The Moorish Wanderer

The Dirham’s Secret Value

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on July 29, 2012

A short post on Morocco’s most coveted economic secret: what is the currency board breakdown used by Bank Al Maghrib to determine our Dirham currency value?

Over the last 13 years or so, Euro-based commercial partners have accounted for a little less than 70% of physical goods. (Dollar in light blue and other currencies in Red)

Speculations place the Euro well ahead between 60% and 80%. And that has a lot to do with the flow of goods and capital circulating between us and the other side of the Gibraltar detroit. Dollar should follow closely as well, with our main exports (Phosphate) and strategic imports (Oil and derivatives) labelled in Dollar.

And yet we should have a close idea of how the Dirham value is determined; it is after all a matter of transparency as well as credibility: the Dirham value tends to condition -up to a point- a significant part of the overall monetary policy, and many businesses are interacting daily with the decisions of Bank Al Maghrib.

The assumption behind this is simple and a bit restrictive: I assume the only determinant (or indeed the most significant) for the Dirham value is the amount of traded goods in  a year, which is an overly simplistic assumption, but one that makes sense, because discrepancies can be then established on the basis of capital flows, and only then residual differences can be attributed to policy arrangements (the so-called activist policy) furthermore, the initial assumption only establishes itself because the price of a currency is mainly function of the relative price of goods traded between one country and many others. This is all very classical (or neo-classical) but for a small, outward-oriented country that is Morocco, the theory applies, since the trade integration index went up from .38 in 1993, to .58 in 2010: (Exports + Imports)/GDP.

Even without a perfect hindsight of the currency portfolio behind it, the Dirham is firmly pegged against the Euro: the correlation in its exchange rate with the Dollar, and that between the latter and the Euro reaches staggering high levels (.97) either points to a fixed currency board -meaning, with no substantial changes in portfolio weightings, or with a semi-constant weighting for the Euro, and a random process determining the pegging against the Dollar and other major currencies to fill in the remaining slots. If such theory were to be vindicated, then any random generating process for, say the remaining 20% will not change that much the trend observed in the second graph.

Firmly pegged to the Euro. the Dirham mimics very closely the Euro/USD rate at its own level.

Suppose now that the Dirham value is computed as the weighted sum of monthly variation in respective Euro and Dollar exchange rates, and consider these weightings do not change during the year (an unnecessary assumption since monthly breakdown per commercial partner are available, this is a convenient way to spare myself additional computations) if indeed the initial assumption holds, then we should not observe large discrepancies between the policy rate, and the pure currency board-based result.

These computations yield mixed results: overall, a synthetic Dirham based on monthly data from 2000 to 2012, solely based on yearly weightings draws about the same trend, but misses out mainly in terms of historical volatility, about three times as volatile as the empirical Euro/MAD exchange rate, an oddity observed during the first months of 2011.

So the currency board, in the narrow definition provided earlier on, does relatively well in describing the trend; if anything, I would say Euro makes up about 62% to 68%, Dollar 10.8% and 11.2%, and the remaining currencies at most 26%. But there are obviously other elements the simple setting fails to account for, chiefly the capital flows and the level of foreign reserves. Bank Al Maghrib tends to intervene on the Exchange Markets to sustain the currency value of Dirham by buying or selling it so as to remaining within a pre-determined Euro-peg. Since 2000, they have tried to keep these variations within a target of .11% a month. These restrictions are looser when it comes to the Dollar, however.

It may come as a surprise, but the managing policy tends to have a soothing effect on the sudden changes in times of market uncertainty, in that sense, it is safe to say if there ever was an activist policy, its aim was to manage volatility and bring it to an acceptable level. But, as P. Krugman has pointed out, fixed exchange rate cannot be maintained indefinitely. Morocco’s policy has been successfully tested during last year, but that resilience does not mean it can go on indefinitely should a global crisis arise from a possible Euro breakup.

2011 was a rough year on the currency board.

The Big Picture – Part 5

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on May 16, 2012

evidence shown on my last piece points out to foreign trade as a major factor in output cycles and its growth. The initial proposed model has therefore to be readjusted accordingly, through the TFP process, and the relation it bears with the Balance of Payments; and so:

\log z_t = \rho z_{t-1} + \tau bp_{t-1} + \epsilon_{t-1}

\log bp_t = \rho bp_{t-1} + \tau z_{t-1} + \upsilon_{t-1}

where \rho is the persistence parameters, and \tau the cross-persistence parameter that captures transmission shocks between TFP and balance of payment; both processes displays the following properties:

E(z_t) = \rho E(z_{t-1}) + \tau E(bp_{t-1}) + E(\epsilon_{t-1}) = 0

and that is so because the empirical data shows it: the long-run shows both the Balance of payments and the Solow Residuals converge to a zero.

