The Moroccan foreign exchange market: What pressures has it been exposed to in the context of exchange rate reform and COVID-19?

Abstract

This paper aims to measure the pressure on the dirham, the official currency of the Kingdom of Morocco, and also to identify periods of high tension on the foreign exchange market. This study takes place in a particular context characterized by the unprecedented spread of the SARS-Cov-2 all over the world andby the ongoing reform of the Moroccan exchange rate regime. Firstly, we used a very popular indicator called the Exchange Market Pressure Index (EMPI) known by its strong predictive capacity as it takes into account in its estimation two key indicators of the external sector, namely the change of the nominal effective exchange rate (NEER) and the foreign exchange reserves (FER). Secondly, we used theEMPI to quantify the contributions of some determining variables of the external sector to the pressures suffered by the foreign exchange market. Finally, we assessed the impact of the various measures implemented by the public authorities to counteract the Covid-19 crisis fallout, particularly those relating to the foreign exchange market.

In terms of results, it appears that: (i) the foreign exchange market showed a strong resilience throughout the year 2020 despite the health crisis consequences and the transition to the 2^nd phase of the exchange rate regime reform initiated in January 2018, (ii) the pressure identified in May 2020 was largely mitigated by the external fundamentals improvement in Q2-20 and (iii) the various measures undertaken by the government to guard against the external sector risks prevented significant pressures on the foreign exchange market in 2020.

JEL Classification : E31

Paper type : Empirical Research