END OF FUEL SUBSIDY COULD SPARK TROUBLE

UNCLAS SECTION 01 OF 02 MAPUTO 001373 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: PGOV PREL ECON EPET ETRD EAID EFIN AMGT ASEC MZ SUBJECT: END OF FUEL SUBSIDY COULD SPARK TROUBLE REF: 08 MAPUTO 121 ¶1. (U) SUMMARY: The GRM's announcement that it would end fuel subsidies that have kept fuel prices in the country artificially low could cause trouble in the first quarter of ¶2010. The end of the subsidy will raise gas prices, food prices, and public transportation costs, financially straining most Mozambicans, possibly prompting civil unrest similar to what occurred in February of 2008 (reftel). END SUMMARY. -------------- GRM Announces End of Fuel Subsidy -------------- ¶2. (U) In a recent press conference, Prime Minister Luisa Diogo stated that the GRM would stop subsidizing fuel companies on December 31. As a result, the artificially lower fuel prices (currently at less than ninety cents per liter) could increase by as much as 40% (to $1.25 per liter). The donor community has repeatedly criticized the fuel subsidy and urged the GRM to seek other solutions. For example, the group of 19 donors (G-19) who provide direct budget support to Mozambique have criticized the subsidy as "very expensive" and mostly benefiting the rich. The G-19 offered to help the GRM find more appropriate and better directed mechanisms to mitigate the high price of fuel, but the GRM has not accepted the offer. An economist with the British development agency, DFID, believes the GRM will not discontinue the fuel subsidy in December, when households have already spent their meager savings during end-of-year celebrations, but will instead wait until April or March after concluding minimum wage renegotiations with unions. -------------- -------------- Fuel Prices to Climb, GRM to Introduce New Subsidy -------------- -------------- ¶3. (U) The subsidized price for a barrel of oil in Mozambique is $40 USD -- much less than the current international market price. Local media have reported that the subsidy had already cost the GRM more than $34 million USD since August. Diogo also said that if international fuel prices do not fall, the GRM would create a mechanism to help citizens maintain a manageable cost of living; the GRM would provide a new subsidy to cover the increasing cost of public transportation, specifically a diesel subsidy for publically run buses and the privately run mini-buses locally known as "chapas." Some cities, including Maputo and Beira, have had temporary gasoline shortages in recent weeks, and border areas report large amounts of fuel flowing into neighboring Malawi and Zimbabwe. -------------- Insecurity Over Fuel Prices Nothing New -------------- ¶4. (U) Insecurity in response to a hike in fuel prices would not be new for Mozambique (reftel). Rising fuel and public transportation costs fuelled a February 5-8, 2008 riot in Maputo that left four people dead and over 100 injured. The riots in Maputo led to similar riots in other provinces including Gaza and Inhambane. In response, the GRM agreed to subsidize fuel for registered mini-bus drivers. -------------- COMMENT: Impacts Could be Widespread -------------- ¶5. (SBU) The fuel price increase connected to the end of the subsidy is likely to significantly impact the transportation system, which relies heavily on ubiquitous diesel-run "chapas," and could have a knock-on effect on food prices. Although Prime Minister Diogo promises a public transportation subsidy, that alone will not shelter the majority of Mozambicans from rising prices. Other factors, including GRM plans to phase out "chapas" in Maputo and replace them with publicly run buses and the associated rise in food prices due to increases in transportation costs, are still likely to pinch the pockets of most Mozambicans. Mozambique is also in the time of year when food commodity prices regularly rise, reaching their peak in January/February. Based on past rioting over local transport price increases, many local commentators consider the possibility for fresh unrest connected with the end of the subsidy very real and could be the new government's first test next year. MAPUTO 00001373 002 OF 002 CHAPMAN