With the tightening of financial policies and the liberalization of the economy in the second half of the 1980s and the early 1990s, Morocco was laying the foundation for the eventual establishment of currency convertibility. Recognizing that the potential benefits of the structural reforms could not be fully reaped unless the exchange system was liberalized, King Hassan II announced in 1991 that Morocco would establish the convertibility of the dirham on current account by 1993. Accordingly, the Government focused its policies in the next two years on establishing current account convertibility, which was formally achieved with the acceptance of the obligations under Article VIII of the Fund’s Articles of Agreement in January 1993.
In deciding to establish convertibility in a third phase of economic liberalization, the Government recognized that removing exchange controls was likely to bring about important advantages and, in particular, that current account convertibility was indispensable if trade liberalization was to be meaningful. From a general point of view, under an open trade and exchange system, consumers are able to choose among a larger variety of goods, while domestic output may be promoted through improved access to productive inputs and modern technology. By exposing domestic producers to foreign competition, an open trade regime and convertibility help to establish the relative prices prevailing in world markets and, accordingly, allocate the country’s resources consistent with its international comparative advantages. With a more efficient allocation of resources and with better access to productive inputs and modern technology, the opportunity to export is likely to improve, further stimulating innovation and quality improvements in domestic industry.
Further efficiency gains can be expected if capital controls are also removed in order to establish full convertibility. This could further help to attract resources from abroad, with direct foreign investment, in particular, contributing to expanding the country’s access to modern technology and to foreign markets, thereby leading to more efficient production methods. Furthermore, if capital controls are eliminated not only for nonresidents but also for foreign and national residents, capital account convertibility could enable economic agents to obtain higher risk-adjusted rates of return by allowing them to hold internationally diversified portfolios. This could have stabilizing macroeconomic effects insofar as the real value of their savings is cushioned against various shocks to the domestic economy.
The Moroccan authorities were keen to introduce current account convertibility in an orderly way in order to avoid the risks associated with a premature introduction. For instance, in the presence of financial imbalances and an inappropriate exchange rate, liberalization could put pressure on the balance of payments and lead to a rapid decline in reserves, a surge in imports, and losses in output. Even with appropriate policies, transitional losses could result from a restructuring of domestic production in response to increased import competition. These risks also depend on the importance of the exchange restrictions in place and the pace at which they are phased out. Thus, the literature has stipulated certain conditions that need to be met to minimize the risks.16 The time required to satisfy these conditions explains to a large extent why Morocco has started relatively recently to liberalize exchange controls. First, there is a need to establish a balance between aggregate demand and supply, consistent with external financial stability, through sound demand-management policies. Second, an exchange rate policy compatible with a sustainable external sector position must be in place. Third, an adequate level of international reserves is necessary to allow the country to absorb domestic or external shocks, without reintroducing restrictions, while domestic policies are being adjusted. Although meeting these preconditions can help minimize the risks involved in establishing convertibility, the elimination of administrative regulations that hinder the proper functioning of the market system represents an additional and fourth prerequisite to fully reaping the benefits of convertibility. However, once the above four conditions are satisfied, a country would be able to move even to full convertibility without undue risk.
Concept of Convertibility
In general terms, currency convertibility can be viewed as the ability to freely exchange one currency for another and to use that currency for foreign transactions. The central concept of convertibility is described in Article VIII of the IMF’s Articles of Agreement. Under Section 2(a), members may not, without the approval of the IMF, impose restrictions on the making of payments and transfers for current international transactions, subject to transitional provisions of Article XIV, which allow countries to maintain those restrictions on current payments and transfers that were in effect when they joined the institution. Under Section 3, members may not engage in discriminatory currency arrangements or in multiple currency practices that are neither authorized under the Articles nor approved by the IMF. Section 4 specifies the obligations of a member country to buy balances of its currency held by another member.
To some extent, Article VIII convertibility goes beyond the concept of convertibility for current international transactions, or current account convertibility. As defined in Article XXX(d), a number of transactions, such as trade credits or amortization payments, are regarded as current transactions, although in the strict sense they would represent capital transactions. Article XXX allows the Fund to determine, after consulting with the members concerned, whether certain specific transactions are to be considered current or capital transactions. Article VIII, however, does not prevent a member from maintaining quantitative import restrictions,17 although such restrictions would not be consistent with the objective of allocating scarce resources efficiently, which can be achieved through convertibility. In addition, the IMF’s Articles of Agreement explicitly allow restrictions on capital movements in order to avoid disruptions occurring from “hot money” flows.18 Furthermore, surrender requirements are compatible with Article VIII obligations although they limit the internal convertibility of the currency.19
Reduction of Exchange Restrictions
The reduction of exchange restrictions in Morocco started in the mid-1980s and gained momentum in the early 1990s. Current account liberalization proceeded in parallel with trade reform. The main measures (Appendix V) were the gradual reduction and, finally, abolition (in 1984) of import deposit requirements; the elimination (in 1990) of the requirement of approval from the Moroccan Exchange Office for payments for imports on List B (where such exchange restrictions were used to reinforce trade restrictions such as licensing requirements); and a continuous increase in allowances for business or tourist travel, study abroad, and payments for technical assistance and general transfer. In 1991, remittances of foreign workers in Morocco and transfers for family expenses were fully liberalized; payments for technical assistance followed in mid-1992, and in early 1993 the authorities confirmed that the Moroccan Exchange Office would approve all bona fide applications for exchange in excess of existing pro forma limits for the purposes of tourism and business travel, educational expenses, medical costs, workers’ remittances, and family maintenance. The applications remained subject only to verification that they were indeed for the purpose of a current international transaction and not for the purpose of transferring capital.
