How to fight once morest inflation without aggravating unemployment? This question has occupied a large part of economic thinking since the New Zealand economist Alban Fhillips theorized in 1958 this relationship between the inflation rate and the unemployment rate: when the unemployment rate falls, wages rise, and companies increase their prices in parallel to restore their profit. margins; Conversely, prices fall when unemployment rises. This relationship, known as the “Phillips curve,” faces a major challenge today, even though various circles associated with critical orthodoxy in the ultraliberal Chicago school still believe in it. This logic is valid only when the analysis takes account of national specificity and does not take account of imported inflation. This is the case in Morocco and other countries that suffer from addiction. This confirms that the solutions proposed to combat inflation in developed countries are not suited to our country.
generalized inflation
Although inflation has affected almost all countries, the extent of its impact varies from one group of countries to another and its causes are not the same in all regions. For the euro zone, inflation this year will vary between 19% in Estonia and 4.9% in Malta. It expects an average European rate of 5.1%. France will have a rate of 5.6% and Spain a higher rate of 7.2%. In the United States of America, this rate reached 8.6% in May on an annual basis, marking the strongest increase since 1994! Of course, we don’t want to talk regarding some other countries with fantastic inflation rates like Turkey, Venezuela, Argentina, Sudan, and Lebanon, to name a few. On this list, Morocco with an expected rate of 5.3% still performs well, some would say.
As for the sources of inflation, they also differ from one country to another, even if we were able to identify a common denominator between them all. For the United States and Europe, the current inflation is not only due to the fallout from the war in Ukraine. Because it started a long time ago. The price increase was initially driven by the economic recovery that took place in 2021, following the health crisis. Demand rose too quickly without supply being able to keep up, causing prices to rise.
Around the world, families who racked up significant savings during quarantine started spending wildly once restrictions lifted or eased. We must also add another element that has contributed to the exacerbation of the problem, and it is linked to the re-emergence of the Covid-19 epidemic in China, at a time when this country was heading towards the so-called “zero covid”. strategy, because it dealt a blow that disrupted local production. This has had cascading consequences: a slowdown in exports, disruption of global supply chains and a deterioration in supply, which ultimately leads to higher prices.
In such a context, the war in Ukraine perpetuated an already existing phenomenon. By stopping Russian and Ukrainian exports, particularly of hydrocarbons and wheat, the conflict has caused energy and food prices to soar.
Use of cash receipts
To curb this inflation, the Federal Reserve (the US central bank) relied on monetary prescriptions through an adjustment to raise the key rate. This led to an increase in their short-term rates by 0.75 percentage points, whereas they had been almost non-existent before, since they fluctuated between 0% and 0.25%, an increase not seen since 1994. will now oscillate between 1.5% and 1% .75%. It is planned to raise the interest rate once more by 0.5 to 0.75 points by the end of 2022 at the next meeting in July. The Fed still plans to double interest rates to 3.4% and peak at 3.8% by 2023. But despite the moves, the Fed Chairman cautioned once morest declaring victory, calling caution before declaring victory over inflation.
For its part, the European Central Bank has confirmed that it will raise interest rates in July, so we await its final decision and what it will decide concretely.
Under these conditions, the decision to be taken by the Board of Directors of Bank Al-Maghrib at its last meeting on June 21 was eagerly awaited. It was questioned whether the central bank would follow the Fed’s lead in raising its key rate or prefer the opposite, ie maintaining the status quo. In the end, the last option was chosen. A decision that did not pass without arousing mixed comments and reactions between a detractor and a supporter. Since economics is not an exact science, it can be said that the first option is not entirely wrong, and the second is not entirely correct. The truth may lie somewhere in between.
The least harmful solution
In fact, any potential increase in the overall price, no matter how small, would seriously harm investment and therefore the labor market. This would lead to economic stagnation and exacerbate unemployment, which has reached unsustainable levels. Moreover, the risks are significant in such a situation of seeing the country sink into stagflation.
On the other hand, maintaining the rate at its current level of 1.5% certainly makes it possible to ensure relatively favorable conditions for corporate financing, but it severely penalizes individual and institutional savers, as long as the rate of return on the savings remains below the rate of inflation. There is much to fear in such circumstances, including savers resorting to investing their money in safe havens such as real estate and gold. In addition, the press release from the Board of Directors of Bank Al-Maghrib confirmed that the bank will continue to follow “with attention the development of the national and international situation”.
As it seems, there is no perfect solution. It is a question of choice and anticipation of the future. Given the nature of inflation in Morocco, which is essentially imported inflation, Bank Al-Maghrib preferred to opt for growth. It would be better to aim for more job-creating growth, even if it means supporting a certain level of inflation, while clearly betting on a return to normal from 2023.
The political treatment of inflation
Finally, it should be noted that the fight once morest inflation is not assumed by Bank Al-Maghrib alone, despite its concern to protect the value of our national currency. On the contrary, it requires political treatment by governmental authority. In this context, although we note with satisfaction the measures taken by the government to support purchasing power, such as maintaining the prices of butane gas and soft wheat bread at their previous levels despite the high prices on the worldwide, and the assistance provided to transport professionals to partially mitigate the rise in fuel prices, it must be recognized that such measures remain insufficient and partial. It has not been articulated into a comprehensive and well-articulated vision, it has not been democratically discussed and it has not been smoothly interpreted for public opinion. As proof, we only mention the way in which the government behaves in the face of the incessant calls from all sides to “shit” on the hot file linked to hydrocarbons. We do not understand why the government is reluctant to review the rate of value added tax on fuel? What regarding discussing excessive profit margins with fuel distribution companies? And to open a file for La SAMIR? And confront speculation head-on, whatever the source? And the dismantling of all forms of illegitimate agreements, disguised monopolies or unjustified oligopolies? And require all vendors to post and advertise prices?
It is better for the government to listen carefully, to see what actions are taken elsewhere. We agree that times are very difficult. But in such cases, governments are necessary and above all useful. Ladies and gentlemen, you have the floor!
> Par : Dr Abdul Salam Al Seddiqi
Translated into Arabic by Professor Abdelaziz Boudra