Monetary Policy in Morocco

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Critical Analysis of the Monetary Policy in Morocco

Farah Ben Maymoun

FIN 3302, Section (01)

Professor Aguenaou

November 25th 2017

Abstract

In this paper, we will examine the main actions taken by Morocco within the plan of reforming its monetary policy. We will also examine the impact of these action on the financial conditions of the country. By doing so, we are going to give the Moroccan central bank recommendations about some of the new tools or measures that the country can make use of within the plan of improving its monetary policy.

Keywords: Monetary Policy, Morocco, Price stability, Inflation

1. Introduction:

In order to get better acquainted with our topic we need first to be able to answer the question: “What is a Monetary Policy”? The monetary policy is the action by which the central bank manages and controls the money supply to fulfill its objective of a stable interest rate, exchange rate, and stable prices. it also strives to achieve the other objectives of economic policy; maximum employment, economic growth and the stability of the financial markets and institutions.

Before the last two decades, Morocco had a different monetary policy than the one it’s adopting today. The old monetary policy was constructed based on a set of instruments that directly control credit. The reason why these instruments were selected is their ability to control the excess liquidity and also their capacity to create money. The main objective here was to enable the Moroccan central bank of directly controlling its connection with the commercial banks.

Within this plan of transmission from the old policy to the new one, Bank Al-Maghrib designed an analytical framework that provides a theoretical basis for the development of the economic models used for inflation forecasting. We are talking here about a macroeconomic model designed for a small efficient economy with fixed interest and exchange rates.

Today, the monetary policy adopted by Morocco is slightly different. The new approach discards the credit framework and the refinancing of banks, and emphasizes on the development and opening of the money market. Moreover, it allows the qualified authorities to indirectly control the money supply through predicting the action by the interest rate and using the money market as a field. After implementing this new approach, the interventions of Bank Al-Maghrib in the Moroccan money market became actions by which the bank liquidity and the creation of money are controlled and regulated.

Every monetary policy has specific goals or objectives that need to be achieved on either short or long term. For Morocco, the two primary goals of the monetary policy are price stability and high employment, also known as the “dual mandate”. However, in order for this dual to be realized, the authorities work on achieving other objectives first, such as economic growth and interest rate stability, since they are (too) part of the equation. To critically analyze this policy, we need to assess the measures and procedures that Morocco has taken into account while pursuing these goals, as well as the impact of these procedures on the financial market and the economy of the country.

1. Analysis of the objectives of the Moroccan monetary policy:

1. Price stability:

As part of the new approach, Bank Al-Maghrib works on achieving price stability through implementing new monetary policy tools and intervening in the money market while using the appropriate instruments. These instruments ensure a descent functioning of the money market and the application of regulations and laws, through monitoring and controlling the activities of credit institutions and similar establishments.

Since price stability is one of the main targets of the Moroccan monetary policy, the central bank directly preserves a substantial portion of the financial savings, also known as the “small savings”. Another measure that was taken by the BAM in order to stabilize prices was to increase the required reserves ratio from 2% to 4%. This decision, according to Abdullatif Jouahri, the governor of the central bank will: help absorb a part of the liquidity, ensure a correct compensation of the savings, and fight against inflation. So, by avoiding a drop in the rates in the market and maintaining a reasonable inflation level, Bank Al-Maghrib encourages financial stakeholders, mainly banks, to exert more efforts considering savings. In other words, it encourages these financial institutions to constitute more savings that will be correctly compensated later. This raise in the required reserves ratio, can be seen as a message from the BAM to the banks, inviting them to manage their credit in a way that can provide more savings. And the fact that the central bank is promising to repay these additional required reserved seems to validate this idea.  

There’s no doubt that the independence of a central bank is a prerequisite for fulfilling its mission of price stability and the fight against inflation. But to ensure a productive environment helpful for investment, economic growth and the protection of citizens' purchasing power, any monetary policy strategy requires other prerequisites such as a healthy state of public finances, a strong efficient banking system, a more flexible exchange rate regime, and a good relationship between economic operators. This being said, Morocco is clearly headed the right way by taking the measures mentioned above; If the authorities keep these prerequisites in mind and keep working on them, Morocco can get rid of the fluctuations around the inflation rate and can keep its prices stable over the medium term.

1. High employment:

In order to maximize employment, a country must first maintain a constant growth. This latter has a direct positive impact on unemployment, since it encourages investors to invest more, which leads to more projects and thus more work opportunities. The unemployment rate in Morocco in 2017 is fluctuating around 9.3% and 10.6% (Graph 1), which is a low level in comparison to previous years. However, this decline in total unemployment masks some critical shortcomings in the labor market and the subjective limitations of growth. According to the OIT’s website, “In urban areas, unemployment remains high (13.8%), mainly among young people (31.6%), women (20.1%) and the most educated (18.7%).” The reasons why unemployment rate is still high in these places is mainly the low and decreasing labor participation rate (especially by women), and also the relative decline in private investment in the manufacturing sector.

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