Morocco looks set to leave interest rates at a record low as it weighs whether a bumper grain harvest can temper inflation caused by the global spike in commodity prices.
The North African country is betting the local impact of soaring food prices won’t be severe enough to necessitate monetary tightening as it waits for last year’s reduction in the benchmark rate to 1.5% to filter through to the economy.
Inflation rose to 1.9% in May, its highest in almost three years, maintaining a sharp upward trend since April, which coincided with the fasting month of Ramadan when food prices usually rise.
It would be too “hasty to weaponize monetary policy in reaction to a spike in global prices that has yet to show its durability,” said Abdelouahed El Jai, a former central bank director. He predicts authorities will hold the rate at Tuesday’s quarterly meeting.
After the tourism-reliant economy contracted 6.3% in 2020 as the pandemic hit, hopes are building for a turnaround this year. Agricultural output is projected to surge, including a grain harvest three times the size of last year’s that should reduce the need for imports.
That could be key at a time when global food prices have hit their highest in almost a decade, raising concern over swelling grocery bills as economies struggle to overcome Covid-19 and stirring memories of 2008 and 2011 when spikes led to riots in more than 30 nations. Despite swathes of fertile land, Morocco has to import 2 million to 5 million tons of wheat each year to meet local demand.
A vaccination campaign that’s covered almost a quarter of Morocco’s population of 36 million since January has also prompted authorities to ease controls on international travel. While the broader European market may take a while to revive, authorities are counting on some of the 2-million-plus Moroccan expatriates on the continent to return and breathe life into once-bustling cities like Marrakesh and Agadir.
“Morocco probably couldn’t miss out on the chance to relax air travel” and take advantage of the crucial summer season, said El Jai, who’s now an economist at Cerab, a research center in the capital Rabat. The Tourism Ministry projects it will probably take until 2024 for arrivals to reach pre-pandemic levels.
“We have no control over the return to normality,” El Jai said.
Low Borrowing Appetite
Beyond that, Morocco is running up against the limits of monetary policy. Even after the benchmark was cut a combined 75 basis points in 2020, there’s little appetite in the business community for borrowing.
The bulk of the new loans extended last year were government-sponsored and for sectors hit by the pandemic, CDG Capital, the investment arm of the country’s biggest pension manager, said in a note last week.
It predicted the pace of lending will slow further this year, while “the continuing deterioration in asset quality should push banks to be more demanding and tighten their risk criteria for new loans.”