Morocco: Governor Jouahri repeats Morocco not ready for flexible exchange rate yet

• Despite positive macroeconomic environment, economic agents, especially SMEs will not be comfortable with dirham free float
• Decision on 25bps rate cut to 2.75% taken unanimously
• BAM forms committee to come up with policies to promote digital banking

Despite significant progress in various areas, Morocco is not yet ready to transition to a flexible exchange rate regime, according to Bank Al-Maghrib Governor Abdellatif Jouahri. While macroeconomic conditions such as budget balance, foreign exchange reserves, and banking system robustness appear favorable, the country's SMEs are not equipped to handle the complexities of a flexible exchange rate system, Jouahri explained at the regular meeting with the press after JUn 25th rate-setting sitting. This transition would require frequent adjustments in interest rates, impacting businesses' ability to adapt their costs, prices, and strategies. To support SMEs, the central bank is working with the Exchange Office to enhance exchange rate hedging options and is conducting a regional tour to assist businesses in managing exchange rate risks. Jouahri emphasized the need for an accompanying policy to ensure businesses can effectively adapt to the new system. He also highlighted the importance of addressing credit management for public and private sectors. Despite macroeconomic readiness, Jouahri remains cautious about the transition due to the current limitations of SMEs.

Jouahri also underlined the Jun 25th BAM's decision to reduce key rate by 25bps to 2.75% has been taken unanimously. He pointed out the forecast for growth inflation, public finances are very optimistic and in particular core inflation is expected to remain close to 2% goal in 2024 and 2025, which allowed for the Board's dovish move. Jouahri added the central bank works with the IMF to lay the foundation to move to an inflation targeting framework and currently is revising its forecasting models. He insisted thorough preparations and communication plan is needed before this happens , and did not touch upon possible timing of the change.

The governor also revealed that BAM has formed a high-level committee to address the country's significant cash circulation issue, which amounts to approximately MAD 430bn, nearly 30% of GDP. This figure marks Morocco as one of the world's most cash-reliant nations, with 74% of transactions being cash-based as of 2022. Governor Jouahri highlighted the urgency of modernizing financial transactions, noting that Morocco lags behind countries like Kenya and Jordan. The committee, comprising representatives from banks, the finance ministry, and academic researchers, is tasked with analyzing the causes of the cash surplus and recommending actionable solutions. Jouahri emphasized the need for a gradual shift towards digital banking, focusing on inclusivity to ensure that vulnerable populations gain access to banking services. Currently, only 44% of Morocco's adult population have bank accounts, with even lower rates among the poor and women.

Governor Jouahri also touched upon Morocco's ongoing negotiations with the European Union (EU) to clarify aspects of new legislation affecting the relay activities of foreign banks within Europe. This issue is of the strategic importance for Moroccan banks operating in Europe. The discussions involve multiple stakeholders, including the Moroccan Departments of Foreign Affairs and Finance and the banking sector, alongside EU bodies such as the European Commission's FISMA directorate, which has drafted the regulation. The proposed regulation has some unclear provisions and leaves certain applications to the national authorities of EU member states. Consequently, Morocco is also engaging in talks with individual EU countries, such as France, to seek clearer interpretations of these regulatory provisions.