Exchange reform was thus proceeding in parallel with trade reform, notably the phasing out of quantitative restrictions on imports. Indeed, eliminating payments restrictions while maintaining quantitative restrictions would achieve little because domestic relative prices would remain isolated from world market prices, providing incentives for an inefficient allocation of scarce resources. Furthermore, the reforms generally involved also the rescission of the exchange regulations underlying the restrictions, although for purposes of Article VIII of the Fund’s Articles of Agreement it is only relevant whether or not payments are actually restricted.
Liberalization of inward and outward investment involving nonresidents started in earnest with a major reform of the investment code in 1983, which eased restrictions on the repatriation of capital and dividends by foreign investors. In the late 1980s, the authorities intensified their efforts to create an environment more favorable to foreign investment: in 1988, the investment code was further liberalized, and in 1989 the “Moroccanization” decree of 1973, which imposed a 49 percent limit on foreign ownership of local enterprises in certain sectors, was abolished. In 1992, the repatriation of profits and capital from foreign investment was virtually fully liberalized, and in late 1993 the remaining restrictions on holding and trading Moroccan securities were lifted. Along with the relaxation of controls on foreign ownership and profit repatriation, the operations of nonresident accounts were gradually liberalized. In 1988, nonresident Moroccans became entitled to open and maintain convertible dirham accounts in Morocco against an initial deposit of at least DH 500,000 in foreign exchange; the minimum initial deposit was reduced to the equivalent of DH 50,000 in 1989 and was eliminated in 1990. The use of such accounts for credit card transactions was permitted, and the interest rate on such accounts was allowed to be freely determined by financial institutions. In early 1992, the repatriation of profits and capital financed by foreigners but from local resources was significantly liberalized when capital accounts were replaced by convertible time accounts. With the introduction of convertible time accounts, funds were allowed to be used without prior approval for a wide range of purposes (e.g., to purchase government bonds, acquire shares listed on the stock exchange, and make transfers to resident foreigners). The assets held in these accounts could be transferred abroad after a waiting period of five years, even if the original investment was not accompanied by a retransfer guarantee.
Similarly, export promotion accounts in convertible dirhams were introduced in early 1991, allowing exporters to retain the dirham equivalent of part of their exchange proceeds (20 percent for exports of merchandise, 10 percent for exports of services) in such accounts to be used, without restriction, for certain business-related expenses abroad. In 1993, exporters were allowed to retain a share of their foreign exchange proceeds (10 percent for exports of merchandise, 5 percent for exports of services) in foreign exchange accounts with domestic banks; similarly, nonresident Moroccans were allowed to open foreign exchange accounts with a minimum deposit of the equivalent of DH 100,000. These accounts may be used freely for a number of business-related purposes; banks may invest the foreign exchange abroad, on-lend it to domestic banks, or sell it against different convertible currencies but not against domestic currency. Finally, foreign borrowing by domestic firms for most purposes (trade, investment, etc,) was liberalized in late 1993, and shortly afterward borrowing by resident firms from foreign shareholders was completely liberalized.
By the end of 1993, on top of current account convertibility, Morocco had established virtually full capital account convertibility for foreign investors. Furthermore, the relaxation of surrender requirements and foreign borrowing restrictions, as well as the authorization of outward investments by certain export firms and banks, represented a first move toward capital mobility for resident Moroccans as well. Indeed, by the end of 1993, a consensus was emerging that full convertibility was within reach and that capital controls had become ineffective and unnecessary. While the IMF’s Articles of Agreement explicitly allow restrictions on capital movements, it was increasingly recognized that full convertibility was desirable for a number of reasons: Morocco could attract more investment from abroad by providing a strong signal about the irreversibility of reform, and resident economic agents would be able to obtain higher risk-adjusted rates of return if they could hold internationally diversified portfolios.
