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Euro-Dollar Fluctuations: Is the Moroccan Dirham a Victim of Imported Inflation? By Hachimi Alaoui

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The global economy is witnessing an unprecedented motion in the value of the euro, as its exchange rate has reached levels not seen since the early years of its existence as Europe’s common currency. After a prolonged depreciation in the euro’s value, the euro/dollar exchange rate has almost reached parity.

It happened faster than expected, and the movement of the exchange rate between these two currencies has been non linear. The euro’s fall below parity against the dollar, however, merely reflects a widening gap in the interest rates between the two shores of the Atlantic. While the Federal Reserve has implemented aggressive interest rate hikes to curb inflation, the European Central Bank continues to opt for a more cautious monetary policy approach.

As a result, a significant interest rate difference between the Euro-Zone and the US, which has sparked larger capital inflows to the US and massive purchase of the dollars, as the dollar has become more attractive to investors.

The latest reforms are not enough

In a global context, however, let’s not forget that the Moroccan dirham is pegged to an anchor basket of these two currencies that reflect the relative weight of our trading partners. In 2015, Bank Al-Maghrib (BAM), Morocco’s central bank, and the Moroccan Ministry of Economy and Finance updated“ the Dirham’s basket weighting to reflect the current structure of foreign trade of our country.”

Under the updated basket, the Moroccan currency’s basket weighting is “set at 60% for the Euro and 40% for the US dollar,” notes the website of the finance ministry. But this range limits the ability of Bank Al-Maghrib to maintain the dirham around a predetermined central value.

The range has only been widened twice, in January 2018 and then in March 2020. In January, 2018, after years of a (+-) 0.3% range around the reference price, the dirham exchange rate began to evolve to a wider band of (+-)2.5%. The outbreak of the COVID-19 pandemic in March 2020 then prompted Moroccan monetary authorities to further widen the fluctuation range of the nominal effective exchange rate, thus increasing to (+-) 5% around a central value.

Despite this progressive process concerning the exchange rate’s flexibility, the fluctuations of the dirham bring out a basket effect that continues to dominate the liquidity effect of market drivers. The basket effect comes from the impact of the fluctuation of the euro/dollar exchange rate on the dirham, and the difference between this impact and the evolution of the reference price of the dirham is equal to the market effect.

While the dirham would appreciate against the dollar and depreciate relative to the euro when the euro/dollar exchange rate appreciates, it would depreciate against the dollar and appreciate against the euro, when the euro/dollar depreciates.

The Moroccan exchange rate regime thus allows the current appreciation of the dollar/euro to appreciate the dollar/dirham and depreciate the euro/dirham rates. Nevertheless, these fluctuating values of the dirham occur at the expense of Morocco’s foreign exchange reserves, which remain the primary buffer against external shocks.

Making the Dirham more resilient to external shocks

Given the dirham’s vulnerability to the relative values of the euro and dollar, switching Morocco’s monetary policy towards adopting a targeted inflation rate, announced by Bank Al-Maghrib, could lead to a stronger market effect. Such a monetary policy framework can be implemented with a floating, or at least, a more flexible, exchange rate.

However, this transition would amplify the exchange passthrough to inflation, defined as the degree to which Morocco’s domestic prices react to a fluctuating value of the dirham, and induce persistent supply shocks, namely cost-push shocks. Nevertheless, more market discipline would follow and the exchange rate, rather than international reserves, would serve as the main shock buffer.

The redesign of Morocco’s monetary policy framework becomes even more critical in the face of the increase of oil prices. Morocco has long benefited from a negative correlation between oil prices and the US Dollar. The resulting compensatory effect made it possible to mitigate, albeit partially, the increase in the energy bill paid in dollars.

But this compensatory effect has faded in recent months due to the  rise in the value of the dollar against the dirham, combined with a staggering increase in the cost of energy inputs. Taken together, these two outcomes have amplified the inflationary pressures that households are experiencing, negatively affecting the Moroccan economy.

Under such conditions, Bank Al-Maghrib will need to provide more support to the dirham at the detriment of foreign exchange reserves. However, current fixed-exchange rate behavior fails to support the Moroccan economy. By strengthening the foreign value of the Moroccan currency, the country maintains the same level of inefficient domestic absorption, which in turn leads to supporting harmful consumption of energy and the bad habit of using imported goods.

Moroccan households currently face a volatile exchange rate and energy shocks. And rather than consuming our foreign reserves to maintain the same rate of energy utilization, an awareness of our consumption habits is probably more suitable. The fact is that pegging the dirham requires selling central bank’s reserves whenever there is an exchange rate pressure that generates costs associated with the continued use of foreign reserves as an external shocks absorber.

