Morocco's Economic Crossroads: Central Bank Urges Caution on Flexible Exchange Rate Transition

In a decisive press conference on Tuesday, Bank Al-Maghrib Governor Abdellatif Jouahri delivered a sobering assessment of Morocco's readiness to transition to a flexible exchange rate regime. Despite notable macroeconomic progress, Jouahri emphasized that the nation's economic landscape, particularly its small and medium-sized enterprises (SMEs), remains ill-equipped to navigate the complexities of such a system.

Morocco's journey towards economic liberalization has been marked by gradual steps since January 2018, when the country initiated a voluntary transition from a fixed to a more flexible exchange rate regime. This shift saw the dirham's fluctuation band expand from ±0.3% to ±2.5%, eventually reaching 5% in 2020. The move aligns with the country's broader strategy to open up its economy and enhance its global competitiveness.

Jouahri acknowledged the significant strides made on several fronts, including budget balance, foreign exchange reserves, and the robustness of the banking system. "We have quite a few green lights. Indeed, the budget balance, the level of foreign exchange reserves, the banking system, all of that is there," he stated, indicating that these improvements signal a potential readiness for considering a more flexible exchange rate.

However, the central bank governor's optimism was tempered by a critical concern: the preparedness of Morocco's SMEs, which form the backbone of the nation's economic fabric. Jouahri questioned whether these businesses are equipped to handle the rapid changes that would accompany a flexible exchange rate system. "Do you believe that the fabric or the companies are capable, themselves, of adapting quickly and having the means to adapt to this new way of doing things?" he pondered during the briefing.

The transition to a flexible exchange rate regime would necessitate frequent adjustments in interest rates by banks, subsequently impacting their customers. Jouahri expressed doubts about businesses' ability to swiftly recalculate costs, prices, and selling strategies in response to fluctuating exchange rates.

To address these limitations, Bank Al-Maghrib has launched a regional tour aimed at supporting SMEs and enhancing their capacity to manage exchange rate risks. In collaboration with the Exchange Office, the central bank is working to expand and improve the range of exchange rate hedging options available to businesses. "We're reviewing the entire range of exchange rate hedging, not only what exists, but how we can further spread the exchange rate risk coverage for these companies," Jouahri explained.

The governor emphasized the need for a comprehensive accompanying policy to ensure that businesses can adapt effectively. "All of that is the accompaniment. And as long as we don't have that, I will hesitate to make the leap," he asserted, underscoring his cautious approach to the transition.

Jouahri also addressed the issue of public and private sector credit, clarifying that while loans to public companies can skew overall credit statistics, measures are being taken to manage this effectively. He mentioned recent budgetary allocations aimed at repaying parts of the bank loans granted to public enterprises.

The central bank's prudent stance reflects a broader concern about ensuring Morocco's economic infrastructure is fully prepared for the potential volatility associated with a flexible exchange rate. As Jouahri succinctly put it, "On a macroeconomic level, for the moment, knock on wood, we have the green lights. But, I say but, our operators, who will be subject to the changes you will intervene with, must be able to adapt to these changes."

As Morocco stands at this economic crossroads, the path forward remains uncertain. The country's macroeconomic indicators may be flashing green, but the readiness of its grassroots economic players will ultimately determine the pace and success of this ambitious transition. The coming months will likely see intensified efforts to bridge this gap, as Morocco seeks to balance its aspirations for economic liberalization with the pragmatic realities of its business landscape.