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Cablegate: Morocco Trades Subsidies for Stability in the Face of Price

VZCZCXRO5139
PP RUEHBC RUEHDE RUEHKUK RUEHROV
DE RUEHRB #0265/01 0861415
ZNR UUUUU ZZH
P 261415Z MAR 08
FM AMEMBASSY RABAT
TO RUEHC/SECSTATE WASHDC PRIORITY 8304
INFO RUEHCL/AMCONSUL CASABLANCA 3977
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEHBJ/AMEMBASSY BEIJING 0496
RUEHLO/AMEMBASSY LONDON 3554
RUEHNK/AMEMBASSY NOUAKCHOTT 3694
RUEHFR/AMEMBASSY PARIS 4965
RUEHEE/ARAB LEAGUE COLLECTIVE

UNCLAS SECTION 01 OF 02 RABAT 000265

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EFIN ELAB PGOV MO
SUBJECT: MOROCCO TRADES SUBSIDIES FOR STABILITY IN THE FACE OF PRICE
INCREASES

REF: A. 07 RABAT 1525 B. CASABLANCA 00035

(U) This cable was coordinated with Embassy Rabat.
This cable being transmitted from Rabat for Casablanca.

1. (SBU) Summary: Like other countries in the region, Morocco has
been buffeted by rapidly escalating international commodity prices.
Internal factors such as the 2007 drought have compounded the
problem. While official indexes do not yet reflect these price
pressures, the exploding budget of the Moroccan government's
Compensation Fund and increasing public angst about price increases
for basic foodstuffs highlight the impact of rising costs. While the
government spoke earlier this year of the need to reform the subsidy
system, it has pledged publicly not to increase the price of
subsidized goods. The brief unrest last year over bread prices
revived memories of past food riots, inducing the government to
continue to pay subsidies for the sake of political stability as long
as it can manage it. End Summary.

------------------------------------------
INTERNAL AND EXTERNAL FACTORS RAISE PRICES
------------------------------------------

2. (SBU) Rising prices in Morocco are due in large part to increases
in international commodity prices. The Compensation Fund, the
government entity that oversees subsidies, shields consumers from
increases in the cost of bread, sugar and butane, but not other
essential staples such as cooking oil, pasta and butter. Analysts
point out that Morocco, like the rest of the world, is also starting
to experience the end of the deflationary benefit it received from
cheap Asian imports. Khalid Belyazid, Director of Groupe Eco-Medias,
publisher of the daily L'Economiste, notes that mass production in
China has driven the cost of industrial products down for years,
slowing inflation. Now, however, newfound wealth in China and India
has put previously unattainable goods within reach of these
countries' consumers, raising demand and, in turn, prices. "Morocco
is a small player," he says, "but it is suffering the consequences."

3. (SBU) While external factors are the main cause of Morocco's price
increases, internal factors also play a role. Severe drought in 2007
caused the country's cereal harvest to be 66 percent below average,
necessitating a substantial increase in costly imports. Jawad
Kerdoudi, an economist who is President of the Moroccan Institute for
International Relations, argues the resulting "imported inflation"
put upward pressure on local salaries, which then put pressure on
prices. Indeed, unions are calling for the government to raise the
guaranteed minimum wage (SMIG), a measure that is under discussion.
Many Moroccans also allege that retailers are taking advantage of the
inflationary environment to engage in price-gouging, and complain of
the government's failure to implement legislation to protect
consumers, an oversight the government has moved to correct in recent
weeks.

-----------------------
HOW BAD IS THE PROBLEM?
-----------------------

4. (SBU) Moroccans who feel their purchasing power has been badly
eroded point to dramatic increases in the prices of such staples as
cooking oil, up 65 percent in recent months, couscous, which has
risen 30 percent, and other basic products. Aziz Benmaazouz,
Director General of the micro-credit organization Fondation Zakoura,
noted in a recent meeting that clients receiving loans have had more
difficulty repaying them since prices began to rise. Furthermore,
the foundation's employees, who earn modest salaries, are also
challenged to make ends meet. We hear anecdotally that even
employers in the financial and other sectors who offer higher wages
are starting to feel pressure from their employees for wage
increases.

