VZCZCXRO2470
PP RUEHBC RUEHDE RUEHKUK RUEHROV
DE RUEHRB #0391/01 1211832
ZNR UUUUU ZZH
P 301832Z APR 08
FM AMEMBASSY RABAT
TO RUEHC/SECSTATE WASHDC PRIORITY 8493
INFO RUEHCL/AMCONSUL CASABLANCA 4035
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/USDA FAS WASHDC 1069
RUEHEE/ARAB LEAGUE COLLECTIVE
RUEHLO/AMEMBASSY LONDON 3579
RUEHFR/AMEMBASSY PARIS 5002
RUEHNK/AMEMBASSY NOUAKCHOTT 3722

UNCLAS SECTION 01 OF 03 RABAT 000391 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EEB/TPP/ABT/ATP JANET SPECK AND NEA/MAG 
 
E.O. 12958: N/A 
TAGS: EAGR EAID ETRD ECON PGOV MO
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - MOROCCO 
 
REF: A. STATE 39410 
 
 ¶B. RABAT 00265 
 ¶C. 07 RABAT 1525 
 ¶D. RABAT 372 
 
Sensitive but unclassified.  Please protect accordingly. 
 
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Summary 
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¶1. (SBU) Rising food prices have quickly become Morocco's principal 
domestic issue, sparking sporadic protests and threatening to bring 
the ongoing "social dialogue" between the Moroccan government and 
labor unions to an impasse.  The government and the King will handle 
this cautiously, remembering the food price riots of the 80's and 
90's that threatened the stability of the nation.  Even before the 
recent increases there was some generalized resentment about growing 
disparities of wealth, kept in check by the relatively widespread 
impact of economic growth. 
 
¶2.  (SBU) To date, the impact of rising prices has been mitigated by 
the Moroccan government's "Compensation Fund," which subsidizes 
flour, bread,  sugar, fuel, and gas.  Mounting budgetary pressure is 
forcing the government to re-think this whole subsidy system, but 
privately, finance ministry officials note that social pressures 
virtually rule out the changes that are necessary.  Unless pressures 
ease soon, increased labor unrest appears inevitable.  Already, 
popular media has seized on the issue, characterizing the country as 
being "at the edge of an explosion."  The government will not risk a 
price rise on the commodities that keep the poor alive, but might 
choose to highlight other issues in order to divert popular 
attention.  End Summary. 
 
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Political Impact 
---------------- 
 
¶3.  (SBU) In recent weeks, despite government efforts to shift 
attention, price increases have crowded out almost all other issues 
in the public eye.  The government has sought to ensure that the far 
left and the Islamists do not seize on the issue and exploit it for 
political benefit.  Planned demonstrations by the Islamist Justice 
and Development Party (PJD) have been banned, and other 
NGO-organized protests have been swiftly broken up by riot police. 
 
¶4.  (SBU) This government vigilance reflects recognition of the fact 
that rising prices have historically been politically explosive, and 
have led to civil strife and protests with extensive casualties. 
Subsidy cuts brought riots in 1981, 1984, and 2007.  In 1990 a 
national strike against rising food prices led to severe riots in 
Fez that killed 30 people.  In the most recent instance of unrest, 
in September 2007, a government announced plan to increase the price 
of subsidized bread by 8 percent sparked a riot in Sefrou and an 
immediate government repeal of the increase.  The government also 
immediately took control of the wheat market, fixing the price of 
wheat at the mill and the price of flour.  Tellingly, final 
decisions on such price increases are in the hands of the Ministry 
of Interior, rather than the Ministry of Finance or that of Economic 
and General Affairs. 
 
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Economic Impact 
--------------- 
 
¶5.  (SBU) The scope of the economic impact of rising global food and 
oil prices is only now becoming apparent in Morocco.  After a year 
in which it essentially achieved a balanced budget for the first 
time in decades, Morocco faces the prospect of a sizeable budget 
shortfall that has already led one international ratings agency to 
lower its outlook from "positive" to "stable."  This downgrade 
reflects both spending on subsidies, which may double its budgeted 
level of 20 billion MAD (USD 2.7 billion-- itself a five-fold 
increase since 2002), but also expectation that the government may 
have to make concessions in its ongoing "social dialogue" with the 
unions that will further undermine budgetary discipline. 
 
¶6.  (SBU)  Reform of the subsidy system to better target the truly 
needy has long been an objective of Moroccan government policy 
(Minister of Finance Mezouar recently conceded that only 10 percent 
of the subsidies actually benefit Morocco's poorest 20 percent); but 
privately, Finance Ministry officials tell us they see no 
 
RABAT 00000391  002 OF 003 
 
 
possibility of reforming the system in the current climate.  (Note: 
The Prime Minister's Office has shared with us a concept to create 
special retail stores selling only heavily subsidized products at 
which only the certified "poorest" people could shop.  This would 
focus aid on the truly need and prevent subsidies from reaching 
hotels, restaurants, the middle class, etc.  It may be a good idea 
but is subject to its own abuses and will take time to implement. 
End Note.)  This leaves the government in an untenable position. 
Without a significant break in commodity prices, which does not 
appear likely soon, the government of Morocco will either continue 
to pay subsidies which it cannot afford, or risk instability. 
 
¶7.  (SBU) Increased spending is also likely to result from the 
ongoing "social dialogue" between unions and government.  The former 
pushing both for an increased minimum wage (currently 1800 
MAD/month), salary increases for civil servants, and reductions in 
tax rates.  The government's initial offer, valued at 14-16 billion 
MAD, was rejected by the unions as too modest, particularly as it 
would not take full effect until 2010.  If the dialogue results in 
an impasse, as appears possible, serious unrest could emerge in 
coming weeks.  For now, the ongoing "social dialogue" has actually 
served to help keep a lid on potential protests. 
 