On the whole, the support that Bank Al-Maghrib provides to the dirham helps maintain relatively high levels of an unfavorable and unproductive use of energy and raw materials. If these imported inputs are expensive and hinder economic growth, Moroccans need to be informed.

Greater flexibility of the dirham and the resulting depreciation of its exchange rate would reduce domestic energy consumption, whereas a fixed exchange rate simply fails to readjust our consumption habits.

 

 

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This Sudan war is too senseless; time we ended it, By Tee Ngugi

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Why are the Sudanese Armed Forces (SAF) and the paramilitary Rapid Support Forces (RPF) engaged in a vicious struggle? It is not that they have ideological, religious or cultural differences.

Not that people should fight because of these kinds of differences, but we live in a world where social constructions often lead to war and genocide. It is not that either side is fighting to protect democracy. Both sides were instruments of the rapacious dictatorship of Omar el-Bashir, who was overthrown in 2019.

 

Both are linked to the massacres in Darfur during Bashir’s rule that led to his indictment by the International Criminal Court for crimes against humanity. They both stood by as ordinary, unarmed people took to the streets and forced the removal of the Bashir regime.

 

None of these entities now fighting to the last Sudanese citizen has any moral authority or constitutional legitimacy to claim power. They both should have been disbanded or fundamentally reformed after the ouster of Bashir.

 

The SAF and the RSF are fighting to take over power and resources and continue the repression and plunder of the regime they had supported for so long. And, as you can see from news broadcasts, they are both well-versed in violence and plunder.

 

Since the fighting began in 2023, both sides have been accused of massacres that have left more than 30,000 people dead. Their fighting has displaced close to 10 million people. Their scramble for power has created Sudan’s worst hunger crisis in decades. Millions of refugees have fled into Chad, Ethiopia and South Sudan.

 

The three countries are dubious places of refuge. Chad is a poor country because of misrule. It also experiences jihadist violence. Ethiopia is still simmering with tensions after a deadly inter-ethnic war.

 

And South Sudan has never recovered from a deadly ethnic competition for power and resources. African refugees fleeing to countries from which refugees recently fled or continue to flee sums up Africa’s unending crisis of governance.

 

Africa will continue to suffer these kinds of power struggles, state failure and breakdown of constitutional order until we take strengthening and depersonalising our institutions as a life and death issue. These institutions anchor constitutional order and democratic process.

 

Strong independent institutions would ensure the continuity of the constitutional order after the president leaves office. As it is, presidents systematically weaken institutions by putting sycophants and incompetent morons in charge. Thus when he leaves office by way of death, ouster or retirement, there is institutional collapse leading to chaos, power struggles and violence. The African Union pretends crises such as the one in Sudan are unfortunate abnormally. However, they are systemic and predictable. Corrupt dictatorships end in chaos and violence.

 

Tee Ngugi is a Nairobi-based political commentator.

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Air Peace, capitalism and national interest, By Dakuku Peterside

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Nigerian corporate influence and that of the West continue to collide. The rationale is straightforward: whereas corporate activity in Europe and America is part of their larger local and foreign policy engagement, privately owned enterprises in Nigeria or commercial interests are not part of Nigeria’s foreign policy ecosystem, neither is there a strong culture of government support for privately owned enterprises’ expansion locally and internationally.

The relationship between Nigerian businesses and foreign policy is important to the national interest. When backing domestic Nigerian companies to compete on a worldwide scale, the government should see it as a lever to drive foreign policy, and national strategic interest, promote trade, enhance national security considerations, and minimize distortion in the domestic market as the foreign airlines were doing, boost GDP, create employment opportunities, and optimize corporate returns for the firms.

Admitted nations do not always interfere directly in their companies’ business and commercial dealings, and there are always exceptions. I can cite two areas of exception: military sales by companies because of their strategic implications and are, therefore, part of foreign and diplomatic policy and processes. The second is where the products or routes of a company have implications for foreign policy. Air Peace falls into the second category in the Lagos – London route.

Two events demonstrate an emerging trend that, if not checked, will disincentivize Nigerian firms from competing in the global marketplace. There are other notable examples, but I am using these two examples because they are very recent and ongoing, and they are typological representations of the need for Nigerian government backing and support for local companies that are playing in a very competitive international market dominated by big foreign companies whose governments are using all forms of foreign policies and diplomacy to support and sustain.

The first is Air Peace. It is the only Nigerian-owned aviation company playing globally and checkmating the dominance of foreign airlines. The most recent advance is the commencement of flights on the Lagos – London route. In Nigeria, foreign airlines are well-established and accustomed to a lack of rivalry, yet a free-market economy depends on the existence of competition. Nigeria has significantly larger airline profits per passenger than other comparable African nations. Insufficient competition has resulted in high ticket costs and poor service quality. It is precisely this jinx that Air Peace is attempting to break.