5. (SBU) Despite dramatic price increases, however, Morocco's
inflation indexes continue to show a benign inflationary environment.
Overall inflation, according to the "index of the cost of living"
fell from 3.3 percent in 2006 to two percent in 2007. Critics allege
that the index, based on a 1989 market basket, is outdated and fails
to track current consumption patterns. They also highlight its urban
bias. Price increases for basic goods most dramatically impact the
40 percent of Moroccans living in the countryside, who spend a higher
proportion of their incomes on them, researcher Hicham Benjamaa told
us. Not surprisingly, most protests against rising prices have
started in rural towns.

6. (SBU) The compensation system itself also holds down official

RABAT 00000265 002 OF 002


inflation rates. Nizar Baraka, Morocco's Minister-Delegate for
Economic and General Affairs, recently argued that without the
Compensation Fund's intervention, inflation would have exceeded 5.4
percent over the last year. Certainly, the price pressure is evident
in the budget allocated to the Fund, which increased five-fold from 4
billion MAD in 2002 to 20 billion MAD this year. Observers warn that
even this sum may prove insufficient, as it is based on the
expectation of a world oil price of 75 USD per barrel. With each
dollar-a-barrel increase above that level costing the fund 450
million MAD, there are fears the initial allocation will run out by
mid-year, forcing either supplemental allocations or a return to the
Fund's practice of delaying payments to suppliers.

--------------------------------
GOVERNMENT RETHINKS ITS APPROACH
--------------------------------

7. (U) With social peace in mind, the GOM is carefully considering
how to respond to rising prices. The increase in the price of bread
from 15 to 19 cents in September 2007 resulted in rapidly growing
protest. After the breakout of an isolated, but potentially seminal,
riot in the eastern market town of Sefrou, the government quickly
annulled the increase and granted higher flour subsidies, returning
bread prices to normal (REF A). According to the Moroccan Press
Agency, 34 people were jailed in late February for participating in
the Sefrou riots. (Note: The King recently visited Sefrou and
brought extensive development commitments). Recent increases are
again spurring trouble and local NGOs are threatening to protest.

8. (SBU) While Baraka has spoken publicly and privately of the need
to reform the Compensation Fund, he has downplayed such suggestions
in recent public comments. Instead, he and other government
officials have stressed that the government will continue to insulate
consumers from increasing world prices for goods that are subsidized
in Morocco.

9. (SBU) Outside the government, economists and analysts are debating
how the compensation system might be changed. Currently, subsidies
benefit all Moroccans, regardless of financial status. As Belyazid
noted and several colleagues confirmed, a moderate increase in food
prices is tolerable for most people, who barely notice the
difference. Still, the GOM "continues to help Moroccans to eat." In
Belyazid's words, "It's ok to subsidize flour for bread, but not for
a croissant." Recognizing that the government cannot continue to
finance large, general subsidies, some Moroccan analysts are talking
about directing resources to the segment of the population that truly
needs them.

----------------
FUTURE UNCERTAIN
----------------

10. (SBU) How critical the problem of inflation may become remains
unclear. Central Bank governor Jouahri warned last week that while
overall inflation rates remain under control, underlying inflationary
pressures could spur an inflationary spike this year. IMRI's
Kerdoudi estimates that Morocco's inflation rate could jump to three
or four percent this year. Zakoura's Benmaazouz shared this gloomy
outlook, saying he is "not sure things will improve."

11. (SBU) Comment: Many Moroccans view their country as a welfare
state that intervenes to shield consumers from significant price
increases. The Moroccan government does not dispel this perception,
and views its protection as essential to staving off the labor unrest
or even riots that historically have occurred when basic commodity
prices have risen steeply. Faced with public angst over inflation
and given rising revenues and the country's low level of national
debt, the GOM will continue to trade subsidies for political
stability, putting off hard questions about reforming the
Compensation Fund. End Comment.

Riley

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