var(z_t) = \rho^2 var(z_{t-1})+\tau^2 var(bp_{t-1})+ var(\epsilon_{t-1})+ 2 cov(z_{t-1},bp_{t-1})


E(bp_t) = \rho E(bp_{t-1}) + \tau E(z_{t-1}) + E(\upsilon_{t-1}) = 0


var(bp_t) = \rho^2 var(bp_{t-1})+\tau^2 var(z_{t-1})+ var(\upsilon_{t-1})+ 2 cov(z_{t-1},bp_{t-1})

Both parameters \rho and \tau are then estimated by computing the TFP residuals on HP-filtered data. Recall:

\log y_t = \alpha \log k_t + (1- \alpha) \log n_t + z_t

we also have: cov(z_{t-1},bp_{t-1}) = corr(z_{t-1},bp_{t-1})\sigma_{z}\sigma_{bp}

Balance of Payments and the Exchange Rate exhibit a strong positive correlation, starting from the mid 1970s.

The graph makes the case for the constructed balance of payments to capture the effects of international trade – starting from the mid 1970s, the discrepancies between Investment and Savings captured by the Balance of Payments, and the exchange rate with the Dollar have locked up in a strong positive co-movement; the exchange rate isn’t set arbitrarily: it has real impact on input cost, on growth projections and consumption across the board. We have now a good insight on how foreign trade impacts growth performance. (The data still does not incorporate government expenditure)

Computations on parameters \left( \rho .\ \tau .\ \sigma_{z} .\ \sigma_{bp} \right) yield:

we get:

\tau = .4324

\rho = .2723

we observe the condition for \left| \rho+\tau \right| < 1 is acquired, and the results might, at this point, explain the discrepancies pointed out earlier: the persistence parameter is significantly weaker as the Balance of Payment shocks are incorporated into the structural process before they get into the economy; we observe the variance-covariance matrix displays the following values:

Variables       e         u         
e            0.004600  0.006510
u            0.006510  0.009214

It makes sense, since these in turns carry part of the unobservable shocks in a closed-economy, and because foreign inflows of capital are critical to the national investment, and thus to output growth, the cross-persistence parameter is more significant; yet another piece of evidence that any sensible public policy to boost growth is NOT to shut down foreign trade (a gentle wink to the protectionist left-wingers out there). We do notice that Capital accumulation in Morocco relies heavily on foreign inflows, and by implication, output growth as well. Structural shocks, to that effect, are a kind of a buffer between exogeneous, unexpected shocks, and the economy: transitory shocks are captured by structural shocks rather than those attached to the

the results are very much in line with prediction on standard RBC, only this time numbers fit a lot better, as they show below. There are still some problems on the Labour side, and public finances’ effects on cycles are yet to be estimated; but so far, the picture looks great 🙂

   Data   |σ       |σj/σy  |Corr(y,j)|
Y_GDP     |0,08030 |1       |1       |
Con       |0,07013 |0,87339|0,82150  |
Capital   |0,09167 |1,14159|0,4448   |
Investment|0,24127 |3,00463|0,83690  |
Labour    |0,09806 |0,81888|-0.8670  |
Government|0,22035 |2,74415|0,49970  |
    RBC     |σ      |σj/σy |Corr(y,j)|
Y_GDP       |0,06596|   1  |    1    |
Consumption |0,04715|0,7148|  0,5092 |
Investment  |0,20460|3,1018|  0,8766 |
Government  |         No Data        |
Labour      |0,00002|0,0003|  0,0238 |
  New RBC   |σ      |σj/σy |Corr(y,j)|
Y_GDP       |0,0631 |   1  |    1    |
Consumption |0,0455 |0,721 |  0,9515 |
Capital     |0,1268 |2,009 |  0,7060 |
Government  |         No Data        |
Labour      |0,0126 |0,199 |  0,7183 |

Stability First: Foreign Exchange Terms

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, The Wanderer by Zouhair ABH on December 26, 2010

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.

downward trend in terms of trade and a high volatility in capital cashflows. The relationship is cardinal: Morocco is not a financial center, so most of its currency flows must be secured from goods exports, as FDIs are growing more and more volatile (Source: Finance Ministry)

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).

Crawling pegs: Euro fixing is tighter compared to USD -mainly because significant commercial partners trade in Euro (Bank Al Maghrib Data)

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.

Real Exchange rates. Starting from the 80's (financial liberalization in France and ECC entry for Spain) each country took a separate path but both countries remain significant markets for the exporters.

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.

Real Exchange rates of some Scandiniavian countries are similar to those of Morocco

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.