Hot spots: Morocco.(hot spots)

The foreign trade deficit increased to an all-time high last year, but the gap was easily bridged by capital inflows. The latest figures published by the Office des Changes in Rabat show that exports rose by only 7% in 2007, to 119.9 billion dirhams, while imports jumped by 33% to MAD 257.0 billion, as overseas purchases of cereals virtually doubled and imports of industrial machinery shot up by 19%. As a result, the merchandise trade deficit increased to an all-time high of MAD 137.1 billion (the equivalent of about USD 18 billion) from MAD 98.6 billion in 2006.

The argument is being made that the explosive widening of the trade gap increases pressure on the government to devalue the dirham, which is pegged to a basket of the currencies of Morocco's foremost trading partners. The MAD gained by 8.44% against the globally weak U.S. dollar last year, while losing a bit less than a percent against the euro (France is Morocco's foremost trading partner, accounting for 28% of exports and 16% of imports, while Spain ranks second). So far this year, the dirham has advanced by another 1.5% versus the greenback, but has lost a bit more than that on the euro.

At that, a larger trade deficit is not, by itself, proof of an exchange rate's misalignment, and a devaluation is a double-edged sword. It raises the cost of importing energy, with Morocco having to buy almost all its oil and natural gas abroad, and it increases the cost of servicing the Kingdom's foreign debt, all of which is denominated in hard currency. Besides, at least for now the expansion of the trade deficit is not an insuperable problem for Morocco. The red-ink spill is more than offset by capital inflows, especially tourism earnings and the homebound remittances of Moroccan expatriates, so that official international monetary reserves rose by 7.5% to somewhat over USD 24 billion.

In the political arena, there was hope in some quarters that the elections of last September 7, which drew a miserably low turnout of only 37% of the electorate, would give rise to a more reform-minded administration, even though the conservative Istiqlal (Independence) party won the most seats and was, thus, put in a position to reconstitute its governing coalition. When, subsequently, King Mohammed named Abbas el-Fassi as the new Prime Minister, many pundits took this as a positive sign for Morocco's fledgling democracy. But then the lineup of the new government confirmed the view of skeptics, who had predicted that true reform would not be part of the Monarch's agenda. Most of the 34 Cabinet members turned out to be palace appointees with little or no ties to the four parties in the supposedly governing coalition.

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Bolstering international trade, on the other hand, is a high priority for the powers that be, and French President Nicolas Sarkozy, who visited Rabat in late-October, was able to bring home contracts for about 3 billion euros worth of business for France, led by EUR 2 billion in deals for Alstom (the world's second-largest manufacturer of trains), the national French rail entity SNCF (Societe Nationale des Chemins de Fer), and RFF (Reseau Ferre de France) for the construction of a rail link between Tangiers and Kenitra. Alstom is to supply 18 high-speed trains, while SNCF and RFF are to furnish technical support. The link is slated to come into operation in 2013 ...