic performance for Morocco in over 20 years.

For Morocco, the crisis is not just a matter of dealing with structural issues by tweaking things here and there to return to good growth. The crisis is of a global nature and the Kingdom cannot do a lot to influence the course of things to come.  A large part of the problem for Morocco is that its traditional and strongest trading partners are in turmoil.  For example, French economists expect France to show almost no growth this quarter and things could worsen after that. France is a major consumer of Moroccan goods and a major source of tourists to the kingdom.  With tourists staying home, the travel and lodging industries in Morocco are bracing for several months of crisis.

In Tunisia, many economists are speaking of a double-digit GDP contraction that could reach up to -15%.  It may be an excessive number, but it is certainly a more realistic assessment than what the Moroccan officials tend to promote. Quebec University professor Moktar Lamari did not mince his words when he suggested in an opinion piece that “the purchasing power and the quality of life of two out of three [Tunisian] citizens” will take a hit.  Prof. Lamari appears to be concerned, and rightly so, about the inadequate strategies implemented by the Tunisia government to contain the virus, and appears to agree, philosophically at least, with Donald Trump’s statement that the cure could be more harmful than the virus.

In practical terms, Tunisia is bracing for a tumultuous period.  Both the formal and informal sectors are being degraded. Nearly one quarter million workers in the tourism sector have been laid off, and many in the industry brush aside the optimistic view of a few that the summer-time recovery will happen. Without an official cure to the disease, no one should bet on a summer recovery.

Just as in the case of Morocco, industrial output in Tunisia is set to further contract due to a decrease in global demand. Prof. Lamari argues that the sectors that will be most affected are the ones that are labor intensive like the garment and textile industry as well as the assembly and the food sectors. The services industry will not be able to compensate the losses recorded elsewhere, and that could have an impact on the more than half million workers employed in that space. Prof. Lamari’s prediction is rather dire, anticipating the collapse of many small and mid-sized companies (SMBs), which account for more than 95% of the Tunisian ecosystem of companies.

The confinement order issued by the Tunisian government will also have adverse effects on the broad economy, not necessarily due to the forced containment of two million workers, but because the details of such containment were not properly thought out. The upcoming wounds hurting the Tunisian economy, just like its neighbors, are largely self-inflicted.

Lamari said “the Covid-19 crisis arrives in Tunisia, when there is at least one in three people living in extreme poverty, facing unemployment or other precarious climate and security issues.” These vulnerable populations “do not always have decent houses to be confined to during the sanitary curfew … do not have the same attitude to risk as the wealthy and ruling elites. They are not ready to be at the mercy of highly politicized governance, having demonstrated its failures since 2011.”

Lamari points to some practical areas that are hurting more than solving problems.  The informal sector, which has always acted as a shock absorber for the purchasing power of consumers, is being eliminated with the closure of borders, the prohibition of interurban travel and the closure of informal souks (markets). And to conclude “the bottom line is that the Tunisian economy is at risk of depressing sharply, with double-digit recession rates, with all the related social, security and humanitarian consequences.”

                                                 Natural Gas Prices since March 2010

Algeria is likely going to be the biggest loser on the economic front in the Maghreb. Having benefited from peak oil prices in the 2000’s, the country is facing a steeper fall from far above, with the potential for more political turmoil over the next two years. Setting aside the coronavirus, the biggest harm to the economy has been caused by mismanagement, corruption and let’s be frank, a completely incompetent cabal of bureaucrats.  Abdelmadjid Tebboune, the current president who has been imposed by the old generals of the military command, is one of those old bureaucrats who is ill equipped to deal with anyone of the several crises facing Algeria. At best, he was housing minister, but just title, having made no improvement to the sector when he led it.  The Algerian people know that the regime forced on them with oppression and violence, is not going to be the source of anything positive.  Instead the people are bracing for one of the worst years ever.

What’s happening in Algeria is a set of crises within the perfect storm that is going to make the position of the regime untenable. They could resort to violence to maintain their power on the medium term, but even a crisis like the coronavirus, which they could have used to project leadership and buy some popular support, is not going to help them considering the escalation of repression currently taking place. The regime, led by old generals, the shadowy DRS political police and an army of bureaucrats who are in favor of the status quo, wants the regime to mimic that of Egypt, where the military is the only seemingly functional institution.

Obviously, the immediate problem for Algeria is Covid-19. But like all other countries, there is going to be an end to that crisis in the medium term, based on our assumptions. Once the dust settles, Algeria’s leaders will hope they never took the job: Oil prices are not likely to recover any time soon. Looking at todays WTI Crude Oil price (26 March 2020), the barrel of oil is going for less than $23. Natural gas is being sold at between $1.612 and $1.680 for one million British Thermal Units. This is an unprecedented contraction that the Algerian imposed leaders have not been prepared to face or skilled to confront. Even worse, global oil companies are retooling themselves to confront the possibility of a barrel of oil priced at just $10.

                                      Crude Oil Prices since 2010

So what’s President Tebboune doing? The usual knee-jerk reaction and a lot of populist decisions. He announced this week new measures to reduce spending, starting with a $10 billion cut to the $41 billion import bill budgeted this year. The budget set aside for procuring services from foreign suppliers, including engineering, will be cut by $7 billion. The state’s operating budget will be reduced by 30%, with the president making the impossible pledge that the cuts will not affect wages. The government’s statement on the issue notes that the health and education sectors will not be affected by the spending reductions. Something that we know will not happen. Social programs are likely to be the first to go.  All state-funded projects have been frozen.

State-owned oil firm Sonatrach has been ordered by the government to cut its operating expenses and exploration budget in half, going from $14 billion to $7 billion, “in order to preserve foreign exchange reserves.”  The truth is without independent oversight, whatever Tebboune says could never happen if the military generals decide otherwise. And we know that the Sonatrach oil company is owned by the Generals.

President Tebboune also ordered the activation of tax collection operations and the recovery of credits granted by public banks. How will he do that in these ongoing extreme conditions is a mystery.

After insisting on the need to focus efforts on agriculture and investment in areas guaranteeing the country’s food security, Abdelmadjid Tebboune says that “this situation could be an opportunity to get out of the endemic dependence on hydrocarbons.” But the reality is that without real earnings to fuel real growth within a diversified economy, the president’s statements on anything related to the economy cannot be taken seriously.  In fact, Algeria will remain in permanent crisis mode until the Hirak forces a real change in the country’s governance.