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. 
 
 
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Riley