Morocco Keeps Option of Flexible Dirham to Tackle Outside Shocks
Morocco to Resume Flexible FX Regime to Tackle External Shocks
(Bloomberg) -- Explore what’s moving the global economy in the new season of the Stephanomics podcast. Subscribe via Pocket Cast or iTunes.
Morocco is able to switch back to a more flexible foreign-exchange regime at the first sign of an external shock such as a surge in oil prices, Bank Al-Maghrib Governor Abdellatif Jouahri said.
The country took a break earlier this year from its 2018 push for a more flexible exchange rate as it struggles to patch up deteriorating finances and as lifelines from Gulf donors dried up. After widening the dirham’s trading band a year ago, authorities were expected to wait until at least 2020 before considering further easing their hold on the currency.
After the first phase of reforms last year, the central bank will continue to keep the dirham pegged to a euro-dollar basket with a ratio of 60%-40% respectively, the governor said. The next step is to further widen the fluctuation band at the first sign of an external shock to its economy, he said in an interview late Friday in Washington during the International Monetary Fund meetings.
“For us, the reform aims to absorb external shocks and boost Morocco’s competitiveness,” Jouahri said, adding that the IMF deems this an opportune time to push ahead with the reforms. “The timing is the question and should be well chosen.”
Following these changes, the country plans to move from managing its currency to a monetary policy that targets inflation and where interest rates will be be adjusted more frequently, he said.
Giving Market Room
After the second phase of its foreign-exchange reform, the central bank will give the market room to fix the dirham’s rates, he said. “Supply and demand will determine the dirham’s value,” he said.
The progress of the reforms hinges on budgetary discipline, he added, calling it a “prerequisite.” To push ahead with the next phase of change, he wants to ensure companies, especially small- and medium-sized firms, are adjusting to the reforms introduced last year.
While Morocco has avoided the upheavals that have hit elsewhere in North Africa, its economy has been struggling to meet rising social needs, beset by a poor harvest and still-weak demand from its key markets in Europe. It projects 2019 economic growth at 2.7%, down from a previous forecast of 3%. The king has previously called for a new model of economic development.
Morocco King Orders Banks to Put More Money In Development
The new model won’t slow its currency reforms, the governor said. The country is also planning a tax amnesty next year for the so-called gray economy as well as local firms and citizens holding assets abroad.
“We tell people: ‘Let bygones be bygones, pay 5% and say goodbye to the informal sector,’” Jouahri said.
Morocco lost ground lately on global competitiveness, he said, adding that the government “must catch up.”
If the foreign-exchange reforms progress to the third phase, authorities will have to further loosen capital controls, he said.
To contact the reporters on this story: Souhail Karam in Rabat at skaram10@bloomberg.net;Jill Ward in London at jward98@bloomberg.net;Rene Vollgraaff in Johannesburg at rvollgraaff@bloomberg.net
To contact the editors responsible for this story: Riad Hamade at rhamade@bloomberg.net, Linus Chua, Steve Geimann
©2019 Bloomberg L.P.