Economist, specialist in public policy, Abdelghani Youmni comments on the consequences of inflationary pressures weighing on the Moroccan economy and analyzes the challenges of the next board meeting of Bank Al-Maghrib. Will or won’t raise the policy rate? His answers…
The level of inflation observed at the end of last April (5.9% according to HCP data) does not seem to worry Abdelghani Youmni, doctor in economics from the University of Sophia-Antipolis in Nice.
Morocco is not an inflationary country and will not be, he insists, adding that for an intermediate-sized economy like that of the Kingdom, this phenomenon can only be curbed by more food and productive sovereignty.
Author of the essay “Morocco and its Mediterranean neighbors» (L’Harmattan, 2019), Abdelghani Youmni affirms that the solution of wage increases is not without risks and would benefit from being associated with a taxation of “monopolistic rents”.
Asked about a possible increase in the key rate of the central bank (the third quarterly meeting of Bank Al-Maghrib being scheduled for Tuesday, June 21), the economist is in favor of raising rates by 25 basis points, which, at his eyes, would be “neither excessive nor blocking for companies and investors”. Maintenance.
What is your view on the level of inflation recently observed in Morocco (5.9% at the end of April year-on-year) and what are the main factors behind this phenomenon?
The current inflation stems from global instability and geopolitical issues such as the shortage of semiconductors, the behavior of oil and gas cartels, the freezing of Russian and Ukrainian wheat exports, the sevenfold increase in the cost of freight between 2020 and 2021 and industrial inputs. This situation stems from a real convergence of ingredients favoring a general surge in prices, a real pebble in the shoe of globalization.
However, inflation is always reduced to a monetary phenomenon. Lower interest rates generally create a credit supply constraint, combined with a depreciation of the local currency’s exchange rate, leading to an inflationary spiral and speculation on public debt.
But inflation is not only monetary, mid-sized economies like Morocco are often victims of cost inflation, which can only be curbed by more food and productive sovereignty. These economies are also victims of imported inflation, which can become exponential if the currency is totally convertible, not very robust and if the financial markets have a strong predisposition to speculation.
As for inflation by costs, this is currently affecting Morocco, it is pushing companies to set prices according to production costs. Any increase in the costs of energy, logistics, transport and inputs, in any industry, leads to price increases.
With regard to imported inflation, it is above all the consequence of incompressible imports such as hydrocarbons and cereals. Since January 2022, the energy bill has increased by 87.3%, Morocco’s trade deficit has increased by 42.9% at the end of March 2022 compared to the same period in 2021, to stand at -65.57 billion dirhams, according to data from the Foreign Exchange Office.
The budgetary arm of the Moroccan executive has deployed more than 47.5 billion dirhams to erect an artificial tariff shield aimed at freezing the prices of electricity, butane gas, flour, supporting the price of sugar and avoid the collapse of Moroccan agricultural and cereal producers.
These purchasing power protection measures will neither be able to invert the inflation curve nor break its dynamics., inevitable to preserve social peace. They risk aggravating the budget deficit and the weight of the public debt.
Do you think the worst is behind us?
Faced with these crises, both considerable and so far cascading, without being juxtaposed, Morocco has shown great resilience and surprising adaptability. The worst is not behind us, nor is it ahead of us.
Over the past sixty years (1960-2020) inflation in Morocco has averaged only 4.2% per year, compared to more than 5.9% in the countries of the European Union and 8.8% in Algeria.
Morocco is not an inflationary country, households produce their own food and greatly reduce the inflation of ready-to-eat foods sold in supermarkets. Subsidies for agricultural production slow down and reduce the high cost of vegetable and fruit production, the rural nature of the population (more than 45.4%), then the low physical mobility of households, also have a significant effect in slowing down inflation. .
For all these reasons, Morocco will not experience double-digit inflationknown as hyperinflation, harmful for the economy and for society, it considerably erodes the purchasing power of vulnerable strata and causes the middle class to tumble by substituting irreversible poverty for social inequality.
