The contours of the next reform

After having successfully completed the first phase of the flexibility of the dirham with the widening of the fluctuation bands, Morocco is closer than ever to the next phase, characterized this time by the removal of the anchor to the basket of currencies composed of the euro and the dollar. A phase in which the value of the dirham will be a little more dependent on supply and demand for the national currency, but which will still not be a total float as in Egypt. Because, according to the Wali of Bank Al-Maghrib at a press conference on Tuesday March 19, 2024, the central bank would continue to intervene when movements are considered extreme in one direction or the other. The central bank will continue to closely supervise the market, probably by keeping the fluctuation bands which would provoke its intervention, precisely to avoid the Egyptian model where the country was forced by the IMF to carry out reform brutally.

The conditions are almost met

The Kingdom's financial and monetary authorities have set a set of prerequisites before moving on to this new phase. Some are reunited, others are not yet. Morocco has indeed reached a high level of exports of more than 600 billion dirhams while being diversified, no longer dependent on phosphates, the automobile having become the first product exported by Morocco. This gives visibility on the recurring demand that there will be on the dirham to support its value even in the event of total floating. And although the trade balance is structurally unbalanced, the 359 billion dirhams in foreign exchange reserves, which break records every year, will allow the central bank to protect the currency by intervening in the foreign exchange market if necessary.

From a technical point of view, the prerequisites are there too. In the Wali's own opinion: “For almost 6 years, the interbank currency market has been functioning perfectly. There are outgoing flows, others incoming, with situations where the banks are in positions, sometimes short, sometimes long. Since March 2020, BAM has no longer intervened in the foreign exchange market. The people (market operators; editor's note) are trained and know what they are talking about.”

On the other hand, what can delay this reform according to the Wali is the capacity of economic operators, particularly businesses, to evolve in this new environment. “I am not talking about large groups but small and medium-sized businesses, individual businesses, etc.,” specifies the Wali. Because this new regime will be accompanied by inflation targeting and therefore a more frequent change in the key rate which would have “very negative potential effects” on these companies. “

“I tell the International Monetary Fund that when I feel the Moroccan economic fabric is ready, I will take the leap. But the leap is not definitive. It is not a wavering. We are withdrawing from the euro-dollar basket for s “anchor on monetary policy while monitoring the movement on the interbank currency market. Abnormal movements will provoke interventions by the central bank”, he insisted.

Furthermore, the central bank requested technical assistance from the IMF to review its forecast models and assess the banks' capacity to support the project.

How is the value of the dirham currently determined?

In the current system, the Central Bank sets the central rate of the Dirham on the basis of the composition of a reference basket composed of 60% of the euro and 40% of the dollar.

This basket, in addition to the liquidity of the domestic market, will determine the value of the dirham. The advantage of this model is that the currency is neither floating nor fixed. It offers a guarantee to national and foreign operators that the dirham will not lose value. On the other hand, it does not protect the dirham against the exogenous shocks that the euro/dollar parity often experiences. According to market operators, making the Moroccan currency market more local would help avoid this type of shock.

AH

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