The first experience with the reform of liquid fuel subsidies implemented in 1995 helped to stabilize subsidies around 1.7% of GDP until 2000, when the systematic use of the indexation system was suspended. The removal of subsidies on edible oil in 2000 and of jet fuel in 2005, together with the reform of the sugar subsidy system in 2006 and the price increases of liquid fuels, mitigated the impact on the budget between 2001 and 2007 but expenditure on subsidies continued to increase to reach 2.7% of GDP in 2007 because of the continued rise in oil prices over the period.

While the 2008 financial crisis had limited direct effects on Morocco’s economy, the subsequent food and fuel price crisis had more serious repercussions. Subsidies reached a peak of 6.6% of GDP in 2012 when, for the first time, they became higher than budgetary investments. Over this period, subsidies explained most of the deterioration in the budget deficits (Figure 5). Indeed, after two years of surpluses in 2007 and 2008, the budget would experience rising deficits peaking at 7.4% of GDP in 2012, the highest deficit since the early 1980s. The high budget deficits eroded all the budget space accumulated over the years. The resulting rapid increase in public debt was worrisome, jeopardizing the stability of the macroeconomic stance. Over the period 2008-2012, public debt worsened by 13 percentage points of GDP, reaching 60.3% of GDP in 2012.

**Figure 5 - Subsidies changes explain most of the changes in the budget deficits (in % of GDP)**

<!-- Start of picture text --> 8.0<br>6.0<br>4.0<br>2.0<br>0.0<br>-2.0<br>-4.0<br>-6.0<br>-8.0<br>-10.0<br>2009 2010 2011 2012 2013 2014<br>Budgetary subsidies Budget deficits<br><!-- End of picture text -->

**Source: Ministry of Economy and Finance**

It is the sharp fiscal crisis of 2012 that eventually forced the government to reform subsidies. The government reactivated the price indexation mechanism for fuel products, which helped cut subsidies by an impressive 24 percent (or almost 2 percentage points of GDP) in 2013. This, in turn, helped to reduce the budget deficit by 1.8 percentage points of GDP. The full implementation of the fuel priceindexation mechanism and the subsidies reforms in 2014 contributed to cut further subsidies by almost 20 percent (or 1 percentage point of GDP) by the end of the year. Moreover, subsidies reforms were complemented by other fiscal consolidation measures including the freezing of higher wages and limits to new hiring of civil servants to stop the rise of the public wage bill, and improvements to the tax collection system through the extension of the tax base, harmonization of tax rates and the fighting of tax evasion. As a result, the budget deficit for 2014 was less than 5 percent of GDP as targeted by the 2014 Budget Law. The central government debt stock increased in 2014, but at a slower pace than in earlier years (66.4 percent of GDP compared to 63.9 percent of GDP in 2013).

Despite the firm commitment of the government to deepen the subsidies reforms, reforming the remaining subsidies on LPG and flour seems uncertain over the short term, given the social and political cost of removing these subsidies. Indeed, unlike gasoline and diesel which are mostly consumed by the non-poor, the shares of LPG and flour are important in the consumption baskets of the poor and the 22