The reform of the dirham exchange rate system, introduced on Monday 15 January 2018, hardly came as a surprise.
The scheduled introduction of the reform last July had to be postponed under unfortunate circumstances. A decision was then taken to introduce it without prior notice and early January 2018 had often been mentioned as a possible date.
The fact remains that the introduction of this reform brings a sense of relief because, after three years of preparations, Morocco would not have withstood the disappointment of abandoning this reform.
It is worth recalling that Bank Al-Maghrib had been working on this reform since 2015 and had set the pre-requisites for such a watershed event, not only stability in the country’s economic fundamentals but also an internal restructuring to ensure that the Bank had all the requisite data and statistics to be able to introduce inflation targeting, which is the basic principle underpinning a flexible exchange rate system.
It is also worth knowing that reforming the dirham’s exchange rate regime was inevitable once Morocco had embarked on a process of financial and economic deregulation, by signing a number of free trade agreements, establishing Casablanca Finance City (CFC), an international financial marketplace and initiating numerous projects as part of a process of integrating Morocco’s economy into the global economy.
As is well known, these projects are now at a very advanced stage with Moulay Hafid El Alami’s Industrial Acceleration Plan. But they raise concerns as to whether our fixed exchange rate regime is adequate with a capital account that is almost entirely closed.
A longstanding ambition
This concern has in fact been raised by the IMF with regard to Morocco, a country which it has considered to be a ‘model student for nearly a decade.
And throughout this period, successive Finance ministers as well as the Governor of Bank Al-Maghrib questioned whether a fixed rate regime was wholly compatible with the country’s global ambitions.
BAM began work on establishing the pre-requisites for this transition by bolstering the Central Bank’s independence and ensuring that the financial sector was rock solid, the first criteria to be met.
The next step consisted of providing the newly independent Central Bank with cutting-edge analytical systems by adopting an analytical and short-term forecasting framework, an essential tool for monetary policy decision-making and for monitoring trends in macroeconomic balances.
It is also worth recalling that, somewhat unfortunately, preparations stalled somewhat as a result of the concomitant global financial crisis.
The latter highlighted the weaknesses of the Moroccan economy, particularly the twin deficits, domestic as well as external, the budget deficit and the current account deficit, resulting in a fall in foreign exchange reserves. As a result, exchange rate reform had to play second fiddle to the more urgent priority of correcting the country’s macro-economic indicators.
Until 2013, the country’s external balance had been in a downward spiral and foreign exchange reserves were at very low levels while the nation’s debt climbed to as high as 65% of GDP.
The budget deficit was brought down and currently stands at 35% of GDP, with a positive ordinary balance of MAD 10 billion.
The balance of payments is almost in equilibrium, with foreign exchange reserves covering almost 6 months of imports. The country’s exports are far more diversified with sectors such as automotive, aviation, textiles and food manufacturing contributing alongside phosphates which, for a long time, had been the main contributor to exports.
Exports have continued to grow, boosted by an upswing in demand for Moroccan goods and services due to the Eurozone returning to growth.
In the meantime, BAM and the Ministry of Finance have not lost any time, continuing to their work and preparing the ground for the reform of the dirham exchange rate system, fully conscious that ‘after the rain comes the sun’.
They requested technical assistance from the IMF and the World Bank on a number of very important aspects including an assessment of the financial sector, the Financial Stability Assessment Program (FSAP), which took place in April 2015. This was followed by an assistance secondment relating to the operational aspects of the transition towards a floating exchange rate regime.
Bank Al-Maghrib also organised several high-level seminars on inflation targeting including one on ‘Monetary policy challenges in the MENA region and benefits of adopting a structural system for forecasting and analysis’ and another on benchmarks, which proved a catalyst in initiating the reform in question.
The Central Bank then held meetings with financial markets professionals, encouraging them to organise meetings with their clients to raise awareness.
For all the above reasons, the introduction of the flexible exchange rate regime for the dirham, within a band of -2.5% to +2.5% versus the band existing prior to 15 January 2018 of -0.3% to +0.3% (based on a currency basket comprising the euro and dollar, weighted 60% and 40% respectively), well-oiled, will provide our country’s economy with a genuine opportunity to make another qualitative leap forward.
Afifa Dassouli
Original article : https://lnt.ma/flexibilite-dirham-long-cheminement-dune-reforme-indispensable/
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