HORIZON SHIFT FOR SUBSIDIES REFORM AS GOVERNMENT

UNCLAS SECTION 01 OF 02 RABAT 000614 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ENRG EFIN MO SUBJECT: HORIZON SHIFT FOR SUBSIDIES REFORM AS GOVERNMENT RAISES FUEL PRICES REF: A. RABAT 201 ¶B. RABAT 546 This message is sensitive but unclassified. Please handle accordingly. ¶1. (SBU) Summary: The Moroccan government moved on two fronts on July 1 to make clear that its existing subsidy regime is unsustainable and that reform of the system is a near term priority. In addition to increasing the price of selected fuel products to reduce pressure on the Caisse de Compensation, which pays the subsidies on fuel and other basic commodities, Prime Minister Abbas El Fassi announced that the government will soon introduce a plan to cap subsidy spending at roughly half its current level and implement a new system of direct assistance to needy families. The government's hand is being forced by the rapidly escalating cost of Morocco's existing subsidy regime: spending on compensation over the first four months of the year totaled 9.7 billion MAD, 6.3 billion MAD more than the government initially budgeted. Work to finalize the reform plan continues, with Moroccan teams fanning out across the globe to examine how similar schemes were implemented in countries including Chili, Brazil, and Indonesia. End Summary. ¶2. (SBU) The government's initial step of increasing fuel prices appears to have been carefully calibrated to reintroduce the idea that petroleum products should be indexed to world markets, while at the same time continuing to shield the basic commodities on which many poorer Moroccans depend. The price of diesel 350 and gasoline was thus increased by one dirham a liter (from 9.13 to 10.13 and 10.25 to 11.25 respectively),while the price of industrial fuel was increased by 500 dirhams a ton (from 2,874 MAD to 3,374 MAD). The increases returned the price of the products to their 2006 levels, when the government of Driss Jettou briefly flirted with an indexation scheme. Left unchanged for the moment were the prices for fuel destined for the National Electricity Office, as well as the prices of normal diesel, which is widely used in Morocco's transport industry, and butane gas. Given that these latter two products are more heavily subsidized (the subsidy rate on butane gas varies between 170 and 178 percent) and more widely consumed, the budgetary impact of the shift will be limited. ¶3. (U) Reaction in the petroleum industry, which has lobbied the government to reduce its arrears in reimbursing the subsidies, was thus mixed. One operator told the "Economist" newspaper that "the increase is not significant and will not produce much, so long as it is not extended to all products." Others, however, welcomed the move, arguing it sets an important precedent. Moulay Abdellah Alaoui, President of Morocco's Energy Federation, noted that the increase will contribute to conservation of energy in Morocco, something that the previous policy of shielding consumers from world prices prevented. ¶4. (U) Separately, in a press conference to review the first year of his government's work, Prime Minister Abbas El Fassi signaled that overall reform of the subsidy system is being moved to the fast track. Emphasizing that subsidies on gasoline do not simply benefit poorer segments of the population, he argued that "this situation cannot continue." To redress it, he said, the Ministry of Economic and General Affairs will soon present a reform plan to the Council of Government by which subsidy spending by the Caisse de Compensation will be capped 20 billion MAD, or approximately 3 percent of GDP. (Note: this is the amount the government initially budgeted for in 2008. End Note.) ¶5. (U) El Fassi added, however, that the government would for the first time move to provide direct assistance to poor families. While the amount of the aid remains to be determined, Minister of Economic and General Affairs Nizar Baraka, who has been at the center of plans to reform the system (ref A),has advanced figures of approximately 500 MAD per family. Such assistance would be contingent on families sending their children to school and ensuring they received regular health checkups from public health services. El Fassi confirmed publicly what Najib Benamour, the Director of the Caisse told us over the weekend: Moroccan teams will soon head for countries including Chile, Brazil, and Indonesia to examine how they put in place such direct assistance programs. RABAT 00000614 002 OF 002 ¶6. (U) The Moroccan government's actions and announcements came as new budget figures highlighted the extent to which subsidy spending was threatening to spiral out of control. From its initially budgeted 20 billion MAD (of which only 13 billion MAD was for this year, with the remainder to cover arrears from 2007),through the end of April the Caisse had distributed over 9.7 billion MAD, an increase of 190 percent over the previous year. The governnment had already moved to increase the Caisse's budget to 35 billion MAD, but recent estimates warned that spending could easily eclipse 40 billion MAD, with petroleum products alone requiring subsidies of over 34 billion MAD. ¶7. (SBU) Comment: Healthy performance of tax revenues has given the GOM a margin of maneuver this year (ref B),but with subsidy spending increasing to a level where it threatens to crowd out needed investments in infrastructure, urgent action was required. The newly announced price increases, though they affect products that only account for 20 percent of subsidy spending on petroleum products, thus set an important precedent, and together with recently announced gifts from the Emirates and Saudi Arabia, should buy the government time to put into place its new assistance regime. This is facilitated by the continuing health of the economy, marked by recently released figures showing solid growth and continued reduction in unemployment. The way in which the government has proceeded, however, makes clear that social stability remains a central preoccupation, and that El Fassi and team will move forward gingerly, carefully measuring public reaction as they put set in place the new system. The relatively muted tenor of the public mood to date, as shown in the relative absence of ripple effect from the recent economic-based (but not price-based) disorder in Sidi Ifni, will undoubtedly reassure them, as will press comment that has generally accepted the price increases as unavoidable. Particularly if it can move forward with its subsidy reform plans, Morocco should remain relatively well placed to weather the price crisis, in the absence of a major international meltdown. End Comment. ***************************************** Visit Embassy Rabat's Classified Website; http://www.state.sgov.gov/p/nea/rabat ***************************************** Riley