Morocco will transition to a floating dirham as its economy grows
Morocco is going through a great moment in economic terms. The latest data provided by the recent Capital Economics report makes it clear that the Alawi kingdom has the capacity to implement one of the processes it has been preparing for the longest time. These conditions are expected to enable the transition to a fully floating dirham, which would make the currency dependent only on market fluctuations.
Towards a floating dirham
If Morocco has made one thing clear, it is that it knows how to make the most of its resources. And not just their own, but also those provided by international organisations. Since obtaining a $3 billion Precautionary and Liquidity Line (PLL) from the International Monetary Fund (IMF) in 2014, the improvement has been clearly visible in all sectors.
This is the view of James Swanston, Middle East and North Africa economist at Capital Economics, who says that "Morocco's macroeconomic stability has improved markedly" in this period. In fact, in the third quarter of last year, the current account deficit narrowed to 0.7% of GDP, the smallest deficit since 2007.
To this must also be added the increase in foreign exchange reserves to $34.3 billion at Bank Al Maghrib, a figure very close to the record $35 billion by the end of 2020. It is one of the many reasons why the IMF is focusing its efforts on Morocco as one of the most important countries in terms of room for growth.
IMF support, one of the keys
Morocco's relationship with the International Monetary Fund (IMF) is one of the pillars on which they want to base the dirham's transition. Morocco is currently benefiting from two agreements worth a total of 6.3 billion dollars, with strong support from the IMF itself, which should go a long way towards paving the way, as this is one of the major objectives set by the IMF in 2014.
It is important to note, however, that the transition will not take place imminently. First, a series of steps must be taken, starting with a widening of the dirham's trading band. Currently, the real effective exchange rate is 3% weaker than at the end of 2021. However, forecasts point to an appreciation of the dirham by about the same percentage against the dollar.
The change towards a dirham with greater flexibility requires confidence on the part of the authorities, something that is expected due to the good indicators. One of the most important is the slowdown in inflation, which in January fell to 2.3% year-on-year, the lowest rate since the end of 2021.
These good conditions favour a change that Capital Economics sees as a breakthrough for the Moroccan economy. The report points to macroeconomic stability, strong IMF support and increasingly low levels of inflation as the three bases on which to defend the expected transition to a floating dirham that will be a key milestone in Morocco's economic development.