On March 30, 2024, Air Peace reciprocated the lopsided Bilateral Air Service Agreement, BASA, between Nigeria and the United Kingdom when the local airline began direct flight operations from Lagos to Gatwick Airport in London. This elicited several reactions from foreign airlines backed by their various sovereigns because of their strategic interest. A critical response is the commencement of a price war. Before the Air Peace entry, the price of international flight tickets on the Lagos-London route had soared to as much as N3.5 million for the  economy ticket. However, after Air Peace introduced a return economy class ticket priced at N1.2 million, foreign carriers like British Airways, Virgin Atlantic, and Qatar Airways reduced their fares significantly to remain competitive.

In a price war, there is little the government can do. In an open-market competitive situation such as this, our government must not act in a manner that suggests it is antagonistic to foreign players and competitors. There must be an appearance of a level playing field. However, government owes Air Peace protection against foreign competitors backed by their home governments. This is in the overall interest of the Nigerian consumer of goods and services. Competition history in the airspace works where the Consumer Protection Authority in the host country is active. This is almost absent in Nigeria and it is a reason why foreign airlines have been arbitrary in pricing their tickets. Nigerian consumers are often at the mercy of these foreign firms who lack any vista of patriotism and are more inclined to protect the national interest of their governments and countries.

It would not be too much to expect Nigerian companies playing globally to benefit from the protection of the Nigerian government to limit influence peddling by foreign-owned companies. The success of Air Peace should enable a more competitive and sustainable market, allowing domestic players to grow their network and propel Nigeria to the forefront of international aviation.

The second is Proforce, a Nigerian-owned military hardware manufacturing firm active in Rwanda, Chad, Mali, Ghana, Niger, Burkina Faso, and South Sudan. Despite the growing capacity of Proforce in military hardware manufacturing, Nigeria entered two lopsided arrangements with two UAE firms to supply military equipment worth billions of dollars , respectively. Both deals are backed by the UAE government but executed by UAE firms.

These deals on a more extensive web are not unconnected with UAE’s national strategic interest. In pursuit of its strategic national interest, India is pushing Indian firms to supply military equipment to Nigeria. The Nigerian defence equipment market has seen weaker indigenous competitors driven out due to the combination of local manufacturers’ lack of competitive capacity and government patronage of Asian, European, and US firms in the defence equipment manufacturing sector. This is a misnomer and needs to be corrected.

Not only should our government be the primary customer of this firm if its products meet international standards, but it should also support and protect it from the harsh competitive realities of a challenging but strategic market directly linked to our national military procurement ecosystem. The ability to produce military hardware locally is significant to our defence strategy.

This firm and similar companies playing in this strategic defence area must be considered strategic and have a considerable place in Nigeria’s foreign policy calculations. Protecting Nigeria’s interests is the primary reason for our engagement in global diplomacy. The government must deliberately balance national interest with capacity and competence in military hardware purchases. It will not be too much to ask these foreign firms to partner with local companies so we can embed the technology transfer advantages.

Our government must create an environment that enables our local companies to compete globally and ply their trades in various countries. It should be part of the government’s overall economic, strategic growth agenda to identify areas or sectors in which Nigerian companies have a competitive advantage, especially in the sub-region and across Africa and support the companies in these sectors to advance and grow to dominate in  the African region with a view to competing globally. Government support in the form of incentives such as competitive grants ,tax credit for consumers ,low-interest capital, patronage, G2G business, operational support, and diplomatic lobbying, amongst others, will alter the competitive landscape. Governments  and key government agencies in the west retain the services of lobbying firms in pursuit of its strategic interest.

Nigerian firms’ competitiveness on a global scale can only be enhanced by the support of the Nigerian government. Foreign policy interests should be a key driver of Nigerian trade agreements. How does the Nigerian government support private companies to grow and compete globally? Is it intentionally mapping out growth areas and creating opportunities for Nigerian firms to maximize their potential? Is the government at the domestic level removing bottlenecks and impediments to private company growth, allowing a level playing field for these companies to compete with international companies?

Why is the government patronising foreign firms against local firms if their products are of similar value? Why are Nigerian consumers left to the hands of international companies in some sectors without the government actively supporting the growth of local firms to compete in those sectors? These questions merit honest answers. Nigerian national interest must be the driving factor for our foreign policies, which must cover the private sector, just as is the case with most developed countries. The new global capitalism is not a product of accident or chance; the government has choreographed and shaped it by using foreign policies to support and protect local firms competing globally. Nigeria must learn to do the same to build a strong economy with more jobs.

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