Climate-related risks could be putting Morocco’s financial sector in jeopardy: Morocco’s growing vulnerability from droughts and floods are exacerbating risks to its economy and banking sector, according to a recent report (pdf) by the World Bank (WB). The report, which was also led by Bank Al Maghrib, the French Development Agency (AFD), and the Global Risk Financing Facility, assesses the risks posed by climate change on the North African country’s financial stability.

Morocco’s water crisis has reached new levels: Morocco’s water reserves have significantly declined, with filling rates dropping to 27.87%. During the same period last year, dams reached a filling rate between 31-32% but high summer evaporation rates and siltation have made that number even lower in recent months, with 63 dams across the country feeling the impact. Water inflows declined in the country from 2.5k cbm per capita annually in 1960 to 620 cbm in 2020, placing Morocco in a situation of structural water stress. Last year the country approached the absolute water scarcity threshold of 500 cbm per capita per year.

Climate change amplifies financial damages: Over a third of bank loan portfolios are exposed to physical climate risks, particularly affecting sectors like agriculture, food processing, and tourism, as well as vulnerable households, according to the report. Drought scenarios could lead to GDP reductions ranging from 1.8 to 3.5 percentage points, while pluvial flooding could cause losses ranging from c. USD 9 bn to USD 10.8 bn by 2050 depending on its severity.

Physical climate risks could affect multiple key industries: Agriculture-related sectors, such as crop and livestock farming, are particularly at risk due to the crisis, but other sectors like food processing and tourism, which are connected through value chains, could also suffer. Floods, mainly along the coastline where population and industries are concentrated, could damage assets and infrastructure, affecting sectors like transport, tourism, and agriculture, and therefore impacting banks with exposure to these areas.

Damages to the banking sector could be managed: The impact of climate transition risks on Morocco’s banking sector could be manageable, due to Morocco’s small contribution to global greenhouse gas emissions. However, rising national emissions, especially from the energy sector, could increase exposure to these risks. Industries sensitive to transition risks include electricity generation, transport, mining, agriculture, manufacturing, and utilities, as well as those affected by the EU’s Carbon Border Adjustment Mechanism (CBAM), such as cement, electricity, and aluminum production.

What measures are needed? A number of policy changes are needed to better understand and manage climate-related financial risks, according to the report. Those include updates to risk analyses, improved data collection and building up institution capacity in the short-term by Bank Al Maghrib. Developing climate-related reporting guidance and indicators can also aid in monitoring risks in the long run. The Moroccon central bank should also integrate climate considerations into its supervisory framework, possibly through stress testing and regulatory guidance. Collaboration with relevant ministries, such as finance and energy, should also be prioritized to offer climate guidance and support the development of ins. markets to manage climate and disaster risks.

REMEMBER- Morocco is sparing no effort to support climate resilience: The board of the African Development Bank (AfDB) approved last month EUR 120 mn in financing for the first phase of Morocco’s Governance and Climate Change Resilience Support Program (GCRRP) in July. This followed a recent approval of USD 100 mn in funding by the Opec Fund for International Development for the program. Morocco also announced plans earlier this year to increase its green investments to reach 10% of its foreign exchange reserves. The central bank will also advise banks on how to assess the climate-related risks from their major borrowers. Morocco faces a funding gap of USD 78 bn to achieve its climate goals by 2050, according to the World Bank.

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