VZCZCXRO3911
RR RUEHMA RUEHPA
DE RUEHCO #0005/01 0030744
ZNR UUUUU ZZH
R 030744Z JAN 08
FM AMEMBASSY COTONOU
TO RUEHC/SECSTATE WASHDC 0084
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHFR/AMEMBASSY PARIS 1221
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 COTONOU 000005 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR AF/W DBANKS 
DAKAR FOR HANSON 
DEPT PLEASE PASS TO USTR 
TREASURY FOR OFFICE OF AFRICAN NATIONS RHALL 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN PGOV BN
SUBJECT: GOB TAKES MEASURES AGAINST INFLATION 
 
1.(SBU) SUMMARY: The GOB's November 30, 2007, decision to put in 
place a system of price controls for items of mass consumption may 
have born fruit as food prices for a typical family dropped from 
their highs in late November 2007 to more affordable prices in early 
January 2008. In response to popular discontent with rising prices, 
the GOB imposed a system of price controls and reduced taxes on 
imports on December 10, 2007 to lower the prices of imported 
foodstuffs and construction materials. The GOB also took action to 
reduce the price of domestically produced foodstuffs.  The GOB 
explained these measures as a response to the impact of the surge in 
prices on the population. Post's sources raised a number of problems 
with this program, and one GOB source admitted the program was for a 
primarily "psychological" affect. END SUMMARY. 
 
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How did the GOB try to bring down prices? 
----------------------------------------- 
 
2.(U) The GOB set prices for basic foodstuffs and construction 
materials in early December 2007.  The prices, which will be 
re-examined every three months, apply to imported wheat, flour, 
rice, milk, sugar, pasta, and tomato paste.  For example, the price 
of a 50 kg bag of wheat, which had almost doubled in price from the 
price of 12,500 FCFA to 22,000 FCFA before the price controls, was 
set at 14,800 FCFA. In the construction sector, the GOB extended 
price controls that previously existed just for cement to rebar (the 
iron rods used when building with cement) and the bags containing 
dry cement.  To offset the increased costs of fixed prices to 
importers, the GOB substantially reduced taxes on imported products. 
 The GOB also offered tax credits to importers who already had paid 
taxes on the goods that now must sell for a lower price.  According 
to Gregoire Akofodji, the Minister of Industry and Commerce, these 
new tax credits will cost the GOB $6.6 million (3 billion FCFA) a 
month. 
 
3.(U) In addition to imposing price controls, the GOB will spend 480 
million FCFA ($1.06 million) to buy crops such as corn, millet and 
sorghum when output is excessive and stock them for future demand. 
The GOB plans to use this stock to help meet the demand during the 
transitional period between harvests.  Additionally, during December 
2007, the GOB repaired feeder roads whose bad condition had 
prevented farmers from bringing their products to market.  The GOB 
also stepped up oversight on customs agents and police officers 
along the main trading routes who had previously demanded "taxes" 
from traders carrying domestically produced foodstuffs. 
 
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Why set prices? 
--------------- 
 
4.(U) The GOB attributes price increases in part to flooding in 
food-producing areas, which destroyed crops and the roads used to 
bring produce to market. In addition, the high demand for corn, 
millet and sorghum in Nigeria at higher prices than in Benin 
encourages Beninese farmers to forgo the domestic market for the 
more profitable Nigerian market. High oil costs also have increased 
the price of imported goods. Although external factors certainly 
play a part in rising prices, several commentators have remarked 
that a rise in prices is not unusual at the end of the year when 
consumers buy more products to celebrate the holidays of Eid 
al-Adha, Christmas, and the New Year. 
 
5.(SBU) The GOB may also have a political agenda in acting to reduce 
prices in the face of upcoming municipal elections in February 2008. 
 A source close to the Minister of Finance readily admitted that 
price controls would be difficult to implement and police.  He 
stated that the price control program was primarily designed to 
demonstrate to the public the government's concern about the 
hardship caused by inflation. 
 
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What could go wrong? 
-------------------- 
 
6.(SBU) Private and GOB sources pointed to a number of problems with 
the price fixing plan.  A GOB Customs Service source stated that the 
market price is a conventional transactional price, which is 
protected by WTO and West African Economic and Monetary Union 
(WAEMU) conventions. According to the same source, the GOB will 
breach these conventions by artificially reducing the market price. 
He also pointed out that importers may declare more goods than they 
actually have to benefit from the GOB's tax credit scheme. 
 
7.(SBU) A source on Benin's Private Investors Council raised the 
 
COTONOU 00000005  002 OF 002 
 
 
concern that price supports in Benin could result in the same 
arbitrage trading with Nigeria, which already occurs in the Beninese 
cement market.  The price of a sack of cement in Benin costs half as 
much as a sack of cement in Nigeria due to Beninese price controls 
on cement.  Traders take advantage of this artificial difference to 
export cement to Nigeria which in turn causes a shortage of cement 
in Benin's construction sector. 
 
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Has it worked? 
-------------- 
 
8.(U) Prices of foodstuffs are decreasing. Before the prices of 
foodstuffs began to surge in August 2007, an average household used 
to spend a little over 5,000 FCFA ($11) for dinner on a weekly 
basis. When inflation was at its peak in late November 2007, a 
household's weekly dinner expenses increased to between 6,000 and 
7,000 FCFA. The same family would pay approximately 5,500 FCFA for 
dinner on January 2, 2008.  It is not readily apparent if the GOB's 
policies caused the decrease in prices or if it was seasonally 
driven, but the GOB should reap the political benefits if prices 
remain low. 
 
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Comment 
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9.(SBU) Comment: President Yayi's imposition of price controls in 
the holiday period appears to have been driven by political 
considerations as municipal elections approach.  The price controls 
and related subsequent decrease in prices demonstrates GOB concern 
for voters most affected by rising prices -- i.e., those whom the 
President counts among his closest political supporters.  The 
continued success of President Yayi's price control program depends 
on prices staying low and the GOB's ability to continue to bear the 
costs of reduced tax revenues on imported foodstuffs. End Comment. 
 
BROWN