Resilience to Water Scarcity and Commodity Price Shocks are Critical for Moroccan Economic Growth and Stability

RABAT– After a strong recovery in 2021, Morocco’s economy has suffered this year from the impact of a severe drought, a slowing global economy, and higher global energy and food prices. According to the World Bank’s latest report Morocco Economic Monitor, Spring 2022: The Recovery is Running Dry, the economy will slow down markedly in 2022, with a projected growth rate of 1.3 percent in 2022, compared to 7.9 percent last year.

The impact of the drought, compounded by the war in Ukraine, highlights Morocco’s exposure to climate and global commodity price shocks. Successive droughts over three of the last four years are a stark reminder of the vulnerability of Morocco’s economy to increasingly erratic rainfall levels. The report includes an analysis of the macroeconomic impact of droughts and water scarcity in Morocco, carried out as part of upcoming work that looks at climate and development in Morocco.

While low rainfall shocks have historically been a driver of macroeconomic volatility in Morocco, droughts tended to be followed by strong rebounds, and have not impeded robust, long-term agricultural GDP growth. However, the increased frequency of poor rainy seasons could result in drought becoming a structural challenge, which would have a severe long-term effect on the economy.

Between 1960 and 2020, the availability of renewable water resources decreased from 2,560 m3 to about 620 m3 per person per year, placing Morocco in what is considered a situation of “structural water stress”. During the same period, the Kingdom built more than 120 large dams, increasing by tenfold total water storage capacity. However, the actual volume of water stored in the country’s main dams has declined for most of the past decade. In fact, the overall water level was about 33 percent when the latest drought hit the Kingdom, posing a threat to water security in some of Morocco’s river basins and prompting the authorities to adopt various emergency measures.

Thus, Morocco would need to complement its infrastructure development efforts with water demand management policies that incentivize sustainable, efficient, and fair water resources.

“Morocco is among the world’s most water-stressed countries. Recent events showed that engineering solutions are no longer sufficient to shield the economy against climate shocks and highlight the need for complementary policies, as outlined in the New Development Model, that would reflect the true value of water resources and incentivize more efficient and rational uses.” said Jesko Hentschel, World Bank Maghreb and Malta Country Director. These reforms include pricing scarcer water resources at their appropriate value, developing efficient water allocation mechanisms through for instance a tradeable quota system, and producing and publishing accurate and extensive data on water resources and use.

The report also looked closely at the impact of rising inflation, which has been fanned by the war in Ukraine. While cushioned by domestic price subsidies, consumer price inflation is expected to accelerate to 5.3 percent this year from only 1.4 percent in 2021. This could erode the purchasing power of poorer and more vulnerable households.

Government support to farmers and consumers through subsidies has increased spending needs while higher global energy and food prices and lower domestic cereal production increased import needs. Consequently, the fiscal and the current account deficits are expected to reach 6.4 percent and 5.2 percent of GDP in 2022, up from 5.6 and 2.3 percent of GDP last year. However, macroeconomic risks are mitigated by the adequate level of foreign exchange reserves, the relatively low domestic real interest rates, the solid structure of Morocco’s public debt, and good access to international financial markets.