RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - MOROCCO

UNCLAS SECTION 01 OF 03 RABAT 000391

SIPDIS

SIPDIS
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DEPT FOR EEB/TPP/ABT/ATP JANET SPECK AND NEA/MAG

E.O. 12958: N/A
TAGS: EAGR EAID ETRD ECON PGOV MO
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - MOROCCO

REF: A. STATE 39410


B. RABAT 00265

C. 07 RABAT 1525

D. RABAT 372

Sensitive but unclassified. Please protect accordingly.

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Summary
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1. (SBU) Rising food prices have quickly become Morocco's principal
domestic issue, sparking sporadic protests and threatening to bring
the ongoing "social dialogue" between the Moroccan government and
labor unions to an impasse. The government and the King will handle
this cautiously, remembering the food price riots of the 80's and
90's that threatened the stability of the nation. Even before the
recent increases there was some generalized resentment about growing
disparities of wealth, kept in check by the relatively widespread
impact of economic growth.


2. (SBU) To date, the impact of rising prices has been mitigated by
the Moroccan government's "Compensation Fund," which subsidizes
flour, bread, sugar, fuel, and gas. Mounting budgetary pressure is
forcing the government to re-think this whole subsidy system, but
privately, finance ministry officials note that social pressures
virtually rule out the changes that are necessary. Unless pressures
ease soon, increased labor unrest appears inevitable. Already,
popular media has seized on the issue, characterizing the country as
being "at the edge of an explosion." The government will not risk a
price rise on the commodities that keep the poor alive, but might
choose to highlight other issues in order to divert popular
attention. End Summary.

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Political Impact
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3. (SBU) In recent weeks, despite government efforts to shift
attention, price increases have crowded out almost all other issues
in the public eye. The government has sought to ensure that the far
left and the Islamists do not seize on the issue and exploit it for
political benefit. Planned demonstrations by the Islamist Justice
and Development Party (PJD) have been banned, and other
NGO-organized protests have been swiftly broken up by riot police.


4. (SBU) This government vigilance reflects recognition of the fact
that rising prices have historically been politically explosive, and
have led to civil strife and protests with extensive casualties.
Subsidy cuts brought riots in 1981, 1984, and 2007. In 1990 a
national strike against rising food prices led to severe riots in
Fez that killed 30 people. In the most recent instance of unrest,
in September 2007, a government announced plan to increase the price
of subsidized bread by 8 percent sparked a riot in Sefrou and an
immediate government repeal of the increase. The government also
immediately took control of the wheat market, fixing the price of
wheat at the mill and the price of flour. Tellingly, final
decisions on such price increases are in the hands of the Ministry
of Interior, rather than the Ministry of Finance or that of Economic
and General Affairs.

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Economic Impact
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5. (SBU) The scope of the economic impact of rising global food and
oil prices is only now becoming apparent in Morocco. After a year
in which it essentially achieved a balanced budget for the first
time in decades, Morocco faces the prospect of a sizeable budget
shortfall that has already led one international ratings agency to
lower its outlook from "positive" to "stable." This downgrade
reflects both spending on subsidies, which may double its budgeted
level of 20 billion MAD (USD 2.7 billion-- itself a five-fold
increase since 2002),but also expectation that the government may
have to make concessions in its ongoing "social dialogue" with the
unions that will further undermine budgetary discipline.


6. (SBU) Reform of the subsidy system to better target the truly
needy has long been an objective of Moroccan government policy
(Minister of Finance Mezouar recently conceded that only 10 percent
of the subsidies actually benefit Morocco's poorest 20 percent); but
privately, Finance Ministry officials tell us they see no

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possibility of reforming the system in the current climate. (Note:
The Prime Minister's Office has shared with us a concept to create
special retail stores selling only heavily subsidized products at
which only the certified "poorest" people could shop. This would
focus aid on the truly need and prevent subsidies from reaching
hotels, restaurants, the middle class, etc. It may be a good idea
but is subject to its own abuses and will take time to implement.
End Note.) This leaves the government in an untenable position.
Without a significant break in commodity prices, which does not
appear likely soon, the government of Morocco will either continue
to pay subsidies which it cannot afford, or risk instability.


7. (SBU) Increased spending is also likely to result from the
ongoing "social dialogue" between unions and government. The former
pushing both for an increased minimum wage (currently 1800
MAD/month),salary increases for civil servants, and reductions in
tax rates. The government's initial offer, valued at 14-16 billion
MAD, was rejected by the unions as too modest, particularly as it
would not take full effect until 2010. If the dialogue results in
an impasse, as appears possible, serious unrest could emerge in
coming weeks. For now, the ongoing "social dialogue" has actually
served to help keep a lid on potential protests.


