MOZAMBIQUE: PETROL PRICES HIKES FUEL GROWING

C O N F I D E N T I A L SECTION 01 OF 02 MAPUTO 000866

SIPDIS
FOR AF/S HTREGER
E.O. 12958: DECL: 07/11/2010
TAGS: EPET ENRG ECON PGOV MZ
SUBJECT: MOZAMBIQUE: PETROL PRICES HIKES FUEL GROWING
DISCONTENT

REF: MAPUTO 860
Classified By: CDA James Dudley for reasons 1.4 (b) and (d)


1. (SBU) Summary. The Mozambican government has raised fuel
prices over 60 percent since April in response to the
devaluation of the metical and increasing world petroleum
prices. Prior to the price increases, the GRM had held fuel
prices near or below market levels, resulting in the
depletion of Mozambique,s oil stocks. The price hikes have
led to public complaints about the Guebuza government and
sporadic strikes by mini-bus drivers, which compelled the GRM
to announce a 50 percent increase in mini-bus fares on June

30. The fuel price increase is expected to ignite
inflationary pressures and dampen economic growth this year,
but the ultimate economic and political effects of the price
increase are still uncertain. End summary.

Three Price Hikes
--------------

2. (U) On June 1 and June 21, the Ministry of Energy, which
establishes maximum retail fuel prices in Mozambique,
announced two separate 19 to 20 percent increases in consumer
fuel prices, comprising a total price increase of 42 to 44
percent for the month, depending on the type of fuel. The
Ministry had previously raised consumer fuel prices by 14 to
18 percent on April 27, translating into a 60 to 70 percent
price increase over the two-month period. The price
increases were precipitated by the recent rapid increase in
world petroleum prices and the devaluation of the metical,
which fell from 19,000 mt/USD on January 1 to 24,200 mt/USD
on June 1, with most of the devaluation occurring in April
and May.


3. (U) The April fuel price alterations corresponded almost
directly with changes in currency values and world fuel
prices. IMF and industry sources have told Emboff that the
GRM historically shifts fuel prices in direct proportion to
currency adjustments, generally keeping prices in line with
the world price plus applicable taxes. This policy often
squeezes profit margins of companies that import and
distribute fuel, and occasionally forces them to operate at a
loss. Between June 30 and December 31, 2004, the metical
appreciated from 24,000 mt/USD to roughly 19,000 mt/USD. The
GRM responded to the appreciation by dropping consumer fuel
prices approximately 23 percent in a series of price cuts
between January and February 2005.


4. (C) The GRM,s June actions, however, may signal a shift
by the Mozambican government toward a policy that is more
amenable to the oil companies than to the consumer. In
meetings held in late May and early June, representatives
from the country's major fuel importers (including Petromoc,
British Petroleum, Total) met with Minister of Energy
Salvador Namburete and later with Prime Minister Luisa Diogo
in order to secure price increases, explaining that oil
reserves were depleted to the point that they could not
guarantee oil supplies for more than a few days at a time.
The Ministry of Energy responded by announcing the two June
price increases. A local television channel (STV) announced
yet another major price hike in the 20 percent range
scheduled for June 27, but it did not take place. Emboff
contacts within the Ministry of Energy confirmed that this
price increase was planned, but was canceled by the Prime
Minister due to concerns about the likely public response.


5. In a July 3 interview with the newspaper Domingo, Prime
Minister Diogo defended the GRM,s actions, stating that the
increase in world fuel prices combined with the devaluation
of the metical averaged 51 percent, and that the GRM had
actually increased prices by less than what the market
demanded. (Comment: It is unclear how the 51 percent figure
was derived. Unofficial calculations show world oil prices
have risen approximately 50 percent since July 1, 2004.
Consumer fuel prices in Mozambique have risen approximately
70 percent over that same period while the value of the
metical relative to the dollar is almost exactly equal to
what is was one year ago. End Comment.) Diogo also added
that the GRM was planning to establish a "cushion fund8 to
be activated in case of a future drop in world prices. In
this scenario, companies could maintain retail price levels
by paying windfall profits into a fund that the government
would use to subsidize companies in order to maintain stable
fuel prices in the face of future world price increases.
(Comment: This measure would make it impossible for consumers
to benefit from world price decreases, as they did in early

2005. End Comment.)

Public Response
--------------

6. (U) The June fuel prices have caused disenchantment with
the Guebuza government among regular Mozambicans and a third
major fuel price increase within one month might well have
lit a fuse of resentment within the populace. Rising fuel
prices are a major worry to Mozambicans -- the price
increases have been front-page news for much of the past
month -- but public outcry has thus far been relatively
muted. Mini-bus (chapa) owners have been the most vocal in
their protests. On June 21, mini-bus operators in the
provincial capital of Xai-Xai protested the second June price
increase by going on strike, and subsequently raising their
prices by 25 percent, independent of the Ministry of
Transportation, the government body authorized to set
mini-bus prices. Many mini-bus operators in other cities
followed suit. On June 30, the Ministry of Transportation
acquiesced to the mini-bus owners, association by agreeing
to raise fares by 50 percent nationwide (to 7,500 meticais
per fare),effective July 1. The fare increase threatens the
well being of many Mozambicans who already spend a large
portion of their monthly income on mini-bus fares to work and
school. The transport association has responded with a
proposal to reduce fares for students, but this has not been
finalized.


7. (U) Labor unions are also unhappy with the government
because, in late May, before the first June price increase,
they negotiated a 14 percent increase in the monthly minimum
wage, raising it to 1,277,138 meticais (roughly USD 53.50).
The wage increase, which is negotiated and raised on an
annual basis, slightly outpaced Mozambique,s inflation rate
of 12.8 percent in 2004. The increase was formally announced
by the GRM on June 5, before the end of the fuel price hikes,
and the GRM has told unions that it will not renegotiate the
minimum wage increase. There is also speculation that the
gasoline and mini-bus price increases contributed to a strike
by workers of the guard company, Wackenhut, that provides
guards for the embassy and other USG facilities in Maputo.
(see reftel)

Looking Forward
--------------

8. (SBU) Comment: Until now, public response to the fuel
price increase has been limited to protests in isolated
sectors and much hand wringing in the media. Mozambique,s
Independence Day celebrations on June 25 passed without any
significant demonstrations against GRM policy. This level of
tranquility may well change. The full inflationary effect of
the fuel price increase is just starting to manifest itself
in public transportation costs, and the expected increases in
food prices have not yet taken effect. The GRM is trying to
create expectations of low inflation; Diogo said on July 3
that she expects inflation for 2005 to be about 7 or 8
percent. This expectation seems unrealistic, given the
combination of high prices and near drought conditions in
much of the country, particularly in the south and central
regions. If inflation reaches over 20 percent -- a level
that Mozambique has not seen since the mid-1990s -- public
reaction against the Guebuza government and the ruling
Frelimo party could be harsh. The GRM is aware of the
problem. On July 8-10, President Guebuza presided over a
weekend-long extended Cabinet meeting; it is said that the
meeting was called principally to address the impact of fuel
price increases and the perceived decline in popularity of
the Guebuza government. End Comment.
Dudley