Is there a magic number not to hit? Not necessarily. Inflation must not be combined with sluggish growth and accumulations of years of drought. This is why the living forces of the Moroccan economy, public but above all private, must join together to create ecosystems to cushion the effects of inflation through consumption and production to substitute for imports and to initiate the energy transition towards renewable, especially solar, not only for electrical energy but also for the use of solar pumps for irrigation.
To what extent can the increase in wages, in particular the Smig, limit the harmful effects of inflation?
A major source of rising inflation is energy prices. High fuel prices can be a serious political problem and cause social tensions. Should we make monetary redistribution to low-income families, then encourage the private sector to distribute exceptional bonuses by anticipating short-term inflation? This is a big dilemma, because inflation can become structural. The increase in wages could lead to an increase in demand and create the conditions for the wage-price spiral. This configuration is not that of Morocco, it will be necessary to create the conditions for negotiations between social partners and companies to reduce inflation without altering the profits and competitiveness of companies and to make it possible to break inflation by more power to consumer purchase.
Many companies can, especially those working in services, their profits have increased after the pandemic and without achieving a perfect indexation of wages to inflation. There is room for maneuver that does not endanger companies who, for the most part, have increased their prices without raising wages, with the exception of those who have adhered to the social agreement signed on April 30, which provides for a 10% increase in the Smig over two years.
To reduce inflation, either strong growth, wage increases or budget transfers are needed. None of these solutions are without riskunless they are combined by associating them with a policy of taxation of monopolistic rents, a voluntarist policy of a floating tax on fuels and non-blind compensatory subsidies intended for targeted social categories.
Should retirement pensions be indexed to inflation?
Demography is the only science that is never wrong. In Morocco, since 2018, benefits exceed contributions, the country has only 4.27 million contributors to the basic pension scheme for more than 1.8 million retirees, for a total amount of 58 billion dirhams. Given the return of inflation and its dangerous combination with the extension of life expectancy, the question of the erosion of the purchasing power of retirees is more topical than ever.
The indexation of retirement pensions for a growing number of retirees is a very legitimate intergenerational social cause. Funding mechanisms are too. They are backed by economic growth and have no impact on public or budgetary finances and could make the social financial trajectory of the State more than perilous.
The challenge would be to model between savings, wealth and social income. All States are going to have to reform taxation to levy on the estates of fewer and fewer and increasingly older heirs to finance longer life expectancy, and ensure the viability of an intergenerational social model which is becoming even more inequitable because of the growing patrimonialization of our societies.
In recent weeks, there has been much speculation about a possible increase in Bank Al-Maghrib’s key rate. Is this the right time for you?
Money is a common good. Today the currency is diverted from its main role, that of financing the real economy and the tools of production. Only 15% of bank credit finances investment. The remaining 85% is used in derivatives markets to fuel speculation. Interest rates that have remained at 0% for more than a decade did not correspond to a healthy functioning of the world economy. If central banks such as the FED, the Central Bank of England and the European Central Bank (ECB) have started to raise their key rates, it is because the criteria are all met to do so and it will be necessary to try to slow down inflation and avoid its entrenchment in the economy which could lead to stagflation (a combination of inflation and unemployment).
This rise in rates will slow investment and consumption and negatively impact sectors such as real estate and the automotive market. For States, it will make debt more expensive and riskier and will signal the return of imperious variable rates.
As for Morocco, Fitch plans an increase in the key rate by Bank Al Maghrib of 25 basis points, the objective being to continue the tightening policy to stabilize prices in the face of weak growth of less than 1.8%, range by inflation estimated at at least 4%. Maintained at 1.5% since April 2021, it was 2.25% in 2019, the dirham’s key rate is in line with the orientation of Morocco’s accommodating monetary policy which promotes adequate financing conditions. This 25 basis point hike does not seem excessive or blocking for companies and investors.
However, the increase in the interest rate induces a drop in the money supply and will have as positive externalities an increase in foreign investments, and a relative appreciation of the dirham, which will make imports cheaper, exports more expensive and will be on the other hand, without effect on the transfers of Moroccans around the world, who will benefit from the neutralizing effect between the rise in interest rates and the fall in the income from the conversion of their currencies into dirhams.