Morocco’s central bank (BAM) decided on December 20th to once again, raise the national key interest rate, in an attempt to halt an ongoing inflation.
Experts, investors and economic actors had predicted this additional rise, after the initial move made back in September had little to no effect.
In a release subsequent to its trimestriel board meeting, BAM explained the decision behind adopting the new 2.50% rate.
Rising Inflation
At the national level, high inflation is weighing on economic activity and on the weight of prices on Moroccans.
In economic theory, the assumption that the higher the lending interest, the lower demand will be for loans is driving this austerity measure.
However, BAM’s initial cautious 50 basis point rise was not enough to slow demand, even at a time of considerable inflation.
Inflation is expected to rise to 6.6% in 2022, after 1.4% in 2021, driven mainly by accelerating increases in food and fuel costs.
It will then average 3.9% in 2023 before rebounding to 4.2% in 2024, in line with the planned decompensation of prices of subsidized products.
The latter will have to continue to record high rates for a much longer period than expected in September, impacted in particular by external pressures that spread to non-tradable goods and services, and by the implementation of the reform of the compensation system from 2024.
Economic growth
After the 7.9% rebound recorded in 2021, economic growth would mark, according to Bank Al-Maghrib’s updated projections, a clear slowdown this year to 1.1%, resulting from a 15% decline in agricultural value added and a deceleration to 3.4% of the pace of non-agricultural activities.
In 2023, growth is expected to accelerate to 3%, driven by a 7% increase in agricultural value added, assuming a return to average cereal production, while growth in non-agricultural activities is expected to decelerate to 2.4%.
The sectors will suffer in particular from the deterioration of the external environment. In 2024, growth would be 3.2%, covering increases of 1.8% in agricultural value added, assuming average agricultural production, and 3.5% in non-agricultural activities.
Fuel prices above all else
Internationally, after peaking in June, oil prices are continuing their downward trend while remaining high, with the price of a barrel of Brent crude expected to average $99 in 2022, compared with $70.4 in 2021, before falling to $82.4 in 2023 and $80.2 in 2024.
Fuel prices affect nearly every stage of production and distribution, hence the rise of prices for non traditionally fuel related products.
As for foodstuffs, prices would end the year with an increase of 14.6%, but would decrease by 9.4% in 2023 and 1.4% in 2024, according to BAM’s projections.
At the same time, according to the World Bank’s October projections, the price of raw phosphate, after rising 119.5% this year to $270 per ton, would fall to $200 in 2023 and $175 in 2024.
Under these conditions, global inflation is decelerating, but it will continue to evolve at high levels and for longer than expected in September.
In the US, for example, after peaking at 9.1% in June, it is expected to average 8% for the year as a whole, before falling back to 3.9% in 2023 and 2.4% in 2024.
In the Eurozone, the greater impact of the energy crisis is translating into stronger and more persistent inflationary pressures with a projected return to around the ECB target in 2024.
Inflation is expected to rise to 8.4% in 2022 and to decelerate to 6.5% in 2023, a significant upward revision, and then to 2.2% in 2024.
Against this backdrop, central banks are continuing to tighten their monetary policies despite the deteriorating economic outlook, stressing that their priority remains achieving their inflation targets.
The US Federal Reserve decided at its December 13-14 meeting to raise the target range for the federal funds rate by half a percentage point to 4.25% and 4.5%, indicating that it will continue to reduce its holdings of Treasury securities and mortgage-backed securities in accordance with the plan published in May.
Similarly, the ECB decided on the 15th of the same month to raise rates by 50 basis points and to start reducing its asset purchase program from March 2023.
As for its emergency pandemic purchase program, ECB intends to continue its strategy of reinvesting repayments at least until the end of 2024.
Morocco’s trade
In terms of external accounts, the year 2022 will be marked by strong trade dynamics and a significant increase in travel receipts and transfers from Moroccan nationals, projects BAM.
Exports are expected to improve by 32.3%, driven mainly by sales of phosphate and derivatives, thanks to higher prices, and those of the automotive sector.
Their growth is expected to slow to 2.7% in 2023, with declines for phosphate and derivatives and agricultural and agri-food products, before a quasi-stagnation in 2024.
At the same time, imports are expected to rise by 38.4% in 2022, mainly due to a 102.1% increase in the energy bill to MAD 153.2 billion, an increase in purchases of semi-finished products and an 89.9% rise in wheat supplies to MAD 27.2 billion.
They should fall by 3% in 2023, with a 13% decrease in the energy bill and a 41.2% decrease in wheat supplies, then rise by 1.1% in 2024.
Travel revenues would end the year with a record jump to MAD 88.8 billion after 34.3 billion in 2021, and would experience a quasi-stagnation in 2023 followed by a 5.5% improvement to 94.1 billion in 2024.
For their part, revenues from Moroccan nationals should increase by 12.9% to MAD 105.8 billion in 2022, fall by 4% to MAD 101.5 billion in 2023, due in particular to the deterioration of economic conditions in the host countries, and then rise to almost MAD 104 billion in 2024.
Under these conditions, the current account deficit would widen from 2.3% of GDP in 2021 to 3.3% in 2022 before narrowing to 2.1% in 2023 and 1.9% in 2024. As regards FDI, receipts would be close to the equivalent of 3% of GDP this year and 3.2% of GDP annually over the next two years.
These projections give financial authorities the leeway to tweak the key rate as recovery manifests, which they say may take a year or two.
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