¶8.  (SBU) Surprisingly, despite the dramatic increase in world food 
prices, Morocco's inflation index for 2007 remained relatively 
benign at 2.3 percent.  However, analysts point out that Morocco's 
official inflation index does not take into account real estate 
prices and is lowered by Morocco's subsidy system.  Latest figures 
released by the government show a sharp increase in both the cost of 
living and inflation.  In the first three months of 2008, overall 
inflation rose 2.4 percent, while food products rose 4.5 percent. 
 
¶9. (SBU) Morocco's trade balance has also deteriorated as a result 
of increasing grain and fuel imports.  The two categories showed the 
largest increases in the country's most recent balance of payments 
statistics, and officials expect the trend to continue. 
 
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Demand 
------ 
 
¶10.  (SBU) Morocco is a net importer of cereals to meet a domestic 
demand of approximately 12 million metric tons annually.  On 
average, domestic production supplies 5 million tons, with the 
remainder coming from imports.  Wheat, used for bread and couscous, 
is the key agricultural staple, while imported corn supports the 
domestic poultry industry, another key element in the Moroccan diet. 
 
 
¶11.  (SBU) A government Compensation Fund subsidizes a number of 
basic commodities, including bread, sugar, and fuel.  Other 
essential staples are not subsidized.  In the past six months, the 
price of cooking oil has increased 70 percent, butter 50 percent, 
pasta 40 percent, and couscous 40 percent.  These sharp price 
increases have particularly hurt lower and middle-income Moroccans, 
who already spend a higher proportion of their salary on foodstuffs. 
 As a result of the subsidy, demand for bread has remained 
relatively constant, despite the doubling in price of wheat in the 
world market.  Press reports and anecdotal evidence we have 
accumulated throughout the country confirms, however, that Moroccans 
of modest means have had to significantly tighten their belts as a 
result of other price increases, forgoing or reducing their 
consumption of other basic staples. 
 
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Supply 
------ 
 
¶12. (SBU) Moroccan domestic cereal production varies greatly, 
depending on rainfall.  In 2006, Morocco had a particularly good 
harvest at 8.3 million tons.  By contrast, Morocco experienced a 
severe drought in 2007, yielding only 2 million tons.  Due to this 
poor harvest and world market conditions, the government removed 
import duties on feed grains and wheat during 2007.  Preliminary 
projections reported by the media are that the harvest should return 
to near normal levels in 2008, or approximately 5 million tons. 
 
¶13. (SBU) Morocco has significant room to maneuver on the supply 
side, though any such effort is unlikely to show results in the 
short term.  Although 75 percent of its agricultural land is 
dedicated to cultivation of cereal crops, tremendous inefficiencies 
through the production and marketing system limit cereal crops to 
 
RABAT 00000391  003 OF 003 
 
 
only 10-15 percent of Moroccan output by value.  Official policy, as 
reflected most recently in the MCA Compact concluded between the 
U.S. and Morocco last August, seeks to provide farmers in marginal 
lands alternative sources of income, with the intent of moving them 
towards sustainable and higher value-added products.  This approach 
remains central to the newly announced Moroccan strategy for the 
agricultural sector (Ref D). 
 
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Environmental Impact 
-------------------- 
 
¶14. (SBU) Increased commodity prices have not had an environmental 
impact in Morocco.  However, if the government carries out plans to 
eliminate or reduce subsidies for cooking gas it would be easy to 
foresee acceleration in the rate of deforestation. 
 
----------------------------------- 
Moroccan Government Policy Response 
----------------------------------- 
 
¶15.  (SBU) Morocco's primary policy response to date has been to 
stress that consumers will remain insulated from increases in world 
market prices for those goods which benefit from a government 
subsidy.  To address the sharp rise in commodity prices the GOM also 
eliminated import duties on corn and other feed grains in the fall 
of 2006 and phased out wheat import duties during the summer of 
¶2007.  The Moroccan government will soon face the question of 
whether to extend the zeroing-out of duties beyond May 31, when it 
is set to expire.  Duties may be re-imposed during the Moroccan 
harvest (June-July) to support domestic prices, but would likely be 
removed soon after. 
 
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Impact on Post Programs 
----------------------- 
 
¶16.  (SBU) Key programs within both the Millennium Challenge 
Corporation (MCC) and USAID seek to provide Moroccan farmers 
alternative sources of income through production of other crops such 
as olives, figs, and almonds.  The Moroccan government remains 
committed to this approach, and reiterated it in the new 
agricultural policy (or "Plan Maroc Vert") which was unveiled in 
Meknes in April 2008.  The government recognizes that 
notwithstanding the sharp rise in commodity prices Morocco must seek 
investment and modernize its agricultural system and develop 
alternate income sources for traditional farmers. 
 
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Policy Proposals 
---------------- 
 
¶17.  (SBU) We remain convinced that this transition is in the 
long-term interest of Moroccan agriculture.  Certainly the need for 
reform of Morocco's tangled subsidy system has been highlighted by 
the current budgetary pressures upon it.  Such a change is highly 
unlikely, however, until commodity prices return to a lower level, 
given the GOM's primordial goal of ensuring social stability.  In 
recent years, post has quietly worked with the National Agricultural 
Research Institute to support research in biotechnology and keep 
scientists informed of developments with potential benefits to 
agriculture.  The increase in commodity prices could serve to help 
Moroccan decision-makers to develop policies which would enable 
Morocco to benefit directly from modern agriculture production 
methods.  Post recommends increased outreach to this end. 
RILEY 
 
 
 
SENSITIVE BUT UNCLASSIFIED