Exchange Rate Reform: The Timeline for the Next Phase Becomes Clear

Morocco's exchange rate reform aims to be gradual and smooth. While the IMF has advocated for a quicker implementation, the Kingdom's financial authorities prioritize consolidating achievements at each stage before moving to the next level. This approach was reiterated by Abdellatif Jouahri, the Governor of Bank Al-Maghrib, during a press conference on Tuesday. The first discussions regarding the reform of the exchange rate regime date back to 2010, focusing on the desire to move away from a fixed exchange rate that is costly in terms of foreign reserves. However, a series of regional crises delayed action until the El Othmani government decided in 2018 to initiate a gradual transition from a fixed exchange rate to a more flexible regime. The initial step involved widening the fluctuation band of the dirham from ±0.3% to ±2.5% against a central rate based on a reference basket composed of the euro (EUR) and the US dollar (USD). In March 2020, the government and the central bank took another step by expanding the fluctuation band to ±5% and establishing an interbank foreign exchange market, which now operates autonomously without intervention from Bank Al-Maghrib. The government highlights that banks can now take long or short positions based on their clients' currency flows, within the current fluctuation bands of ±5%. This mechanism is viewed as tangible evidence of the reform's progress and the robustness of the banking system. Regarding future steps, Jouahri indicated that the next phase would involve a complete abandonment of the euro/dollar currency basket. This change would place the responsibility of determining the dirham's value solely on market forces, based on supply and demand. Concurrently, Morocco will need to adopt an inflation targeting regime, with a specific inflation target and management of the exchange rate through the key interest rate and monetary policy instruments. Despite the IMF's insistence, Jouahri believes that the Moroccan economic fabric is not yet ready to absorb such a change, particularly for small and medium-sized enterprises (SMEs). He explained that transitioning from a fixed exchange rate to one based on monetary policy via the key interest rate requires businesses to fully understand the implications to avoid negative effects. A compromise has been reached with the Bretton Woods institution: Morocco will advance towards inflation targeting without initially accelerating the liberalization of the exchange rate. To prepare for this transition, Bank Al-Maghrib has already begun technical work and training teams, aiming for implementation by July 2025. Some adjustments are still needed, particularly concerning the models used. A full-scale exercise is planned for 2026, designated as a "test year," during which Bank Al-Maghrib will propose to the IMF to simultaneously apply the current monetary policy framework and inflation targeting methods. This phase will test the robustness of the tools and the market's adaptability. If the results are deemed satisfactory, the official implementation of inflation targeting will occur on January 1, 2027. At that point, preparations will be made to abandon the currency basket, although Bank Al-Maghrib is expected to maintain fluctuation bands to retain control over the market, continuing the gradual reform approach.