Inflationary pressures continue to hurt Moroccans' purchasing power, as BAM mitigates its limited options

Morocco is facing its highest inflation rate since the 90s, which poses various challenges for the country’s central Bank Al-Maghrib, and the government, as they attempt to mitigate the negative impact on citizens’ purchasing power.

The national inflation rate began to rise with the Russian-Ukrainian war, but at the end of last July, it rose to 7.7%, on an annual basis, driven by a 12% increase in food prices, and 18% in the cost of transportation.

Inflation in Morocco recorded 7.2% in June, and 5.9% in both May and April, and it is not excluded that it will continue in the coming months, according to the High Commission for Planning (HCP).

Bank Al-Maghrib had expected that the current year would end with an inflation rate of about 5.3%, and that next year it would return to less than 2%, the customary overall rate for the last few years.

However, such forecasts are becoming more clouded in doubt, especially considering the lasting impact of the war in Eastern Europe, the relatively low annual growth rate forecasts, and the intense international economic context.

Inflation is defined as a continuous rise in the general level of prices of goods and services, which means that these rates directly affect citizens’ purchasing power, especially when wages remain stagnant.

Inflation also affects investment decisions, as a significant increase in inflation means an increase in the level of costs borne by the investor, be in public, private or foreign.

Inflation additionally affects the value of the currency, which raises the cost of imports, usually made with hard currencies.

For Morocco, the ongoing inflation is imported, resulting from the increase in the prices of a number of materials that the country imports from abroad, especially fuels.

When the price of fuel rises, the cost of transportation is affected, and therefore the prices of all basic materials inevitably rise, which is what Morocco has been experiencing since February with the outbreak of the Russian-Ukrainian war.

In addition to fuel prices, the prices of foodstuffs, such as grain, and raw materials like building materials have witnessed a noticeable increase as a result of the geopolitical repercussions of the ongoing war in Ukraine.

Bank Al-Maghrib considers price stability among its main objectives, and it must act according to what is available to it to reduce inflation rates. Ample options are available to the central bank to deal with regular domestic inflation.

Such mechanisms include manipulating directive and loan interest rates to re-balance the monetary mass. However, when it comes to imported inflation, options are limited.

Economist Rachid Aouraz described the situation in Morocco as complicated and predicted that the crisis of high inflation would be prolonged, rendering temporary “quick fix“ solutions insufficient.

In an interview with Hespress AR, Aouraz said that “the possible solutions for Morocco in light of the current crisis are to search by all means to revive the economy, give real guarantees to investors and improve the business climate.”

In this regard, the speaker suggested encouraging investment, especially foreign direct investment, and pointed out that “domestic capital and Moroccan investors also need guarantees, protection of their investments, and speeding up and simplifying administrative procedures.”

So far, the Moroccan government has deployed aid packages targeting the most affected sectors and industries, such as the transportation sector. But these initiatives are not sufficient.

Despite the slow declining cost of fuel in Morocco, prices of basic goods continue to rise, or remain unchanged from earlier spikes. The prices of consumables are still higher than they were in the past, while salaries and wages remain unchanged.