North Africa in a race against time for growth and development

Big budgets and major projects in Morocco and Algeria aim to help the region return to rates of expansion seen before inflation and global geopolitical turbulence hit

Jamie Wignall

The countries of the Arab Maghreb Union have ambitious plans for 2024 as they try to return to the kind of robust expansion seen before inflation and global geopolitical turbulence hit.

North Africa in a race against time for growth and development

Mohamed Sharki

last update on 25 Jan 2024

Hopes are brighter for North Africa’s economies as the calendar flips into 2024, with the region seeking to put a bleak year behind it.

Geopolitical turbulence increased levels of uncertainty in 2023 when ripples from the pandemic were still being felt, and the impact of climate change worsened.

The worst drought the area has ever seen hit agricultural production. A devastating earthquake shook the Atlas Mountains in Morocco, catastrophic floods inundated Derna, Libya, recurring forest fires broke out in Algeria, and a food shortage sparked a wave of hunger in Tunisia.

And so, the bar for improvement is set low for the year ahead, but there is a sense of determination that progress will be made.

Members of the Arab Maghreb Union have allocated substantial financial budgets and investment projects for 2024. These allocations are considered the largest in their history as part of an effort to regain economic momentum.

Not long ago, the region – situated between the Middle East and the European Union, historically known as the intersection of the Arab-Islamic East and the Christian West – had precisely that.

In 2021, there were economic growth rates of up to 8% in Morocco, 4.3% in Tunisia, and 31.4% in Libya in 2021. But in 2022 and 2023, inflation stoked record-high prices and brought growth crashing down. Youth unemployment rates in North Africa exceeded 13%, exacerbating poverty and vulnerability.

AFP — A woman reacts standing infront of her earthquake-damaged house in the old city in Marrakesh on September 9, 2023.

The region spans over 6 million square kilometres within a triangle defined by the Mediterranean to the north, the Atlantic to the west, and the Sahara Desert to the south.

The faster the economy grows, and the higher per-capita income is achieved, the more jobs are created, offering a path out of poverty and higher living standards.

That is the aim. But it will not be easy.

According to a report from the International Labour Organisation in Geneva: "Middle-income countries in the Middle East and North Africa are unlikely to recover to pre-pandemic unemployment rates before 2019. The average unemployment rate is projected to remain 11.2%."

Going for growth

Nonetheless, North Africa’s countries aim for growth, at 3.7% in Morocco, around 4% in Algeria, and 3% in Tunisia.

The International Monetary Fund (IMF) expects Libya to achieve the highest growth rate in the region and the wider Middle East, of 7.5%, fuelled by global oil prices, even after the impact of the devastating floods in the country’s northeast last autumn.

The IMF expects Libya to achieve the highest growth rate in the region and the broader Middle East, of 7.5%, fuelled by global oil prices.

Energy markets are also expected to help Mauritania, where the IMF expects growth of over 5% this year and over 7% in 2025 as the country begins exporting liquefied natural gas from the shared Tortue field with Senegal.

The draft budgets of the Maghreb countries will pose an additional challenge after local debt denominated in dollars exceeded alarming rates.

Tunisia: Vulnerable finances

North Africa is considered a region with medium-to-high indebtedness, ranging from 55% to 80% of GDP. Global rating agencies Moody's, Standard & Poor's, and Fitch all place Tunisia in the CCC category, indicating a high risk.

The country failed to reach an agreement with the IMF on a financing package estimated at $2bn. However, tourism saved the economy in 2023, with over 9 million visitors generating revenues exceeding €2bn ($1.7bn), according to the Central Bank of Tunisia.

While the growth targets in the Arab Maghreb are clearly set out, there is no guarantee that they will be met.

Tunisia appears to be the most vulnerable financially, even after it made significant improvement, thanks to a 47% increase in tourism revenues at the end of August and a 1.2% growth rate over the previous year.

The World Bank noted: "The prospects for the Tunisian economy remain lower than those of its Maghreb neighbours, despite increased exports in textiles, machinery, and olive oil, coupled with growing tourism revenues, which constitute 9% of the GDP, contributing 0.8% to economic growth."

AFP — Farmers bring water by tanks for their livestock in the remote village of Ouled Omar, on November 28, 2023, with the North African country grappling with its worst water scarcity in years as it enters its fourth year of drought.

However, like the rest of the region, Tunisia faces a severe drought that may impact agricultural production. The World Bank advised Tunisia to develop an urgent reform package, including adapting to climate change, strengthening industrial competitiveness, improving tax resources, and reducing the budget deficit.

The IMF made similar recommendations.

Tunisia is also grappling with financial difficulties that have exacerbated social problems, with unemployment rising to 15.6% among the working-age population.

Meanwhile, debt levels rose from 67% of GDP in 2017 to 78% in 2023 as the country struggled to obtain the external financing that the economy needs to create jobs.

In part, the problems relate to conditions on financial support from the EU as the bloc pressures Tunisia to take measures over the irregular migration from the country into Italy.

Tunisia appears to be the most financially vulnerable after failing to reach an agreement with the IMF on a financing package estimated at $2bn.

Algeria: Largest budget and largest deficit

Algeria has set its 2024 budget at around $110bn, which local media has reported to be the largest in history. But it also faces a fiscal deficit estimated at $45bn, also the largest in history.

