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Cablegate: Horizon Shift for Subsidies Reform As Government

VZCZCXRO8212
RR RUEHLMC
DE RUEHRB #0614/01 1841354
ZNR UUUUU ZZH
R 021354Z JUL 08
FM AMEMBASSY RABAT
TO RUEHC/SECSTATE WASHDC 8802
INFO RUEHAS/AMEMBASSY ALGIERS 4830
RUEHMD/AMEMBASSY MADRID 6011
RUEHFR/AMEMBASSY PARIS 5069
RUEHTU/AMEMBASSY TUNIS 9665
RUEHCL/AMCONSUL CASABLANCA 4186
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC

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

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