Exchange Rate Policy
As part of its overall adjustment strategy, Morocco moved to establish a market-clearing exchange rate. Under its current system of exchange rate determination, the nominal exchange rate is set on the basis of a currency basket that comprises the currencies of Morocco’s principal trading partners, weighted according to the geographic distribution of Morocco’s foreign trade and the pattern of currencies of settlement. In practice, Bank Al-Maghrib implemented its exchange rate policy by setting daily the buying and selling rates for the French franc; rates for other currencies were established on the basis of the dirham-French franc rate and the rates between those currencies and the French franc in the Paris exchange market, The system was highly centralized. Authorized banks could trade foreign exchange with their customers at the official rate but had to purchase from or sell to Bank Al-Maghrib their balances on a daily basis. A limited forward foreign exchange facility, operated by Bank Al-Maghrib on account of the treasury, has been available to exporters and importers benefiting from special customs arrangements (essentially imports to be used for exportable production) since 1979.
Under this system, the authorities pursued an active exchange rate policy during 1980–86 to depreciate the dirham gradually by about 30 percent in real terms (Chart 4). The real effective exchange rate, as measured on the basis of the IMF’s Information Notice System basket,20 remained relatively stable between 1987 and early 1990, as a nominal effective appreciation by more than 13 percent over this period was somewhat more than offset by the smaller increase in consumer prices compared with increases in partner and competitor countries. Despite the stability of the real effective exchange rate, the authorities decided in May 1990 to devalue the dirham by 9.25 percent against the basket of currencies to which the currency is pegged. This decision was to a considerable extent motivated by the sharp deterioration in Morocco’s terms of trade, which had caused the trade deficit to widen precipitously during 1987–89.
Exchange Rate and Price Movements
Sources: Moroccan authorities: and IMF, International Financial Statistics.The dirham subsequently remained pegged to the basket, apart from a brief series of small step adjustments in 1992; however, the real effective exchange rate appreciated by about 9 percent between May 1990 and the end of 1993, partly eroding the gain in competitiveness. This outcome is also reflected by movements in the prices of tradables relative to those of nontradables. Using the ratio of the wholesale price index to the consumer price index as an approximative indicator of the relative prices of tradables (Chart 4), the “real exchange rate” thus defined was broadly stable between 1986 and 1990 but has appreciated since then, while export volume growth slowed down. However, this picture is highly influenced by volatile prices in the agricultural, mining, and energy sectors, where administrative controls have contributed to keeping price increases below the overall inflation rate. The relative prices for light industry and metallurgy production indicate that incentives to channel resources into these sectors increased rapidly during 1986–90 but have been partly eroded since then.
Overall, Morocco’s exchange rate policy has succeeded in moving the exchange rate to a market-clearing rate and, thus, prevented sizable exchange rate misalignments in spite of the shocks to which the economy has been subjected. An indicator of the success of this exchange rate policy is the convergence of the official and the parallel exchange rates. In the small parallel exchange market, the spread between the official and parallel exchange rates was virtually eliminated in mid-1992.
International Liquidity
For currency convertibility to be sustained, the macroeconomic policy stance generally must be able to prevent the emergence of a balance of payments crisis; however, there are situations where adverse transient external shocks should be financed at least to some extent through running down international reserves to avoid possible contractionary effects from a temporary tightening of financial policies or a depreciation of the currency. When shocks are more permanent, more time may be required to formulate the requisite policies, implement them, and start to feel their effect. A reserve level of at least three months of imports is generally regarded as a minimum cushion against such shocks. A larger import cover would be advisable when first establishing convertibility, given the possible initial pressures. The countries that have recently accepted the obligations of Article VIII maintained an average import cover of over four months of imports, and in those countries with a pegged exchange rate policy, the import cover was even higher, exceeding five months of imports.
Benefiting from substantial exceptional financing in the form of debt relief from official and private creditors in the previous decade (see Chapter VIII), Morocco was able to achieve a gross reserve level of five months of imports of goods and nonfactor services at the end of 1992. Staff simulations have indicated that such a level of reserves would be adequate for Morocco, even in the face of a relatively large but temporary terms of trade deterioration. However, as Morocco’s experience in the late 1970s has shown, it is crucial for the authorities to stand ready to adjust macroeconomic policies promptly in the face of more permanent shocks to avoid a chronic loss of reserves.
These preconditions, as well as a comparison of the Moroccan, Tunisian, and Algerian experiences, are discussed in Nsouli, Cornelius, and Georgiou (1992). For issues concerning the appropriate sequencing of steps toward convertibility, see also Nsouli (1993).
The guiding principle in determining whether a legislative or administrative measure is a restriction within the meaning of Article VIII is whether it involves a direct governmental limitation on the availability or use of exchange as such (Gold (1971), p. 4).
However, according to Article VI, Section 3, these controls must not be exercised in a manner that may restrict payments for current transactions or may unduly delay transfers of funds.
As commonly defined today, internal convertibility implies that residents have the right to maintain domestic holdings of certain assets (e.g., bank deposits) denominated in foreign currency and then to convert domestic currency internally into foreign currency assets.
This basket is more comprehensive than the one used by the central bank. The results given by the two baskets can therefore differ at times.
