The national currency continues to appreciate due to the continuous fall of the dollar. Is a strong dirham good in this time of crisis? Or should we act to push it down and make use of the little foreign exchange earnings that come in during these times of scarcity? Expert opinions differ. Decryption.

Trading at 9.66 dirhams a year ago, the dollar is now worth 9.20 dirhams. A depreciation of 4.7% which also weighs on the value of the dirham against the euro, which continues to appreciate due to the free fall started by the greenback since the outbreak of the Covid.

In Morocco, the euro is worth 10.85 dirhams today, against 10.67 dirhams a year ago.

In short, our national currency is depreciating against the euro and appreciating against the US dollar. A trend that will continue if we rely on the analyzes made at the international level which predict an even more pronounced fall in the dollar over the rest of the year. Due to the economic crisis in the United States, its low interest rate monetary policy, its growing deficits (budget and trade) and the uncertainties surrounding the presidential election.

A basket effect that works against the dirham

The cause of this increase in the value of the dirham can be summed up in one word, according to one banker: “the basket effect”.

The value of the dirham is in fact pegged to a basket made up of 60% in euros and 40% in dollars. The movement of one of the currencies directly impacts the value of the dirham.

“One might think that this trend of appreciation of the dirham is due to a market effect, given that the fluctuation band was widened in early March. But the truth is that the market is very stable. Supply and demand are almost in balance. These changes in the dirham are due to the simple basket effect and the fall in the dollar,” explains our banker.

The country's monetary authorities have precisely decided to adopt a more flexible exchange rate regime, to allow the dirham to readjust according to the international situation and above all to be able to depreciate in the event of an external shock. We are right in the middle of this shock, but the behavior of the dirham is not what we expected.

Faced with shrinking foreign exchange earnings due to the shutdown of the tourism sector, the drop in earnings from Moroccans living abroad and those from FDI and plummeting exports, a depreciation of the dirham would theoretically be welcome. Both to make the Moroccan product more competitive and to limit imports which will de facto become more expensive. An objective that fits with the new industrial policy reorientation announced by Moulay Hafid Elalamy.

Hence the call from several manufacturers and market operators to “provoke” a depreciation of the dirham.

In what way ? By readjusting the basket of currencies on which the dirham is hung and counterbalancing the downward movements of the dollar, with a better balanced parity (50/50 instead of the current 60/40). Or by further widening the fluctuation band of the dirham. An enlargement which, however, risks not changing anything, given the wavering experience of the past two years.

After a first enlargement in early 2019 of ± 2.5%, then a second in March 2020 of an additional ± 2.5%, the dirham has not depreciated. Quite the contrary. Hence the call from certain banking and industrial sources surveyed to “proceed with a pure and hard devaluation” and thus “cause” this depreciation of the value of the national currency.

But things are not as simple as you might think, because each decision has its advantages and disadvantages, and can sometimes even induce the opposite effect of the desired objective.

In any case, this is what the economist Omar Bakkou, one of the best specialists in foreign exchange policy in Morocco, and author of the book “To better understand the flexibility of the Dirham” thinks.

According to him, in the current state of things, acting on the value of the dirham would be counter-productive, even carrying negative effects on the economy.

The perverse effects of a depreciation of the dirham

“It is true that the dirham has appreciated in recent months. But it remains in fairly limited proportions which cannot have significant economic consequences. If we provoke a depreciation, we will certainly give a bonus for the exporters who will earn more revenue in dirhams. But we will at the same time pay more for our imports,” he explains.

The context of crisis makes, according to him, the appreciation of the dirham more beneficial from a macroeconomic point of view.

“We live in a somewhat unusual context, where exports are weak. And this weakness is not due to a price effect but to the global context which is not favorable to foreign trade. There is also a downturn in economic activity and national income. We are in a context of impoverishment. A strong dirham helps to cushion these effects of impoverishment because we will at least avoid an increase in imported prices, and therefore an increase in domestic prices,” he believes.

This analysis takes its relevance from the structure of Moroccan imports which, according to our economist, are incompressible. Indeed, they are not simply intended for consumption, they also feed the production circuits.