8. (SBU) Surprisingly, despite the dramatic increase in world food
prices, Morocco's inflation index for 2007 remained relatively
benign at 2.3 percent. However, analysts point out that Morocco's
official inflation index does not take into account real estate
prices and is lowered by Morocco's subsidy system. Latest figures
released by the government show a sharp increase in both the cost of
living and inflation. In the first three months of 2008, overall
inflation rose 2.4 percent, while food products rose 4.5 percent.


9. (SBU) Morocco's trade balance has also deteriorated as a result
of increasing grain and fuel imports. The two categories showed the
largest increases in the country's most recent balance of payments
statistics, and officials expect the trend to continue.

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Demand
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10. (SBU) Morocco is a net importer of cereals to meet a domestic
demand of approximately 12 million metric tons annually. On
average, domestic production supplies 5 million tons, with the
remainder coming from imports. Wheat, used for bread and couscous,
is the key agricultural staple, while imported corn supports the
domestic poultry industry, another key element in the Moroccan diet.



11. (SBU) A government Compensation Fund subsidizes a number of
basic commodities, including bread, sugar, and fuel. Other
essential staples are not subsidized. In the past six months, the
price of cooking oil has increased 70 percent, butter 50 percent,
pasta 40 percent, and couscous 40 percent. These sharp price
increases have particularly hurt lower and middle-income Moroccans,
who already spend a higher proportion of their salary on foodstuffs.
As a result of the subsidy, demand for bread has remained
relatively constant, despite the doubling in price of wheat in the
world market. Press reports and anecdotal evidence we have
accumulated throughout the country confirms, however, that Moroccans
of modest means have had to significantly tighten their belts as a
result of other price increases, forgoing or reducing their
consumption of other basic staples.

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Supply
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12. (SBU) Moroccan domestic cereal production varies greatly,
depending on rainfall. In 2006, Morocco had a particularly good
harvest at 8.3 million tons. By contrast, Morocco experienced a
severe drought in 2007, yielding only 2 million tons. Due to this
poor harvest and world market conditions, the government removed
import duties on feed grains and wheat during 2007. Preliminary
projections reported by the media are that the harvest should return
to near normal levels in 2008, or approximately 5 million tons.


13. (SBU) Morocco has significant room to maneuver on the supply
side, though any such effort is unlikely to show results in the
short term. Although 75 percent of its agricultural land is
dedicated to cultivation of cereal crops, tremendous inefficiencies
through the production and marketing system limit cereal crops to

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only 10-15 percent of Moroccan output by value. Official policy, as
reflected most recently in the MCA Compact concluded between the
U.S. and Morocco last August, seeks to provide farmers in marginal
lands alternative sources of income, with the intent of moving them
towards sustainable and higher value-added products. This approach
remains central to the newly announced Moroccan strategy for the
agricultural sector (Ref D).

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Environmental Impact
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14. (SBU) Increased commodity prices have not had an environmental
impact in Morocco. However, if the government carries out plans to
eliminate or reduce subsidies for cooking gas it would be easy to
foresee acceleration in the rate of deforestation.

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Moroccan Government Policy Response
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15. (SBU) Morocco's primary policy response to date has been to
stress that consumers will remain insulated from increases in world
market prices for those goods which benefit from a government
subsidy. To address the sharp rise in commodity prices the GOM also
eliminated import duties on corn and other feed grains in the fall
of 2006 and phased out wheat import duties during the summer of

2007. The Moroccan government will soon face the question of
whether to extend the zeroing-out of duties beyond May 31, when it
is set to expire. Duties may be re-imposed during the Moroccan
harvest (June-July) to support domestic prices, but would likely be
removed soon after.

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Impact on Post Programs
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16. (SBU) Key programs within both the Millennium Challenge
Corporation (MCC) and USAID seek to provide Moroccan farmers
alternative sources of income through production of other crops such
as olives, figs, and almonds. The Moroccan government remains
committed to this approach, and reiterated it in the new
agricultural policy (or "Plan Maroc Vert") which was unveiled in
Meknes in April 2008. The government recognizes that
notwithstanding the sharp rise in commodity prices Morocco must seek
investment and modernize its agricultural system and develop
alternate income sources for traditional farmers.

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Policy Proposals
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17. (SBU) We remain convinced that this transition is in the
long-term interest of Moroccan agriculture. Certainly the need for
reform of Morocco's tangled subsidy system has been highlighted by
the current budgetary pressures upon it. Such a change is highly
unlikely, however, until commodity prices return to a lower level,
given the GOM's primordial goal of ensuring social stability. In
recent years, post has quietly worked with the National Agricultural
Research Institute to support research in biotechnology and keep
scientists informed of developments with potential benefits to
agriculture. The increase in commodity prices could serve to help
Moroccan decision-makers to develop policies which would enable
Morocco to benefit directly from modern agriculture production
methods. Post recommends increased outreach to this end.
RILEY



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