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Cablegate: End of Fuel Subsidy Could Spark Trouble

VZCZCXRO9204
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHTO #1373/01 3511413
ZNR UUUUU ZZH
R 171413Z DEC 09
FM AMEMBASSY MAPUTO
TO RUEHC/SECSTATE WASHDC 1110
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHLO/AMEMBASSY LONDON 0580
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHDC
RHEHNSC/NSC WASHDC

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

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