towards a more flexible and agile Dirham

Fini the corset of the basket of currencies, composed of the Euro (60%) and the American Dollar (40%). Make way for a more flexible exchange rate regime, where the Dirham will reflect a little more the supply and demand expressed by the market, without becoming completely floating as in Egypt or Turkey for example. Bank Al-Maghrib is in fact preparing to abandon the anchoring of the Dirham to the basket of currencies, a system in place since the 1970s. A decision which augurs a new era for the national currency, which will now be more flexible and more agile.

A paradigm shift which also promises to shake up the habits of economic operators and open the way to new opportunities. Questioned on this subject during the press briefing held at the end of the first meeting of the BAM Board for the year 2024, the wali of Bank Al-Maghrib (BAM), Abdellatif Jouahri, specified that “even if the Fund international monetary policy insists, I will only recommend the transition to the new phase of the flexible exchange rate regime when I am convinced that the Moroccan economic fabric is ready. But the Central Bank has not completely rejected the idea and intends to move towards this intermediate stage which will free the Dirham from its current anchor.

“The second step does not consist of letting the market freely determine the value of the Dirham, which would correspond to a total float. Rather, it aims to abandon the peg to the basket of currencies and adopt an anchor via the key rate and monetary policy, while continuing to monitor movements in the interbank currency market. In other words, if abnormal movements occur in one direction or the other, the Central Bank will intervene to indicate the direction it wishes to take,” affirmed the wali.

Contacted on this subject, many trading room managers provided us with more clarification on this reform: “the price of the Dirham will now be determined by market forces, that is to say by supply and demand expressed by banks and their customers. This means that the value of the Dirham will fluctuate according to the needs of the Moroccan economy. On the other hand, “the fluctuation band of the Dirham will likely be maintained, which means that its value will not be able to vary excessively. This measure aims to limit the risks linked to market volatility.

Pwhy now?

The reasons are multiple. First, the current system limits the competitiveness of the Dirham, making it vulnerable to fluctuations in international currencies. Then, this regime limits the effectiveness of BAM's monetary policy, which can find itself tied hand and foot in the face of large-scale external shocks. In addition, the rise in exports and the relatively high level of foreign exchange reserves are likely to facilitate this transition. According to a market source, the new system will reduce Morocco's dependence on fluctuations in the Euro, the Dollar and raw materials. This will better protect the Moroccan economy from external shocks. Also, the volatility of the Dirham will now be a less important factor for Moroccan exporters and will make them more competitive on foreign markets. “For example, in 2022, a shock on the Euro took place. Importers suffered from the rise in the European currency, while exporters benefited. With each shock to one of the two currencies, Morocco suffers the effects of the associated interest rate. With the new system, we will only be subject to supply and demand for our own currency,” underlines our interlocutor.

Conditions to be met

Raising your hands on the current system and letting the market determine its exchange rate requires a range of conditions to be met. For Jouahri, “it is essential that certain balances are confirmed before this transition, in particular medium-term budgetary sustainability, an adequate level of foreign exchange reserves, a resilient banking system and the capacity of the Central Bank to manage both reserves exchange rates and inflation targeting. Furthermore, this transition to a more flexible exchange rate regime is not ruled out for 2024. The wali confirms to us at a press conference that they are already preparing technical assistance for the project with the IMF. In particular, they review all forecast models to ensure that they remain adequate in the face of past crises and to assess the banks' preparation for exchange risks, within the framework of inflation targeting and an exchange rate regime. more flexible. They also analyze their risk maps before taking the plunge. If all of these conditions seem to be met, there remains one point to improve, according to the Wali: the preparation of economic operators. “I am more afraid for small businesses than for large groups. They will have to manage an environment where the key rate changes more often. We have to make sure they are ready,” he notes.

The case of China and Egypt

Elsewhere in the world, several countries have already implemented different exchange models for their national currencies. Among the most notable examples, an expert cites China, which has opted for a sliding-band exchange system. The value of the Yuan is allowed to fluctuate in a narrow band around a central exchange rate set daily by China's central bank. This system allows China to manage the volatility of the Yuan while allowing it to gradually appreciate against the US Dollar.

Egypt, for its part, has decided to simply eliminate its fluctuation band. The free floating of the Egyptian Pound has improved the competitiveness of Egyptian exports, but it has also exposed the Egyptian economy to greater volatility. Inspired by these examples, BAM seems to want to adopt an intermediate system, combining the flexibility of a floating exchange rate regime with the stability of a fluctuation band. This approach would allow Morocco to benefit from the advantages of both systems while minimizing the risks.

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