There are few places where Europes faltering economic
recovery will be more closely watched than in the Maghreb.
Through exports, tourism and migrant remittance flows, the
countries of the region are critically reliant on relations
with their EU neighbours across the Mediterranean.
Yet despite the problems besetting western markets with
which they are closely linked, North African economies have so
far escaped the worst of the global crisis.
Algeria and Libya were sustained by the continued strength
of their oil and gas revenues and, when energy markets dipped,
by lavish government spending. But Morocco and Tunisia also
demonstrated striking resilience, thanks to strong domestic
demand, a diverse productive base and improving industrial
Overall, the region notched up real GDP growth of 3.6% in
2009. It could do even better this year, especially if European
consumers regain the confidence to shop and travel. Moreover,
in no country was expansion driven by the kind of financial or
property market bubble that has burst in other emerging
Financial systems across the region are mainly bank-based
and not heavily reliant on inflows of portfolio investment or
credit from the world financial system. This may be viewed as
under-development in some respects, but it did help to shield
the Maghreb states from the worst impacts of the global
liquidity squeeze and banking crisis.
But beyond the reassuring headline facts of the
Maghrebs solid performance over the past several years,
serious challenges remain to be confronted. Regional
integration is strikingly under-developed, by comparison with
the European Union but also sub-Saharan West Africa or the Arab
The Institute of International Finance (IIF) points out that
in 200708, intra-regional trade between the four Maghreb
states amounted to just 2% of their total merchandise trade,
one of the lowest rates in the world for a geographically
contiguous group of states. Tariffs have been widely reduced,
but there are still many non-tariff and regulatory obstacles to
cross-border business. Difficulties are compounded by the
chilly state of political relations between Algeria and
Morocco, the two most populous markets; this hinders the flow
of business and travel, and cooperation on regional issues.
For example, Morocco has been excluded from a new
Algerian-led partnership with West African countries to enhance
security in the Sahara (where problems such as people and goods
smuggling and Islamist terrorism have a clear economic
development impact). Some progress has been made in preparing
an action plan of financial sector reforms, such as the
harmonization of regulation, statistics and payment systems.
But there is a long way to go.
The weakness of economic partnerships with their neighbours
leaves individual Maghreb countries heavily dependent on
internal demand and on their relationships with Europe.
The stronger the recovery in Europe, the better it is for
Tunisia and Morocco. It all depends on what happens in the euro
zone, because of their reliance on EU imports and
tourism, says Garbis Iradian, senior economist for Africa
and the Middle East at the IIF.
With a population of only 11 million, Tunisia has based its
development strategy on heavy investment in education, the
emancipation of women and the creation of an efficient business
infrastructure, to support a competitive trading economy that
is built around a close trading partnership with near
neighbours in Europe.
The country hopes to extend its association agreement with
the EU to encompass services, and it is also seeking to deepen
modernization at home further, through measures to promote
industrial diversification and efficiency, funded in part
through direct foreign investment which reached E283
million in 2007, half of it focused on industry.
Economic stability is further underpinned by
self-sufficiency in oil. But the country is now starting to
encourage the development of a modern green economy,
subsidizing consumers, for example, to install solar panels on
Morocco with 32 million people but still major basic
development challenges is more inward looking.
Tunisia is a small economy that is strongly oriented
towards export, whereas Morocco is a large and highly
diversified economy whose focus is essentially domestic,
says Anouar Hassoune, senior analyst at Moodys, the
investment rating agency.
And while Morocco was the first Maghreb state to take action
to strengthen banks with a crackdown on bad loans, Tunisia has
now followed suit. Tunisia has made impressive progress
in reducing non-performing loans, from an average 40% of bank
lending portfolios five years ago to a mere 15%, says
Agriculture remains a major source of income and
livelihoods, although output in the sector is volatile because
it is exposed to the risk of drought. But the domestic
industrial and services base is also a key driver that has
helped to sustain Morocco through the global crisis.
A crucial strength is the structure of the banking industry.
The kingdoms government has resolutely ignored the
international fashion for developing financial services hubs,
and limited the range of banks to what was necessary to cater
for the local economy.
Morocco was the first Maghreb state to embark on
reform of its banking sector. The central bank has been
cautious about approving licences, and the market is dominated
by about 10 banks that are highly liquid, thanks to an inflow
into the economy of privatization revenue between 2003 and
2008, tourism income and more than E5 billion a year in
remittances from Moroccans working abroad, says
This has allowed Moroccan banks to maintain lending
throughout the global credit squeeze, to meet the domestic
demand for credit which is strong in an economy where
most businesses have a relatively small base of
The Moroccan model is not without its shortcomings. The
country may be over-reliant on bank financing, while equity
investment is relatively undeveloped there were no
initial public offerings on the Casablanca stock market last
This problem has been implicitly acknowledged by
policy-makers with a recent decision to merge ONA
Moroccos most strategic conglomerate, controlled by the
royal family with its parent group and then float off
dominant stakes in its key subsidiaries on the Casablanca
There is also a recognition of the need to strengthen the
competitiveness of the economy and its technological focus.
Morocco would gain tremendously from jumping on the
bandwagon of technological innovation and change, by
revitalizing higher education and research and developing a
national roadmap for green growth, the countrys
Royal Institute for Strategic Studies argues in a recent policy
Whereas Moroccos strategy is based around a mixed
economy, with a big role for the private sector and a strong
commercial outlook even for nationally owned groups, Algeria
remains fundamentally statist and nationalist in outlook.
Although some companies have been privatized, the
countrys socialist history is still deeply felt. The
economic foundations are gas and oil, and the public sector.
The expansion of gas exports has sustained growth and allowed
the government to pay off almost all international debt.
Several years ago, the country was on the verge of
liberalizing oil and gas investment, to give foreign energy
companies a more dominant role. But at the last minute it
pulled back, choosing to risk disillusionment among foreign
investors rather than surrender national control of a strategic
Foreign direct investment is still tightly regulated. A
cause of particular wariness among international investors is
the states insistence on a pre-emption right if an
investor chooses to sell out; the government has on occasion
been ready to take punitive action against investors when it
dislikes their decisions on the disposal of assets, and this
has badly shaken the confidence of foreign businesses.
Even so, in broad macroeconomic and financial terms, this
approach has allowed Algeria to plough through the recent
global downturn almost unscathed. Growth last year was 3.5%,
and it was particularly impressive at 7.6% in the
non-hydrocarbon sector, boosted by a $150 million programme of
But while this approach has sustained growth, it has not
delivered major improvements in living standards or public
services, or created the jobs that are needed for a
fast-growing youth population.
One regional specialist estimates that internal liquidity in
Algeria stands at $250 billion. But the banking system acts
mainly as a repository for savings rather than as an effective
vehicle for financial intermediation; the huge mountain of
deposits is not translated into the retail business and
personal credit that could stimulate economic activity and the
creation of prosperity and employment at the local level.
Most growth in Algeria and Libya is
driven by domestic spending while the private sector is lagging
behind. Most of the banking sector in these two countries is
still in public hands, says the IIFs Iradian.
How long will the growth last? They have to slow down.
This growth is not sustainable.
But while there are long-term challenges, Algeria and Libya
can feel vindicated that the energy sector and the maintenance
of a large public sector have spared them from heavy reliance
on investment, and helped to carry them through a period of
crisis in the world economy relatively unscathed.