What are the prerequisites for a floating regime and are they fulfilled by Morocco? (4th part)

Part 4: Improving economic fundamentals

TOAfter having reviewed in the first article of the series the general conditions that an economy must meet before moving to a floating regime, and discussed in the second article the case of Morocco, examining its economic situation, and drafted in a third article the Observing that the conditions for a Dirham float are only partially met, we close this series of articles by improving and strengthening the economic fundamentals, in order to satisfy all the prerequisites of the float regime. The current health and economic crisis is a temporary event that Morocco is facing. But we must not settle for just dealing with the immediate, we must also prepare for the future. The answers that must be given to the economy must not only be cyclical, but also structural. You have to work on the fundamentals. If we choose to go further in easing the Dirham, all the prerequisites mentioned above must already be satisfied. However, we have seen that this is not the case today; there are prerequisites that are not. In order to make the national currency more flexible, not only must all the prerequisites be met, but they must be met as well as possible. All prerequisites for the establishment of a floating regime must not only be met, but also largely met. Therefore, it is necessary to correct macroeconomic imbalances and strengthen the fundamentals as much as possible so that the economy can better face external shocks. Major reforms must be undertaken to increase the level of economic growth. Ideally, the average growth excluding

agriculture should approach or exceed 5%, over a fairly long period of several years. The reforms would also serve to increase the resilience of the Moroccan economy, especially if the Dirham is subject to a floating exchange rate regime. It is therefore about correcting the imbalances and strengthening the foundations. As everyone knows, agricultural seasons are not always satisfactory in Morocco, but in the case of a floating Dirham, we can no longer afford to have an economic growth rate that depends on rain. The excessive dependence on the growth of the agricultural sector must be reduced through greater diversification of the economy. The development of other sectors and industries will mechanically reduce the weight of agriculture in the Moroccan economy. And in the agricultural sector, we must reduce dependence on weather and rain hazards by building additional dams.

and seawater desalination plants. The trade balance deficit must be reduced, in particular through greater export competitiveness. But we must improve the real competitiveness of the economy; it must be structural and not depend on a depreciation of the currency induced by a more flexible exchange rate regime. In fact, easing may cause a depreciation of the currency which will improve national competitiveness, make Moroccan products more competitive for export, help exports more easily cope with foreign competition, but it will not be necessary to rely solely on devaluation to increase competitiveness. We must develop a true commercial and industrial policy, with a solid productive fabric, competitive both in price and quality. Exports must be increased by producing more, better and cheaper. We must promote export-oriented investment and help SMEs to develop this activity. To alleviate the deficit in the trade balance, it is also necessary to reduce imports by encouraging Moroccan citizens to consume more national products and reducing the weight of energy products, in particular oil, by developing a national energy strategy. To reduce the current account deficit, it will also be necessary to find means of incentives to attract more foreign investors, to open its economy to foreign capital. It may be necessary to develop a new strategy to attract and promote FDI. We will also make sure to facilitate stays and transfers for MRE, and we will seek to increase tourism income by developing the tourism offer and targeting more exclusive tourism. It is necessary to improve public finances and review fiscal policy with the aim of reducing the deficit. Furthermore, the debt

public sector in times of health crisis has reached a very high level in relation to GDP: it is essential to return to a more moderate level as soon as possible, because the Damocles sword of inflation and the rise in interest rates still remains, which could cause interest charges to explode and lead to a debt crisis. The foreign exchange reserve situation is at a comfortable level. But to strengthen this security cushion and increase these reserves, we can work on all areas likely to ensure foreign exchange earnings, such as exports, FDI, MRE transfers, tourism. The soundness of the banking and financial sector needs to be strengthened, in particular by reducing the bank liquidity gap. The increase in this deficit is due to the increase in fiduciary circulation. The latter being due to the expansion of the informal economy as well as the parallel exchange market, it is necessary to seriously confront this problem of the informal sector in order to structurally reduce fiduciary circulation and the bank liquidity deficit. The Central Bank must also provide a structural response to the banks’ cash needs, in particular through instruments such as repos, currency swaps and guaranteed loans, in order to reduce the liquidity deficit in the long term. Finally, the foreign exchange regulations and the reforms undertaken to make the Dirham more flexible must be well understood by all operators. We must inform them, make them aware of the consequences of these reforms, give them time to prepare and familiarize themselves with the hedging instruments, before going further in terms of flexibility and establishing a floating regime. There is also a structural problem, certainly linked to the lack of economic growth, and which is a social issue of the first order: it is the increase in unemployment and the deterioration of the labor market. We cannot claim to have met the prerequisites for a floating Dirham with skyrocketing unemployment. Parallel to employment, it will be necessary to promote education and develop research and innovation. We have seen that not all the prerequisites for a Dirham float are currently met. As it would not be reasonable today to go further in the process of making the currency more flexible, while the health and economic crisis persists, we should meanwhile set ourselves the double objective of fulfilling all the required conditions and improving the economic situation. fundamentals as much as possible. At the right time, if the decision to move to a floating regime is upheld, the Moroccan economy will at least be as well prepared as possible. Today, it must be said, he is not ready. With all the macroeconomic imbalances observed, the prerequisites that are only partially fulfilled and the current context of crisis, still full of uncertainties, deciding to float the Dirham, or even simply make the exchange regime even more flexible, would only increase the risks for Morocco already Is exposed. There are already too many uncertainties and imbalances to risk adding to them.