Stability First: Foreign Exchange Terms
Last issue of Bank Al Maghrib was of great interest especially the foreign exchange bit. Apart from its comparatively low productivity per exported output, one of the curses of Moroccan economy is its inability to field enough foreign reserves to hold a long-term shadow exchange rate, or just to attract confidence and therefore more diversified foreign investment.
Following the November issue of the “Revue Mensuelle de la Conjoncture Economique, Monétaire et Financière“, the Foreign Trade balance is definitely worsening. Indeed, the Goods and Services balance is in a MAD 114.5 Bn deficit, which means that it aggravated by 5.1% compared to last year. This is mostly due to the fact that imports increased by 13%. However, cover rate (i.e. Exports/Imports ratio) climbed back to the average of the past decade to 48% (from an average f 46% in the last 3 years); and so one of our structural weaknesses is that of exports’ inability to match the imports. In value of course, especially -but not only- when it comes to energy imports. Indeed, the digest does underline the fact the deterioration of the present goods and services balance deficit was due to the increase of 34.8% of energy-based imports. “L’expansion des achats de produits pétroliers est due à l’accroissement du prix moyen de la tonne importée de pétrole brut et du volume, respectivement de 40,6% et de 19,3%. Le prix moyen de la tonne importée s’est en effet établi à 4.689 de dirhams, au lieu de 3.334 dirhams pendant la même période de 2009. Quant aux importations de demi-produits, chiffrées à 45,5 milliards de dirhams, elles ont enregistré une croissance de 18,3%, attribuable pour l’essentiel à la hausse des achats de produits chimiques, de fer et acier et de matières plastiques, respectivement de 23,4%, de 17,9% et de 15,8%.” This is one way of explaining why our imports do not cover exports fully: the cost per exchanged good is in favour of imports, which means that value -in terms of capitalistic or skilled labour intensity- is lower in the exports when compared to exports, excluding energy goods (whose prices are market future, thus encompassing the expectations rather than any cost of production or indeed any efficient factors’ combination). The total average cost of imported ton was for the first semester 2010, MAD 7.663 per ton, while the total average cost per export ton was, for the same time period, MAD 6.41 per ton. (Office des Changes Figures) Oil and energy-based goods do not represent the most expensive imports (Their weighted average was MAD 4.05 per ton, but the strain they put on the balance deficit is due to their intrinsic volatility. On the other hand, some imported quantities can be substituted away due to the fact electricity is mainly produced by means of conventional fossil fuel. Seeking new sources of energy would result in an expanding GDP, a net creation in jobs and partial resorption of the deficit in goods and services balance. Furthermore, more efficient energy sources would enhance production, and thus increase exports productivity (again, reducing the balance of commerce deficit) cutting by half the MAD 114.52 Bn deficit is possible if import of MAD 52 Bn in energy-based goods can be halved one way or the other. In facts, there are other ways around to cut the deficit, especially any re-exports. However, this is not my subject. I wanted to discuss the effects on foreign reserves and perhaps some ways to finesse it.
The structural commerce balance deficit compels the Moroccan economy to finance it by getting real money (service like tourism, or FDIs) into the domestic market, foreign currency money. The Moroccan economy has to face two broad challenges in managing the foreign currency reserves: it has to sustain the announced peg, and to pay for any outflows of these hard currencies as well (whether in terms of exports, or for FDIs when the investors want to cash out their dividends). The first decision is basically a matter of policy-making: there was an official decision that the local currency -the Moroccan Dirham- needs to sustain a certain level of exchange rate with dominant currencies, either large commercial partner (Euro for France or Spain) or because strategic goods are labelled in Dollar (Phosphate, Oil and Gas).
This crawling peg though, is not credible for the forex markets: either because of interest rates and/or inflation rate differential with the significant currencies, or because the foreign reserves Bank Al Maghrib holds are not deemed sufficient to sustain it. The peg is an artificial exchange rate, to be sure. And speculators can from time to time arbitrage the Dirham (it is true the currency is not that important in terms of foreign trade, but if the differential is above market levels, then arbitrage is possible, even over small amounts, dozens of millions are gained usually) and thus increase the exchange rate with say the Euro. BAM will indeed from time to time buy up some Dirhams on these markets to sustain the desired level and needs to pay it up from the foreign reserves it holds. This can be observed on the exchange rate Bank Al Maghrib sustains with the Dollar, and more specifically the Euro. Basically, an idea can be tossed around about the variables that could have an effect on our foreign reserves , are mainly due to differentials between our own business cycle, and those of significant partners. Because our currency has tied itself to, say the Euro, differentials in inflation rate, in interest rate, in output gap and in an array of less , significant but non negligible other micro-variables, all of which make the official exchange rate more or less artificial, and so, more or less easy to manage. Ideally, the central bank would seek ‘smoothing’ the exchange rate by synchronising our business cycles with those of our partners. The trouble is, we do not have the same structures, the same weaknesses or strengths countries like France or Spain’s. The ensuing peg can therefore differ from the real exchange rate Morocco sustains with the Euro. This differential results in speculation attacks on the Dirham’s value, thus a pretty useless waste of precious foreign reserves. The problem can be solved either by abandoning fixed or pegged exchange rate -with its drawbacks and benefits- or do the courageous thing, that is, to look for commercial partners with congenial business cycles, or the least thing to do is to diversify a bit (and I got an interesting theory about that. Not mine, but something about diversifying risk) so as not to be fettered with an expensive exchange rate. This money can be used for other things: investment in infrastructures, paying back foreign debt, alleviating pressure on the domestic debt market, or even to pour it so that our exports can create value instead of destroying it.
