As a source of energy in any country, oil will positively or negatively affect the rate of economic growth depending on its cost. Initially gold was used as the principle currency for international trade. Due to an attempt to peg currencies to gold, there was a wide spread inflation brought about by trying to have a fixed exchange rate and maintain it. This led to the collapse of Bretton Woods system in 1971. This was because the oil crisis was spreading all over the world (Al-Chalabi, 2010).
By this time, Morocco was liberalizing its economy. It was largely driven by forces of supply and demand. Between the years 1973-1974, the oil prices had raised four times. This greatly affected the economy. Demand for oil was relatively inelastic, given that oil was the main source of energy in most sectors of the economy. The oil producing countries like Morocco experienced current account disequilibrium. They earned more from the export of oil; hence, there was surplus in the current account. This led to inflation that had serious effects on those nations. This crisis was caused by Arab members of OPEC. It was also accelerated by the failure of Bretton Woods system (Al-Chalabi, 2010).
Morocco had a long history of her citizens migrating to European countries. This increased even more after the 1973 oil crisis. Between 1971 and 1972, Morocco was undergoing some political instability. The crisis resulted into economic restructuring due to economic stagflation. As a result, demand for unskilled labor went down. This led to high levels of unemployment in Morocco. Those who migrated to European nations decided to remain there permanently. Morocco was more affected than the European counterparts. It suffered brain repatriation as its experts were increasingly moving to other nations. Thus, its economic growth stagnated. Inflation affected all sectors of economy increasing cost of production (Mills, 2008).
As a result of this oil crisis, Morocco and other developing countries were funded by the OPEC nations to boost their economic growth. This led to increase of Morocco’s debt. By 1975, its debt grew from US $ 1.8 billion to 11.3 billion in 1983. This negatively affected Morocco’s economy in the long run. It has retarded its growth as it strived to repay its debt. Morocco’s economic growth was largely dependent on other countries. It was an oil importer whose price was not stable. It was also depending on importation of food to support its citizens. Due to the 1973 oil crisis, there was a lot of imported inflation. Exchange rate that was not favorable to Morocco’s currency also led to increased inflation (Al-Chalabi, 2010).
Morocco was now importing oil at a cost that was more than four times higher. This negatively affected the country’s current account. The outflow of foreign exchange was higher than its inflow. This meant that her terms of trade were unfavorable. This led to selling of Morocco’s gold reserves and exhaustion of its foreign exchange reserves. Its exchange rate and thus the value of its currency were on the decline. As a result, her BOP account was adversely affected. Its money market was also not left behind as it was also negatively affected. During this time, Morocco was experiencing a serious recession, just like many other countries of the world. All its sectors were underperforming. The macroeconomic policies that were initially used to maintain equilibrium failed to perform efficiently due to its state of stagflation. Its GNP drastically dropped. Cost of production was increasing each day. This scared away investors. As a result, capital inflow was declining each day due to fear of losses. Fiscal and monetary policies were pushed to the corner by the international exchange rates (Mills, 2008).
Due to Morocco’s recession, there was the need to jump-start her economic activities. The government had to come up with strategies to create more jobs for its citizens. This was aimed at stopping the migration of its citizens to European countries, who would be instead used in building the country’s economy. Therefore, Morocco government had to liberalize the economy to attract foreign direct investor (FDI) and other investors. The oil crisis did not last for long, but its impacts were long lasting. Through privatization and opening of the economy, there was accelerated economic growth, and hence more jobs were created. Inflation was now stabilizing and going back to the accepted levels. Though Morocco’s economy was exposed to both internal and external shock and hence inflation, proper application of macroeconomic policies (fiscal and monetary) and effective exchange rate led to disinflation in Morocco. There were policies directed towards improving economic activities in the country. This was an attempt to improve manufacturing, increase exports and their value. As a result, import was to go down, thus improved terms of trade. There were also discoveries of oil, which reduced Morocco’s dependency on the western nations, thus reducing external shocks that led to imported inflation (Mills, 2008).
In ensuring proper working of monetary policy, there was the need for proper governance and accountability. Central bank was made an independent institution. Therefore, it was able to manipulate monetary and fiscal policies without political interference. Morocco’s central bank could not be pushed to finance government financial deficits. This helped bring inflation to reasonable levels and hence encouraged investment due to the possibility of high profits. The 1973 oil crisis had long-term effects on Morocco that took time before the country recovered.