Executive Summary
High food and energy prices add to socio-economic pressures in the Maghreb, as a lack of structural reforms limits the region’s potential to benefit from the Ukraine war in energy and manufacturing.
After a year of democratic backsliding and a recent constitutional referendum, Tunisia is particularly ill-equipped to face price pressure. Morocco and Algeria look more stable but are also conflict prone.
The war in Ukraine underscores the Maghreb’s strategic importance for the EU: from gas imports to business relocations to focusing resources on conflict management in the Western Sahara.
Implications for International Business
Algeria’s potential as alternative energy supplier for Europe, combined with the government’s new investment code, increases the country’s attractiveness for international investors.
Morocco, and to a lesser extent Tunisia, position themselves as key players in renewables, but political and social instability look set to deter international investors.
The Maghreb’s strategic position as a gateway to Europe and Sub-Saharan Africa offers consequential business opportunities amid the war in Ukraine, especially in manufacturing.
State of Play Russia’s war on Ukraine hurts Maghreb States’ imports and budgets
The Maghreb is strongly impacted by the Russian attack against Ukraine. Tunisia is most vulnerable. It depends on wheat imports and is exposed to global prices as a net energy importer. Tunisia’s precarious public finances and high unemployment rate further weaken its ability to absorb shocks, as the government finalizes an austerity program with the IMF. Along with an increase of presidential powers after the constitutional referendum on 25 July, based on low turnout, this makes growing popular discontent more likely. Morocco, traditionally less reliant on wheat imports, currently suffers from disruptions in domestic production due to a severe drought. In response to high inflation and widespread protests earlier this year, the government increased energy subsidies. Although Algeria is affected by rising food prices as it imports most goods, it benefits from the rise in global energy prices as a major supplier. To curb social unrest, the government has suspended tax increases and is considering not to pursue planned subsidy reforms. Continued turmoil in Libya poses an additional security risk to its Maghreb neighbors.
Key Issues Great power competition in the Maghreb adds to the region’s strategic importance
The Maghreb has historically had strong ties with the West, especially Europe, on issues of security, counter¬terrorism, migration, and trade. As a result of the war in Ukraine, the region’s strategic importance is growing, mainly in security and economic terms. While the EU works to reduce its energy dependency on Russia, Maghreb states are important allies to win and keep. With its energy resources, Algeria is a key strategic partner for the West, particularly for Spain and Italy, which import gas directly from there.
Both Russia’s and China’s engagement in the Maghreb adds to the region’s strategic importance for Europe. Russia’s relations with the Maghreb focus on economic and security interests, with an emphasis on energy, agriculture, and tourism in Morocco and Tunisia. Algeria, in turn, is Russia’s third largest arms importer. Russian involvement is also driven by the ambition to become a major player across Africa, and the Maghreb states are a gateway to the Sub-Saharan region). China shares this ambition and has invested in digital and tech initiatives, as countries such as Tunisia and Morocco became home to major Digital Silk Road projects. Morocco has begun to strengthen ties with the West by joining the Abraham Accords and recognizing Israel as the fourth Arab country. Besides migration, Morocco is a key partner in renewable energy, which is crucial for Europe’s energy transition.
Increasingly, however, the conflict between Morocco and Algeria over Western Sahara interferes with Europe’s short- and long-term needs. Rabat recently won US recognition of its sovereignty over this territory and Spanish support for its autonomy plan. Algeria, in turn, suspended a two-decade friendship treaty with Madrid, even threatening to stop its supply of gas. This, however, is unlikely for two reasons: First, Algiers wants to position itself as a reliable partner to Europe, and second, it relies heavily on exports earnings to ensure domestic political and social stability. The country’s diplomatic proximity to Russia renders the Western Sahara conflict a geopolitical issue to focus on for the West, especially as Russia has abandoned its neutral position and sent signals of support to the nationalist liberation movement. Algeria thus appears to be trying to leverage its energy supplies for political support.
Structural problems limit the region’s potential for European manufacturing
Morocco and Tunisia have directly benefited from the supply-chain distribution in the automotive industry, as some manufacturers moved their production there following the war in Ukraine. For instance, Japanese car parts suppliers Yazaki and Fujikura shifted part of their fabrication to Morocco and cable supplier Leoni Wiring Systems moved to Tunisia. Manufacturing relocations could take place in the aeronautic, textile or agribusiness industries, where the two countries have strong competitive advantages due to their geographic location, skilled and cost-effective labor force, and know-how. Both countries also have great renewable energy potential. They began to expand their capacity by investing in the necessary infrastructure, adopting a regulatory framework to promote investment and facilitate public- private partnerships through tailored financing mechanisms. However, EU countries have yet to officially promote investments in these states as part of the European Green Deal strategy.
In addition, the three Maghreb governments have made efforts to encourage FDI by providing financial and land incentives, streamlining procedures, and creating opportunities for public-private partnerships. Nevertheless, the political and social instability in the region, the lack of investment in infrastructure (except for Morocco), and the lack of reforms in the banking and financial system are key challenges holding back multinational companies. In Tunisia in particular, social unrest is becoming a major obstacle to the country’s economic potential, especially as the Labor Union openly opposes plans to reform public enterprises, reduce subsidies and cut budgets. Strikes are expected in the coming months as the government prepares its budget plans for next year. The three countries look set to suffer from the Ukraine war’s negative effects more than they could benefit from increasing relocation of production. Companies looking to expand their presence in the Maghreb must weigh the region's potential against the threat of political instability, structural weaknesses and sluggish infrastructure investment.