The depletion of our foreign reserves can, with reasonable assumptions and extrapolations, be delineated as the effect of constant desynchronizing of our economy, and that of the Euro-zone, France in particular. Let us walk through the figures here. Consider the real exchange rates of France and Spain compared to that of Morocco. Prima facie evidence shows a seemingly good correlation between our exchange rate and their over a long period of time (and 50 years is a long time series as far as Moroccan economics is concerned). However, statistical computations would show that starting from the 1980’s, figures wildly diverge, which means that in real terms, the relative prices of goods produced in Morocco, in Spain and in France are getting more and more different from each others. The assumption that our business cycles are desynchronizing is not inherently extravagant, and the observations on real exchange rate just shows it. The question is now how to move away from this unhealthy relationship to a state in which not only our reserves would stand a larger chance than a snow ball in hell, but also, how to actually make foreign exchange in goods and services worthwhile.
First, we need a benchmark of similar countries in terms of exchange rate -we while then move to another, more detailed argument. Computations on the U-Penn world table allowed for 4 countries to compare to Morocco as follows (graph on the side). The group countries is unlikely, to be sure. But the fluctuations since the 1980’s do prove that there is a certain convergence, if not a good synchronization of Morocco’s and the Scandinavian countries’ cycles. The fact that some are Euro-dominated currencies is not important, as the currency is not an aggregate of Euro economies. Let us now examine their structural imports to see if there’s some opportunities Moroccan business can leap on and get us some honours (this does not exculpate them from looking into other sectors to invest in).
Beforehand, I wanted to discuss the differences between imports and exports values (for Morocco), more specifically, the clothing industry. For the 2009 figures, the Office des Changes reports an average price MAD 15,855 per ton for the synthetic textile fibre used for clothing. The average price for exported clothing was, for the same time period, %AD 4151,5. Synthetic fibre is a key component in textile products, thus actually destroying value for imports. When it comes to overall clothing however, figures are trickier: the nominal value for exported clothing items is MAD 23,180 which could lead to think that value is created out of fibre input; However, the nomenclature subsumes other items that do not require the synthetic fibres for their industrial process: the complete name for clothing rubric is ‘ARTICLES D’HABILLEMENT ET FOURRURES‘ which includes Fur as well. The breakdown shows that Fur items have actually a value of MAD 19533, which is part of the overall clothing exports nomenclature- fur does not need synthetic input, the wildlife supplies it.
It is, without a doubt, a sad indictment of how competitive one of our leading export. Not only do they specialize in poor capitalistic and skilled labour-intensive goods, but they actually are gradually destroying value, rather than creating it. This explains partially why Morocco is running a balance deficit. What applies to clothing and textile could apply to other industries as well, but because clothing exports make up for 20%, along Chemical products (15%) and Food industry (14,1%), I rest my case.
Now, what sort of imports Scandinavian countries like Sweden, Norway and Denmark? Sweden imports more than $ 16 Bn. worth of manufactured goods and continues in doing so, chiefly clothing and textile (surprise, surprise !). Denmark imports similar pieces of goods and amounts in Dollar. It is true Morocco suffers from juggernaut Chines competition, but that is due to the fact that our clothing industry competes on the same sectors, and quite often on the same markets. If textile business were to put their heads together into increasing productivity, or indeed increasing the level of capitalistic and skilled labour contribution in output, that would insure far better quality, and the little extra in production cost can be passed on to consumers like Scandinavian without much losses in terms of competitiveness, as long as Moroccan textile can differentiate itself as a “good quality” product.
That’s were challenges lie: how to increase the average cost of exported ton, so as to create value, and subsequently cut down the trade deficit. In order to provide resources for these policies, our exports need to look somewhere else, get rid of the small and shrinking niches they got so comfortable in, and start looking for new markets. The positive externalities would have far-reaching consequences: a more diversified pool of export markets would render us less dependent on our traditional partners’ business cycles, with all the benefits on our foreign reserves and the Dirham value.