Morocco needs more reforms before floating dirham

The central bank has ruled out a sudden full float like Egypt’s, favouring a gradual liberalisation.
Sunday 19/08/2018
Smooth transition. A currency dealer counts Moroccan dirhams at a currency exchange in Casablanca.                                                                 (Reuters)
Smooth transition. A currency dealer counts Moroccan dirhams at a currency exchange in Casablanca. (Reuters)

LONDON - With the introduction of a more flexible exchange rate policy, the Moroccan government has maintained the value of its currency, the dirham. However, wider and more comprehensive reforms to attract and encourage investments are needed before deciding to float it.

In January, Moroccan authorities increased the trading margin of the dirham against hard currencies to 2.5% from the original 0.3%, hoping to increase Moroccan exports while preserving the kingdom’s foreign currency reserves.

In a currency basket of 60% in favour of the euro and 40% in favour of the US dollar, the dirham remained stable even though the new system gave investors and traders a wider margin for speculation and nourished expectations that the margin would be increased.

However, High Commissioner for Planning Ahmed al-Halimi and other analysts said Morocco needs to implement reforms on a wider scale to boost the country’s economic competitive power. They mentioned that foreign investors and local industrialists require a well-performing public education sector to produce a qualified labour force. There is also need for relaxing import duties and measures regarding imported technologies and raw materials.

Halimi said: “What is needed now in a country like Morocco is not a reform in the currency exchange system. Before we do that, we must first carry out other reforms or finish the reforms already initiated.”

He pointed out that Morocco needs to introduce reforms in its educational and vocational training systems as well as reintroduce moral values in public affairs in general and the economy in particular. There is also a need to increase participation in public affairs.

One-third of university graduates each year in Morocco fail to find a job because of low qualifications.

Economic expert Rashid Aourraz, from the Moroccan Institute for Policy Analysis, said: “Changing the currency exchange system is equivalent to a political constitutional reform.”

After years of preparations and with International Monetary Fund backing, Morocco last January began the initial phase of a gradual plan for floating the dirham and liberating the economy. It is important that this plan succeeds because Morocco aims to become a financial centre for Africa.

As the dirham kept stable, the economy in Morocco was shaken by an increase in oil prices and the consumer boycott of three well-known brands in the country.

More economic bad news has emerged. During the first half of this year, foreign investments in Morocco were down 31%. The Casablanca Stock Exchange saw only one preliminary offer of shares at the beginning of the year and its overall market value dropped 5% in the same period.

Banking officials said it was probably too soon to speak of the steps to be taken. If the dirham remained stable, it was because it benefited from favourable external factors. The real test for the dirham is yet to come.

The “external factors” refer to the drop in wheat imports, an increase in remittances from Moroccans living abroad and an increase in tourism revenues. Because of these factors, foreign currency reserves in Morocco shot to an all-time high of $23.5 billion.

Aourraz said revenues from tourism and remittances are not reliable sources of foreign currency in the long run. They are subject to sudden fluctuations caused by external factors. For example, the new generation of Moroccans living abroad, in Europe essentially, do not have strong ties to the country as their parents used to.

Easing bureaucratic rules to import goods would be key for companies, which sometime struggle to adjust plans if market conditions change quickly, bankers said.

The central bank has ruled out a sudden full float like Egypt’s, favouring a gradual liberalisation. It refuses to say how gradual, but it has sought to downplay expectations of further steps anytime soon.