Oil and gas exports are expected to generate hard currency revenues amounting to about $50bn this year, which is $5bn less than the 2023 revenues that reached $55bn due to the decline in oil prices in the international market.

The budget features an oil price assumption of $70 per barrel in the international market. Algeria exports around 500,000 barrels of oil per day and supplies gas to Italy, Spain, and France.

Imports in 2024 are expected to reach $43.5bn, which is insufficient to meet the consumption needs of a country with a population of approximately 46 million.

This raises concerns about a return to food queues at a time of severe drought, which will increase the cost of wheat imports this year. Even if imports reach 2025 forecasts of $47.4bn, the local market will still lack basic commodities.

The picture is worsened by some food imports being diverted to the military amid a lack of transparency and governance, according to the Stockholm International Peace Research Institute (SIPRI). It criticised the purchase of weapons when there was a need for the supply of essential consumer goods.

Despite being the largest economy in the Maghreb region with a GDP of $190bn, Algeria's per capita income is expected to fall in the coming year.

Algeria's Minister of Finance Laaziz Fayed outline the intentions for the budget: "The budget aims to improve purchasing power, enhance infrastructure, and promote social development."

But the local market is grappling with rising inflation, reaching 11% on food items, increasing by 1.2 percentage points monthly throughout the past year.

Chris Geiregat, head of the IMF mission to Algeria, drew a distinction over timeframes: "The short-term economic outlook is reassuring thanks to energy prices, but there are medium and long-term risks due to reliance on fossil energy exports... There is an urgent need to diversify income sources."

Despite being the largest economy in the Maghreb region with a GDP of $190bn, per capita income is expected to decline in the coming year and beyond, anticipating a reduction in revenues due to falling energy prices.

Exports are also projected to decrease to 22.5% of GDP as prices fall, prompting a reliance on cash reserves that will begin to decline in 2024.

The IMF advises adopting three crucial measures: encouraging the private sector and diversifying income sources through additional economic activities, overcoming inflation, and adapting to climate change in freshwater resources.

Morrocco: Economic diversification

Morocco lacks fossil fuels, but its economy is the most diversified among the Maghreb and the broader Arab world. Agriculture constitutes 13% of the GDP, fisheries 4, tourism 7%, and industry around 30%.

In the past year up to November, the country exported $13.5bn in car sales, $2bn in aircraft parts, $7.7bn in food, and $4bn in clothing. The total exports of industrial and service sectors amounted to $41bn compared to $66bn in imports.

Tangier car assembly plant in Malloussa, east of the coastal city of Tangier.

The treasury received approximately $21bn in tourism receipts, remittances from Moroccans living abroad, and $3.1bn in foreign investment.

Rabat has allocated a $1bn budget for 2024, primarily focused on education, health, social care, and direct support for poor families. The budget also includes subsidies for gas cylinders, wheat, and sugar.

It aims to precede hosting the 2030 FIFA World Cup with an unprecedented investment boom that would bring Morocco to the same level of development as fellow hosts Spain and Portugal.

Morocco also aims to improve human development indicators through socially oriented programmes to eliminate poverty, increase income, and improve living conditions, especially for rural and suburban populations, amounting to $3.6bn.

The budget also includes home and apartment ownership assistance, ranging from 10% to 33% of their total value.

However, Moroccan society continues to face challenges. There is limited state help for the poor and other marginalised individuals. Employment rates for women are low. Regional and class disparities have increased since COVID-19.

But as Morocco prepares for the attention that will come with the World Cup, it is keen to make changes, including the first provision of direct financial support to the poor. Improving the country's social safety net has top-level support from King Mohammed VI.

Morocco has ambitious plans for major infrastructure projects estimated at around $500bn over the coming years. Agreements have been reached with sovereign wealth funds in the United Arab Emirates to contribute to financing 12 major projects.

These include desalination plants, an extension of over 500 kilometres to a high-speed rail line to Marrakech, and its share of the Nigeria-Morocco gas pipeline with an estimated value of $25bn.

Diana Estefanía Rubio

Freshwater resources pose the greatest challenge to the Moroccan economy. It currently has 140 dams with 18bn cubic meters of water capacity. But the decrease in rainfall in recent years has reduced water reserves in the dams to less than one-third.

There are concerns about a water crisis in some regions during the upcoming summer, which is anticipated in several North African areas severely affected by climate change.

Water scarcity poses the greatest challenge to Morocco as a drop in rainfall in recent years has shrunk water reserves to less than one-third.

Border problems

North Africa's wider economy faces a range of problems, including border closures, weak intra-regional trade, and a near-complete absence of financial and investment coordination. Such difficulties mean it is estimated to lose between 2% and 3% of its annual growth.

The region is poorly integrated and features disputes between its nations. Algeria has opposed Morocco's rights in the Sahara for half a century following Spain's exit from the region in 1975.

As long as political differences remain unresolved, plans for a North African railway will remain stalled, along with the interests of 110 million people looking for development and a standard of living comparable to the European Union.

The five countries of the Arab Maghreb need high growth rates of at least 6% to accelerate economic and infrastructure while creating employment opportunities for the nearly 500,000 people entering the labour market annually and to reduce rates of emigration.

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