“We import essential products that we cannot do without, such as energy, wheat, capital goods… In addition, 40% of national production is linked to imports. In this context, in the event of a depreciation of the dirham, there is a risk of falling into a trap of rising prices at all levels. And what exporters can gain thanks to the fall in the dirham will be lost by the increase in the cost of the imports they make to produce,” he argues.

Shouldn't the exchange rate policy precisely support the country's new industrial aspirations and the declared policy of import substitution? For Mr. Bakkou, “if we want to limit imports, we have to act on the quantity, not on the price. Because whatever the price of the products internationally, we are forced to buy them for the moment, ”he replies.

Devaluation: “an antisocial measure”

One question remains: why does the dirham, beyond this basket effect, continue to appreciate at a time when practically all the country's foreign currency resources are drying up?

The answer to this question lies in the particularity of this Covid-19 crisis and the way in which the country's financial authorities have managed it.

In theory, the flexibility of the dirham is supposed to act as a counterbalance in the event of an external shock. This is the very purpose of its establishment. But the shocks that we scripted before are totally different from the one we are experiencing today.

The widening of the dirham's fluctuation band was decided to limit the effects of a surge in commodity prices, for example (oil in particular). Or in the event of a global economic crisis which would affect the country's exports, FDI and tourism and would dry up its currency reserves. In these cases, the current account imbalance can be alleviated by acting on the value of the currency, which would make our exports more attractive, limit the outflow of foreign currency and make Morocco a more attractive destination for investors and tourists.

With Covid, things are a little different. Morocco is experiencing the same shock of the drying up of foreign exchange resources. But opposite, this drying up is counterbalanced by the fall in the prices of oil and raw materials, by the blockage of the logistics chains which slowed down imports, but also by the policy of the Treasury to resort massively to external financing.

“Morocco does not currently have a current account problem. Lower exports, travel receipts and FDI were balanced by lower imports and oil prices. We were already starting from a fairly good base with a good currency base and things adjusted automatically. Not to mention the activation of the LPL and external financing mobilized by the country to maintain its foreign exchange reserves at a comfortable level,” explains economist Omar Bakkou.

It is this automatic readjustment between currency inflows and outflows that explains, according to him, the behavior of the dirham on the market. A behavior that the economist had already anticipated in an interview given to the Stock Exchange the day after the second operation to widen the fluctuation band of the dirham.

With foreign exchange reserves covering more than 7 months of imports, Morocco is far (for now) from the disaster scenario that would justify a relaxation of the currency, as was the case in Egypt for example.

"A further widening of the fluctuation band of the dirham is not appropriate"

For Omar Bakkou, Morocco is not in a situation where a strong depreciation of the dirham or a devaluation would be economically justified.

“Morocco has chosen the floating option. And he will continue on this path. If he made this choice, it was precisely so as not to have to devalue. Because devaluation is a political decision, which is sometimes taken under pressure from economic actors, or for simple political calculations. So I don't think Morocco will devalue its currency,” he said.

In a well-researched scientific article, recently published in "Libre Entreprise", Omar Bakkou explained his opposition to the choice of devaluation with the following two arguments:

- "It will be politically difficult to implement, because it will be perceived as a decision to increase prices by the government, an increase which would be considered socially inappropriate in a context of general decline in the purchasing power of the population”;

- "It will be strategically interpreted as inconsistent with Morocco's vision of exchange rate policy, a vision revealed by the government in April 2015 in an official press release, which announced the launch of a process of gradual exchange rate flexibility exchange rate of the dirham which will be carried out through the establishment of a fixed regime within a horizontal band, a band which will be gradually widened until it is abolished".

A paper in which he concluded that even a widening of the fluctuation band in these times of crisis would be inappropriate.

“The advisability of taking a new step in the process of making the dirham more flexible comes down to a question of arbitration between the presumed slight negative effects of this measure on purchasing power, and the equally weak positive impacts of the said measure on reserve assets. This possible arbitration will logically have to be decided against the widening of the fluctuation band of the dirham exchange rate. And this, given the political cost of such a measure, with antisocial connotations, particularly in the current context marked by a general decline in the purchasing power of the Moroccan population,” writes the economist.