IMF identifies signs of fiscal dominance in Morocco and other regional economies

The International Monetary Fund IMF has released a study on central bank independence in the Middle East, North Africa, Central Asia, and the Caucasus, concluding that greater autonomy for central banks correlates with better inflation control and resilience to macroeconomic shocks. The study examines interactions between fiscal and monetary policy, using net claims of the banking system on the state as a percentage of GDP to measure "fiscal dominance." The IMF notes that countries like Morocco, Egypt, Jordan, Algeria, and Pakistan show public debt to the banking system above the regional average, indicating fiscal dominance. This occurs when state financing needs influence monetary policy, potentially leading authorities to fund the government or maintain artificially low interest rates. The IMF warns that significant reliance on the banking system for public deficit financing can complicate monetary policy transmission, fuel inflationary pressures, and undermine central bank credibility. The institution also highlights that excessive public debt to the banking sector can crowd out private sector credit, hinder investment, and impact economic growth. The report cites Egypt and Pakistan as examples where high domestic debt limited central banks' ability to raise interest rates promptly, contributing to persistent inflation despite easing global supply chain tensions. To address these issues, the IMF recommends short-term measures such as strengthening central banks' legal fra